Ryder System, Inc. (R) Q3 2007 Earnings Report, Transcript and Summary

Good morning and welcome to Ryder System Incorporated Third Quarter 2007 Earnings Release Conference Call. All lines are in a listen-only mode until after the presentation. [Operator Instructions]. Today's call is being recorded. I would like to introduce Mr. Bob Brunn, Vice President of Investor Relations and Public Affairs for Ryder. Mr. Brunn, you may begin.

Thank you. Good morning and welcome to Ryder's third quarter 2007 earnings conference call. I would like to begin with a reminder that in this presentation you'll hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectation and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive, market, political and regulatory factors. More detailed information about these factors is contained in this morning's earnings release and in Ryder's filings with the Securities and Exchange Commission. Presenting on the call today are Greg Swienton, Chairman and Chief Executive Officer and Mark Jamieson, Executive Vice President and Chief Financial Officer. Additionally, Vicki O'Meara, President of U.S. Supply Chain Solutions and Tony Tegnelia, President of the U.S. Fleet Management Solutions are on the call today and available for questions following the presentation. Also present is Robert Sanchez, whom as you have seen from last week's announcement, will be succeeding Mark as our new CFO later this week. With that, let me turn it over to Greg.

Thank you Bob and good morning everyone. This morning we will recap our third quarter results. We will provide our current outlook for the fourth quarter and then as always we will open up the call for questions. Before I began the presentation, I would like to take a minute to thank our outgoing CFO, Mark Jamieson for his service to our company. And as Bob mentioned, as you may have seen in last week's press release, Mark is leaving Ryder to accept another opportunity outside the company more aligned with the private equity activity. I would like to thank him for his contributions during his time at Ryder, especially in the areas of strategy, acquisitions and with the process efficiencies he did help introduce at our company. We wish him all the best in his future endeavors. I am also pleased that we have named a very capable internal candidate as our incoming CFO, Mr. Robert Sanchez. Robert has a great deal of experience with Ryder in many different roles and has been a valuable member of our leadership team. Most recently, Robert served as Executive Vice President of FMS operations for the U.S. and Canada with responsibility for a fleet of over 145,000 vehicles and more than 800 maintenance facilities. He has a great depth of expertise to bring to his new position at Ryder through his prior responsibilities here in finance, asset management, fleet and supply chain management operations as well as former Chief Information Officer. He is here today. Robert will be involved in the next call. I very much look forward to introducing him to many of you in the weeks and months ahead. And with that, let me begin with our third quarter results. Reported net earnings per diluted share were $1.11 for the third quarter 2007 as compared to $1.06 in the prior year period. In this third quarter 2007, our reported results included a net $0.03 charge for restructuring costs primarily related to headcount reductions partially offset by a gain in the sale of a property. The gain on the property sale relates to the relocation of an FMS operating facility. In the third quarter 2006, our reported results included a $0.06 pension accounting charge. Comparable earnings per share in the quarter therefore were $1.14, up 2% from $1.12 in the prior year. Total revenue for the company was up 2% in the quarter. Operating revenue, which excludes fuel and subcontracted transportation revenue, was up 3% due to growth in contractual revenues in Supply Chain and Fleet Management Solutions as well as favorable foreign exchange rate movements. Fleet Management total revenue was down 1% while operating revenue was up 1% versus the prior year. Total FMS revenue was impacted by a 5% reduction in fuel revenue, reflecting fewer gallons pumped for customers in this quarter. FMS revenue benefited by foreign exchange rate movements in Canada and the UK of 1%. Contractual revenue, which includes both fuel service lease and contract maintenance, was up 7%, reflecting our sales activity over the past few quarters. Full service lease revenue was up 7%. This growth is primarily a result of a continuation of new vehicles being put into service associated with sales contracts signed over the prior couple of quarters. Contract maintenance revenue was up 10%, reflecting our heightened focus on growing this long-term contractual business with customers. A weak freight demand environment during the quarter resulted in a 15% reduction in commercial rental revenue on a 10% smaller global fleet. Softer than anticipated market demand conditions in the U.S. resulted in flat rental utilization and lower pricing in the domestic market. While utilization comparisons were flat versus the prior year's quarter, they have improved relative to comparisons over the prior several quarters of this year due to our strategy of reducing the rental fleet size. Gains from the sales of used vehicles were lower than last year due to lower pricing on a higher volume of used vehicles sold. We also incurred higher carrying costs on larger used vehicle inventory. The lower gains and higher carrying costs were both impacted by our decision to sell some units at wholesale pricing rather than at our typical retail pricing as we wanted to bring the size of our used inventory down significantly during the quarter. Net before tax earnings and Fleet Management in down by 10%. Fleet Management earnings as a percent of operating revenue were down by 150 basis points to 12.3%. FMS earnings were negatively impacted by lower commercial rental, used vehicle sales and fuel results. These negative impacts were partially offset by improved performance in our contractual product lines as well as lower pension and sales and marketing costs. While total depreciation was up in the quarter, FMS earnings also benefited from lower depreciation costs related to the previously announced depreciation policy change effective on January 1st this year. On page 5, turning to the Supply Chain Solution segment, we had an 8% increase in total revenue including the impact of managed subcontracted transportation. Operating revenue was up 9%, reflecting new and expanded customer contracts with particularly strong growth in our international operations. The impact of new business was partially offset by the previously disclosed closure of a significant automotive plant during the second quarter as well as lower volumes with some domestic high tech and telecom customers. Third quarter net before tax earning in Supply Chain were up 6% versus the prior year. Net before tax earnings as a percent of operating revenue were down 20 basis points to 5.3%. Supply Chain's earnings benefited from new business wins and lower incentive-based compensation expense. These benefits were partially offset by the automotive plant closure I previous mentioned. In Dedicated Contract Carriage, total revenue was down 2% and operating revenue was down by 1% due to lower volumes of managed subcontracted transportation and the non-renewal of certain customer contracts. DCC volumes were slightly down on a total basis. Net before tax earnings in DCC were up by 5% and as a percent of operating revenue were up by 50 basis points to 8.8%. Earnings increased in the quarter due to improved operating performance on a higher quality portfolio of dedicated contracts and lower incentive-based compensation costs. Page 6 highlights key financial statistics for the third quarter. Operating revenue growth was up by 3%. However, comparable net earnings were down by 2%. Comparable net earnings were negatively impacted by a weak domestic rental market and lower used vehicle sales in the FMS segment. These items more than offset the benefits of contractual revenue growth in the SCS and FMS segments and the other positive impacts of lower pension costs, lower incentive-based compensation and the benefit from depreciation policy changes made on January 1st. While comparable net earnings were down by 2%, comparable earnings per share were up 2% to $1.14 due to a lower average number of shares outstanding, reflecting the impact of share repurchases. The average number of diluted shares outstanding for the quarter was down by approximately 2.7 million shares to 59 million. In May of this year, we announced a $200 million share repurchase program. During the third quarter, we purchased 2.1 million shares under the program at an average price per share of $54.31 for a total cost of $113 million. These purchases fully concluded the program under which a total of 3.7 million shares were repurchased at an average price per share of $53.85. At September 30, there were 58 million shares outstanding. Our third quarter tax rate was 37.3% as compared to 39.2% in the prior year period. The lower tax rate reflects the recognition of tax benefits as a result of audit closures, expiring statutes of limitations within several jurisdictions and a tax law change in the UK. While this quarter benefited from a lower than forecasted tax rate, this benefit was fully offset by several other unanticipated items including fuel accommodation adjustments, foreign exchange losses, increased bad debt in FMS, a brief automotive strike at GM and the write-off of operating tax receivables from a foreign operation. Page 7 highlights key financial statistics for the year-to-date period. Operating revenue growth was up 4% and comparable net earnings were up by 2%. As you've seen in our recent earnings announcement, year-to-date results have been negatively affected due to slower economic conditions impacting commercial rental activity and used vehicles. Used vehicles were impacted both by reduced prices on some vehicles sold and by increased reductions in the carrying value of certain used vehicles. These negative impacts were partially offset by several items including higher contractual revenue in lease, contract maintenance and supply chain. Year-to-date results also benefited from lower pension costs, decreased incentive-based compensation, the previously disclosed depreciation policy change and more favorable development of estimated prior year self-insurance reserves due to our focus on safety performance and a long-term positive trend of improving results in this area. Comparable earnings per share were $3.04, up 4% from $2.91 in the prior year, reflecting the impact of improved net earnings and share repurchases. The average number of diluted shares outstanding was 60.4 million, down by 1.3 million as compared to 61.7 million last year. Our year-to-date tax rate of 38.1% was impacted by the tax law changes I mentioned previously. The prior period tax rate of 37.1% was impacted by income tax law changes made during 2006 in Texas and Canada. Our return on capital declined from 8% to 7.4%. The decrease is due primarily to an increased investment in leased vehicles due to the heavy replacement cycle last year and also to our downsizing of the rental fleet and subsequent movement of these vehicles into the used vehicle sales centers. I'll now turn to page 8 to discuss our third quarter results for the business segments. In Fleet Management Solutions, operating revenue was up by 1%, driven by 7% contractual revenue growth but largely offset by a decline in commercial rental of 15%. Total revenue decreased by 1% due to a lower volume of fuel sales resulting from lower miles driven, particularly in the commercial rental product line. FMS revenue also included a 1% favorable FX impact. Fleet Management Solutions earnings were down by $10.5 million or 10%, driven by a substantial decline in U.S. rental results and lower used vehicle sales related to additional wholesaling activity to reduce the fleet size. These results were partially offset by stronger full service lease and contract maintenance results as well as lower pension and sales and marketing costs. Depreciation costs, while higher in total, benefited from the previously announced depreciation policy change effective January 1st that impacted certain vehicle classes. In lease, we continued solid revenue growth as a result of new vehicles being placed in revenue earning service related to sales made in recent quarters. Miles driven per vehicle per work day on U.S. lease power units were up 4% versus the third quarter 2006 and were up 3% as compared to last quarter. Contract maintenance continued the strong performance we've seen this year with 10% growth as we continue to have good success in emphasizing sales of this asset light product line. U.S. commercial rental utilization on power units was 73%, slightly down from 73.2% in the third quarter 2006 due to a weak freight demand environment. While our utilization comparisons improved from the first half of the year due to a reduction of the fleet size, we had been forecasting a modest improvement in utilization this quarter which did not materialize. U.S. rental pricing on power units was down by 3% in the third quarter compared to the third quarter 2006, which is consistent with pricing trends we saw in the second quarter this year. Now I'll discuss our rental fleet planning in more detail in a few minutes. In Supply Chain Solutions, total revenue was up 8% in the quarter and operating revenue, which excludes subcontracted transportation, was up 9% due to new and expanded contracts. The growth in operating revenue was driven by our international supply chain business, which was up a very strong 19%. U.S. revenue was up due to new business growth, but was partially offset by the closure of a significant automotive plant in the second quarter which generated $55 million to $60 million of annual revenue as well as from lower volumes with some high tech and telecom customers. SCS' net before tax earnings were up by $1 million or 6% for the quarter. Earnings benefited from new business and lower incentive-based compensation. These improvements were partially offset by the automotive plant closure. In Dedicated Contract Carriage, total revenue was down 2% and operating revenue was down 1% due to lower subcontracted transportation activity and the non-renewal of certain customer contracts. DCC's net before tax earnings improved by $600,000 or 5% due to improved operating performance and lower incentive-based compensation. Our total Central Support Service costs were down by 4% or $2.1 million for the quarter due to the lower incentive-based compensation partially offset by foreign exchange transaction losses and higher IT spending from ongoing upgrade initiatives. The portion of Central Support costs allocated to the business segments and included in segment net earnings was down by 6% while the unallocated share, which is shown separately on the P&L there on page 8, increased by 2%. Comparable net earnings were $67.2 million, down $1.6 million or 2%. Page 9 highlights our year-to-date results by business segment, and in the interest of time, I won't review these results in full detail. Comparable year-to-date net earnings were $183.6 million as compared to $179.9 million in the prior year, up $3.7 million or 2%. At this point, I will turn the call over to Mark Jamieson to cover a number of items, beginning with capital expenditures.

Thanks Greg. Turning to page 10, year-to-date gross capital expenditures totaled $982 million, down by $281 million from last year. Lower capital spending was driven by reduced spending on full service leased vehicles of $295 million. This reflects fewer vehicle replacements as well as new sales following last year's pre-buy activity. Commercial rental vehicle spending was up by $10 million from the prior year. The year-to-date rental capital reflects lower spending in North America offset by higher spending in the UK. The UK spending reflects improved rental results in that market and also allows us to refresh the UK rental fleet after spending virtually no rental capital in the UK last year. We realized proceeds primarily from sales of revenue earning equipment on a year-to-date basis of $297 million, up by $40 million from last year, principally driven by a higher number of units sold. We also executed a $150 million sale-leaseback of revenue earning equipment during the second quarter. Deducting sales proceeds and the sales-leaseback from gross capital spending, our year-to-date net capital expenditures were $535 million, down by $470 million from last year. Turning to the next page, you will see that we generated cash from operating activities of $837 million on a year-to-date basis, primarily through our earnings and the depreciation add back. Depreciation increased due to the heavy replacement activity in fleet growth in lease last year. The change in working capital reflects improved accounts receivable performance and lower income tax payments. Including the impact of our used vehicle sales activity and the sales-leaseback, we generated over $1.3 billion of total cash, up by $410 million from last year. The additional cash generated was used to invest in revenue earning equipment primarily under long-term contracts. Cash payments for capital expenditures were approximately $1.1 billion, down by $79 million versus prior year period, reflecting investment in leased vehicles. Including our capital spending, the company generated $239 million of positive free cash flow this year as compared to a use of $254 million in the prior year period. Our full year forecast for free cash flow is $230 million, down from our prior projection of $305 million principally due to the closing of the Pollock National Lease acquisition in October for which we paid $74 million. On page 12, you can see total obligations has increased $119 million as compared to year-end 2006. The increased level is largely due to spending on contractual vehicles and stock repurchases. Balance sheet debt to equity was 158% as compared to 164% at the end of last year. Total obligations as a percent to equity at the end of the quarter were 169% versus 168% at the end of 2006. We continued to have significant balance sheet capacity as this is well below our long-term target of 250% to 300%. Our full year forecast for total obligations to equity is now 163%, up from the prior forecast of 157% due to the closing of the Pollock acquisition. Our equity balance at the end of the quarter was almost $1.8 billion, up by $65 million versus year-end 2006, reflecting our net earnings and foreign currency translation adjustments offset by dividends and net share repurchase. At this point, I'll hand the call back over to Greg to provide an asset management update.

Thank you, Mark. Page 14 summarizes our key results in the U.S. asset management area. We sold almost 6600 used vehicles during the quarter, an increase of 38% from the prior year. While we utilized our used vehicle sales centers effectively to sell a substantial number of vehicles at retail prices, we also elected to sell a number of units at discounted price levels to wholesale buyers in order to reduce our used vehicle inventory levels. Primarily as a result of this wholesaling type activity, proceeds for all used tractors sold through the used vehicle centers were down by 17% and for trucks by 10%. Excluding this wholesaling type activity, retail market pricing on both trucks and tractors was down by about 3% versus the prior year's quarter for equivalent vehicles. At quarter end, our used vehicle inventory for sale was approximately 7600 vehicles, down 27% from 10,400 units at the end of the second quarter. This reflects the large number of units sold during the period as well as a reduction in the number of units moving into the used vehicles sales centers to normalized levels. As we communicated in our prior call, we remain on track to end this year with inventory levels at or slightly below the level at the start of this year. At the end of the quarter, approximately 7600 units were classified as no longer earning revenue. While this number is up from the prior year, it's down by over 3000 units from the second quarter primarily due to a decrease in the number of units available for sale. Our U.S. commercial rental fleet size in the third quarter was down on average by 12% from the prior year with the power fleet down by 17%. This reduction is intended to positively affect utilization levels on the rental fleet going forward. We anticipate returning to normalized out servicing and subsequent sale of rental vehicles in the fourth quarter in order to align our rental fleet with the typical seasonal slowdown. As such, we expect the total U.S. rental fleet to be down by 11% and the power fleet to be down by 14% to 15% on average in the fourth quarter versus the prior year. Page 16 outlines our current EPS forecast. At this time, we are reaffirming the comparable full year EPS forecast of $4.10 to $4.15 we provided in our earnings forecast update earlier this month. This represents an increase of 3% to 4% as compared to a comparable $3.99 we earned in 2006 excluding some tax changes and a pension charge we had last year. We are also establishing an EPS forecast for the fourth quarter of $1.06 to $1.11 per share. Our fourth quarter forecast is based on our expectation for continued softness in the U.S. commercial rental market in at least the near term. We do expect, however, that utilization in the rental fleet will improve modestly in the fourth quarter due to our significant reduction in the rental fleet size. We also anticipate continuing negative impacts in the coming quarter from used vehicle sales as we work towards our targeted fleet level. In terms of lease activity, our year-to-date new sales activity is higher than forecast in our business plan, reflecting success in growing with some existing customers and adding new outsourcing contracts. At the same time, however, we have also seen higher than anticipated reductions in some existing lease fleets due to slowdowns in customers operations. In Dedicated, we continue to improve the quality of our contract portfolio by targeting higher service opportunities and remain focused on margin enhancement while managing through the effects of a softer economy. In Supply Chain, we expect continued growth with both new and existing customers with particularly strong growth in our international operations. Our growth expectations for U.S. Supply Chain operations are somewhat mitigated, however, due to the impact from the automotive plant closure we previously discussed. Given the slower market conditions, we have heightened our focus on cost reduction opportunities. We believe that significant progress improvement opportunities exist in the company which can yield future cost savings. We've also taken steps to better align our costs with market conditions through the recently announced elimination of 300 positions globally. We have also increased our efforts with acquisitions as we believe that market conditions have improved somewhat for opportunities in this area. We remain interested in looking at tuck-in acquisitions in the FMS segment that allow us to leverage our facility infrastructure as well as supply chain deals that provide us with product and/or geographic extension to enhance and expand our services to customer. Overall, our outlook anticipates continuation of the soft conditions we have seen in the economy and in the transportation sector specifically. While we are impacted by these conditions in several areas, overall, our company has performed much better than it has in historically similar periods because our business is more contractually-based today and because of the many business model and process improvements to that business model we have made over the past several years. We also have a strong balance sheet and can use it effectively to support our acquisition and leverage objectives. That does conclude our prepared remarks and at this time, I'll turn it over to the operator to open up the line for questions. Question And Answer

Thank you. [Operator Instructions]. Our first question comes from Jon Langenfeld. You may ask your question and please state your company name.

Robert. W. Baird. Good morning.

Good morning.

Greg, first on the commercial rental side, I just want to try to get my arms around where we've going there. A number of changes just in terms of the fleet size and utilization, but can you give us some visibility if we assume no change in the environment? How much longer is this going to be a year-over-year drag on earnings?

I think that the year-over-year differences will minimize overtime. Obviously, we are getting close to catching at least what was the significant beginning of a tail from last year. So I think while we are going to have a shortfall by comparison as you'd expect from a smaller fleet, a smaller power fleet, that there will be declines continuing compared to last year in both operating revenue and net before tax earnings. I think that will decline over time, more and more so as we move into next year. And that assumes really no particular economic recovery. That's really due to our own efforts.

So in the next couple of quarters at least and then beyond that, kind of dependent upon with the external environment says?

Yes, I think there is obviously a positive impact and less degradation as you get into the end of this year and the first half of next year. We'll see what the economy looks like. We are not anticipating some necessary recovery through 2008. We'll review that more when we get into the 2008 business plan when we discuss that at the end of the year and into next year.

And then when you think of the gains on sale, I mean it seems like it's going to be kind of a similar trajectory, bit of a hit here again in the fourth quarter with the wholesaling. But as you get into earlier next year, you probably assume less wholesaling, so the gain should look a little bit better relative to the second half of '08... relative to the second half of '07 here?

Yes, I think we are going to continue to have headwinds. However, we did more than normal wholesaling in the third quarter because we wanted to accelerate the reduction in the fleet. I think you wouldn't necessarily expect as much wholesaling in the fourth quarter or into the start of next year because we are really getting much closer to our targets. And as I said, we expect to be at our target levels by the end of this year, which would put us in much better normalized shape as you start the new year of '08.

Okay, good. And then the CapEx, gross CapEx number kind of the midpoint is I guess $1.3 billion thereabout. How much of that is gross CapEx?

You said $1.3 billion; that... is that --

Just looking at the gross number on kind of the midpoint forecast. I don't know if you have that --

Yes, I think we are anticipating that number of growth to be about $150 million.

So there is $150 million of potential... I guess what I am driving at is if I look at you doing over $300 million this year and next year, assuming no change in the environment, that gross CapEx is going to go away I would imagine. So I am thinking of free cash approaching $5, $6 a share in '08, is that... am I thinking about that correctly?

Well without confirming specifics, because we haven't disclosed the 2008 plan, I think that your assumptions are probably directionally correct. We would love to continue to grow the CapEx number as long as we are getting asset under management growth under leases. That means that in spite of economic conditions, we are doing as well as we can in converting new customers and overcoming reductions in some fleets. So it will be a situation of how strong the economy is, how solid our customers feel about their prospects and how effective our sales efforts are. But at this point, it's probably directionally correct in terms of what you said.

Okay. So this year you did 200 million in buy back, you bought a tuck-in acquisition, another 75 million. Your leverage went the wrong... or it looks like it will probably end up the wrong way modestly. So I mean how do you improve that leverage towards your goals when free cash is going to accelerate?

Well total obligations to equity in our current forecast actually goes up a little bit I think to 169%. But that's not a huge material change. So the fact that you can expect incremental CapEx and growth in assets under management to be fairly modest. I think that the two leverage points will be what we said we'd like to do in this environment since we have a strong balance sheet and we very likely may have more cash available especially next year. We do want to continue to have some cash available for acquisitions. We want to have some dry powder there in order to be able to do that if they come to fruition. Barring that, then we will continue with consideration for more share repurchase. So it will probably be, I would guess, a combination. And I'd like to more and more get that done within about a two to three year period. If we can get... if things continue as they are and we get the good balance between acquisitions and share repurchase.

Okay, good color. And then lastly, not looking for an '08 guidance here because I know you are not going to give it, but you've had a number of moving pieces this year with the pension changes, the depreciation change and then kind of the headwinds you've had from the used trucks. If you think about this environment unchanged, I mean, is this an environment that Ryder should be able to grow operating income?

Well I believe so. And in fact, I think that if you think about our activity and our performance in what I would call this downturn versus the last downturn, a lot is very different. And rather than just try to control costs, which are always important and a significant factor, we are continuing to grow operating revenue and we are continuing to grow our earnings, and that's what our objective is going to be in 2008; again, without talking about specific numbers. But we believe that on balance with the pluses and the minuses, our objective is to continue to improve performance, albeit it might be a little bit more modest than we might have thought a year or two ago considering the environment. But our objective and our belief and our running of this business and reacting to what's going on in the marketplace, our objective is to continue to grow the top line and the bottom line of this business even in a more challenging environment.

And that's more than just through share buyback?

Yes.

Yes. Okay, thanks for the time.

You're welcome.

Thank you. Our next question is from Ed Wolfe. You may ask your question and please state your company name.

Thanks, Bears Stearns. Good morning.

Good morning Ed.

Share repurchase, since we were just talking about that, was anything reauthorized now that you're done with the current plan and if not, what would be the timing of something like that?

No, nothing new has been reauthorized. I think as we take a short look ahead into 2008 and we determine where we are with the capital needs, free cash flow, acquisitions and share repurchase, we will revisit that and determine what may be appropriate. But as of yet, we haven't announced anything new.

Okay. So it's part of your whole... when you come to the Street with a CapEx plan and new earnings, that's when we should expect to hear that?

I would say that's a fair expectation.

Okay. You talked a couple of times about a goal of getting the vehicles for sale back to where they were at year end last year. Where was that number?

Let me ask Tony Tegnelia. He may have that on the tip of his tongue more than I do.

Right at about 7000 units, Ed, and that's our objective to get it there. The unit count but also as well the actual dollar invested figure there as well, because, as you know, those assets don't generate revenues so we want to mitigate them. We made a lot of progress in this quarter getting that inventory down. We are right on track to be there at year end, and with the uncertainty in the economy, we want to be certain that going into '08 that we are comfortable with that unit level and also dollar level as well.

Thanks Tony. Why 7000? Why not 0? I mean what's the balance there?

Well, there will always be several thousand units in that inventory. As you know, quite unlike our competitors, we feel we do have an advantage by having a network of 50 retail outlets to protect our residuals, which really impacts the price initially. And you do have to have those locations with some inventory level to keep your position in the marketplace so that in times like '07 you have that retail outlet to really use. So several thousand, about 5 to 7 is pretty much where we think is our normalized area to be with that network.

So if you are 7 at year end '07, you are you saying there will still be a goal to get down to 5000 by year-end '08 kind of thing?

If I had my druthers 5 to 7, 5, 6 would probably be a little bit better. But we are comfortable with the target that we have at year-end '07.

Okay. Just a couple of kind of financial things. The depreciation policy change you referred to, what are you talking about with that?

Every year, we do an evaluation and review residuals and on what we announced in the first quarter effective January 1st was the long-term trend in terms of the valuation in residuals on a wide variety of vehicles. We do that rigorously each year and that was effective January 1st. And we just mentioned that in that that was a bit of a plus, although our current depreciation expense is higher than it was last year and a bit higher than forecast.

So in other words, it would have been even higher if not for that change?

Yes.

Okay. Tax rate going forward, how should we think about it?

Probably not much different than where we have been in the recent past. You've seen some ups and downs I think in both years. It depends on audits that are done, accruals that are released, statutes of limitations, jurisdictions changing. I wouldn't expect any difference generally when we've said at the start of this year to be around 39%. That's probably a good long-term average. But the first quarter I think, this year, I think was 39.4% and I think year-to-date we are 38.1%, so somewhere in that range.

Okay. I mean I haven't seen 39%. I am looking back 10 years. I have been 38%, 37% kind of number, but okay. Talking... the acquisition you made, can you talk a little bit? You said it cost $74 million. Can you give us a sense of rental versus lease in that business and how much revenue there is?

Yes, I think we announced the total revenue was $43 million in total. It has a number of pieces. It has lease, it has rental and it has dedicated contract carriage.

Is there any rough direction of how that breaks out?

I don't know that we've disclosed.

The truck leasing and rental piece is about 55% of the total and about 45% pretty much is on the DCC side.

And that deal closed on what day?

First week of October.

Okay. And should we assume profitability similar to that of Ryder at this point?

Well this acquisition will be accretive to the Canadian operation for us in the fourth quarter.

Okay. Can you talk a little bit about commercial rental utilization throughout the quarter, if you look month by month, what the utilization looked like versus a year ago?

Yes. Well, first, Ed, let me take, co-tailing on Greg's comments, for the quarter overall, we were really flat year-over-year and we were quite pleased with being flat year-over-year. It reflects a lot of work that we have done during the year to reduce the size of the fleet and calibrate it with demand. Utilization has been rising as a result of that effort, and as a result our return on rental assets had been rising as well throughout the year and throughout the quarter as a result of those reduction. Also, our pricing, even though somewhat lower, about 3% low, is still very stable. So it's lower but stable. So as utilization rises, our revenue per unit will rise and therefore the returns will rise. If you recall, our position has always been on rental we don't chase revenue with assets; we go for return. So we are seeing utilization improve, we are seeing the return on that fleet improve and the revenue per unit rise as well. So we are pleased with the hard work that we did earlier in the year to reduce the size of that fleet. It was painful, but it is behind us and we are more normalized out servicing rates now for the rental unit.

Okay. Can you... with that being said, can you go through July, August, September, October in terms of if there is much difference there?

We won't disclose October because that's coming up, but if you have got the numbers, Tony on July and September, you can.

Yes, I think for the most part, they are pretty stable all along, reflecting the full quarter. Only 100 basis points here or there may differ within the quarter for the most part.

And Tony, when was the last quarter that it was flat or better utilization?

That would be in '06. All of the quarters for utilization in '07 were lower than they were '06. So second or so third quarter in '06 the utilization was higher than that third quarter in '05.

Okay. And then last question on the headcount reductions you announced. You talked about $20 million as a run rate or $0.21 for '08. Is that just on assuming you're not going to need to replace those people and the impact of paying salaries and wages and so forth, or is there anything else in that number?

No, that's essentially it.

And why is there $5 million you don't get in '08?

Because you get a little bit at the end of this year and a little bit in '09. So it totals a $25 million annual rate, of which the vast majority, or $20 million, we'd see in '08.

Okay, thanks a lot for the time. I appreciate it.

Sure.

Thank you. Our next question is from Alex Brand. You may ask your question and please state your company name.

Hi, this is actually George Pickral for Alex. Stephens is the company. Greg, can you give a little color on the Boeing contract you announced last week?

It is a transportation management contract, and Vicki O'Meara is President of our U.S. Supply Chain, if you'd like to add anything other than that?

No, that's it. It's a transportation management contract. We are delighted Boeing is a new customer to Ryder. We'll be managing their North American freight movement.

Does it start January 1?

It's going to start up... actually, a lot of our activity is starting up this year in preparation. Most of the financial impacts of course are going to be next year.

Okay. And staying with Supply Chain, Vicki, maybe you can answer this one too. Auto is weak and now telecom is weak. Are there any areas in the U.S. that are outperforming or doing better than you expected?

Well, yes, and I don't.... I wouldn't say telecom is weak. The comments we made about volumes being light in the third quarter in hi tech and telecom shouldn't be interpreted as weak; certainly, as it impacts our business. Those volume decreases in the third quarter are part of certain customer-based planned volume decreases which is part of their product cycle. And in fact this particular customer that plans the cycle decreases for this time in fact experienced a higher volume even for the trough of their cycle at this time period than they had anticipated. The other effects you see on telecom and hi tech go I think move toward opportunity for Supply Chain than an indication of any weakness. And the volume fluctuations are short term because we are seeing a very rapid change in the configuration of the integrated global supply chain network, which is affecting the way U.S.-based and global networks deal with those volumes of freight movements around the world. Smaller batches, shorter lead times all with the view of trying to decrease inventory levels. Those have short-term impacts on the hi tech industry in particular. Though long term, I think the supply chain industry in all areas including automotive globally is very strong. I mean automotive numbers are largely what's fuelling our revenue growth. And I think that the automotive industry in fact is going to be a strong... continue to be a strong supply chain base in the future as well globally as well as in the United States.

But right now --

We have seen some impacts from the housing industry that's primarily been on our Dedicated Contract Carriage product line though, not on the Supply Chain side.

Great, thank you for that. And can you remind me real quickly when that auto plant closed?

March.

March, okay. So that will still have impact on the first quarter, but not in the second?

Correct.

Great. And lastly, Greg, kind of a follow to Jon's question, I know the markets fragmented and there are a lot of potential targets out there over the next two or three years. What's you're confidence level or conviction level that you will be able to make enough of these small tuck-in acquisitions to use some cash and get towards a long-term debt to equity range?

Well, it's certainly our intent and we believe it's fairly good probability. But as these are private firms who make their own decisions, ultimately, it will be their decision and receptivity and determination on what they think is right for their own endeavors. But that being said, I think that this is an environment in which I think more of those discussions are reasonably to be expected.

Are there more opportunities outside of the U.S.?

Well Canada we have just done. We are really only talking about North America for FMS.

Thank you for your time then.

You are welcome.

Thank you. Our next question is from David Ross. You may ask your question and please state your company name.

Thanks, Stifel Nicolaus. Good morning everyone.

Good morning

On the Dedicated side, you talked about revenue declines due to the non-renewal of customer contracts. Just curious as to where this business went. I know you just talked about some housing-related impact there. If you could just give a little more color on that.

All right, I will ask Vicki to answer.

Sure, thank you. The decline in revenue that you saw quarter-over-quarter on comparable periods in the managed transportation is largely what you see from the housing impact. The more important point to your question is a good one. And we are continuing the culling process of our existing portfolio and intentionally exiting low margin business and replacing it with much more profitable business. And you are continuing to see the impact of that. In addition to that, we are investing in the Dedicated business as we have said before. We think this is continuing to be a good market opportunity for us and we anticipate accelerating growth in the future due to the productivity initiatives that we are taking that you see reflected in the NBT. Even though revenue is flat, you see significant NBT improvements year-over-year. Those are directly reflective of the productivity initiatives and additional internal changes we are making, and we see accelerated growth on the top line in the future as well.

And that culling process you talked about of your existing portfolio, how far along are you in that process or is it a continual process where you identify maybe the bottom 10% of the counts you are trying to replace them with higher yielding accounts?

At this point, we would view at more as a continual process at this juncture. Over the next year, we may see some with enhancements at the large fleet level, which we are working on in that business line. We might be able to see a net change in the way those numbers look, but it may be a continual process for some time. We've reported on it now for the last two years, and I'd say that process is a healthy one and continuing.

Okay. And then on Supply Chain Solutions, we talked about some softness in telecom and the shutdown of the auto plant. But auto and industrial is still up 10% year-over-year in third quarter. What's the reason for the growth there? Is that just with new accounts? Are those foreign transplant, U.S. Big Three?

Yes, we are seeing a lot of revenue growth. As Greg mentioned, a lot of that is reflective of the manufacturing surge that we see globally, and our Supply Chain business serves our customers on a global basis. So we are going with them globally. But there is a lot of growth automotive global, there is a lot of growth industrial in the U.S., and we've actually seen some significant growth in the United States in the automotive portfolio with Big Tree as well as with our other non-U.S. based OEMs that we also serve here in the United States. And you noticed the NBT impact is noted in those increases in revenue as well because some of our increases in revenue have been reflective of start-up activity where we have had to make investments that will accrue to future period earnings based on that business, and some of that is automotive.

Okay. And then turning to Fleet Management Solutions for a bit, Greg, did I hear you correctly when you said that miles driven per vehicle per work day on full service lease units was up 4% year-over-year?

Yes.

And then up 3% sequentially from the second quarter?

Yes, that's correct.

Have you talked to your customers as to why that may be in this soft environment? Are they just getting better utilization out of their lease fleet and not renting as much or --?

I think that's probably the case. Obviously, the flexible capacity in commercial rental has declined, but for the fleet sizes that they now have under their direct activity in leasing from us, they are tending to utilize them, which I think is at least that's a good sign. That's a number that we always watch. If those miles start going down on a per vehicle basis, that would be an indication of even something softer going on. So I think the fact that the units that they have, they are running in at least as good or a better rate than last year; I think so far so good.

And in past cycles, are you seeing your customer base I guess better managing what they need in terms of leased vehicles than they may have done several years ago?

Well I think they are probably as astute and as capable as ever. I think that what we do see, and I don't know if we mentioned it on here, I think perhaps we did, that we continue to do selling. More customers are actually more hesitant about actually signing the contract. We talked about that before, and that's still true. Sometimes when fleets come up for renewal, say at some point in time, a customer had four units out of others that just happened to be coming up for renewal, well, in the environment that's softer, we still have the customer, they still do business with us, but they say I don't need four anymore; I need three. So there is a decline. So you have to try to make up those declines with other growth areas. So that's a reflection of what's going on in the environment and some softness. It's really good went if four come up for renewal and they say I want five, that's great, but that's not where we are right now.

Yes. And then also I noticed in the presentation that there has been a 30% increase in early terminations year-to-date, year-over-year, which is an acceleration I guess from where it was from the first half of the year. Can you just talk a little bit about the early termination activity?

Yes, and part of that, to give you some more color, is some of those early terminations were due to the fact, for example, of the automotive plant shutdown. So that's equipment that would then [ph] return from Supply Chain into Fleet Management. So that would be defined as an early termination. However, when you go to the portion of extensions or additional service, those bar charts are moving up because most of that equipment that would have come out under the category of early termination may have been redeployed into other areas. So it isn't necessarily quite as simple or clear as that graph. Sometimes this happens with a contract that we support, but then we get other deployments and larger deployments into other activities. And then Tony, if you want to add anything to that.

Yes, I would just add that because of the economic environment today, we are seeing a number of our good customers request some early terms in some fleet reduction. And we will typically accommodate them with allowing them to do it, paying the penalty fee that's required in the lease term or another future commitment from them. But we have seen that impact our retention. The customer relationship is fine, their economic conditions relative to their balance sheet and their credit worthiness is fine, but they are asking for some reductions in their fleet. And we are working through that with them. There has also been a number of plant shutdowns and location shutdowns for the customers as well. So we are working with them on that basis. But as you can see, our redeployments are up as well and so we are being very expeditious in working with those customers for a long-term relationship but redeploying them to maximize revenue and also returns at the same time. But the customers are very agile today in managing their assets and we work with them and we need the same agility in our redeploys.

Okay. And then Mark, I just want to say congratulations on your new job and Robert, congratulations on the promotion.

Thank you.

All right, thank you.

Thank you. Our next question is from Philip Walker [ph]. You may ask your question and please state your company name.

Hi Phil Walker, White Mountain Advisors [ph]. Hey guys, I just want to back up on a few things as it relates to the Fleet Management Services. Specifically, do you guys provide, I'll call it, a kind of a net interest income number? You have revenue coming in, you take out depreciation and you take out the requisite interest expense. Do you then have... do you look at that particular number and make judgments as to which way it's going, because clearly you're building the contractual business, which is a good thing. But are you doing that by discounting the product or can you maybe give a little bit more insight into that?

I wouldn't say that we are doing it by discounting the product, because what we do measure, and we have talked about on previous calls, is that every unit has an EVA calculation. And the average EVA per unit has continued to increase. And we think that is a sign of making sure that our pricing and our returns are heading in right directions. So it really, I wouldn't say, has been a case of more severe or any additional discounting. Tony, if you want to add anything to that.

Yes, we are not discounting. As a matter of fact, our pricing and our EVA is very stable and the market actually is very stable; competitive, but stable. The issue now is really the fundamental demand for the cube because freight levels are so low. But we are not unhappy with our pricing. It's very stable. We clearly look at those margins not only on a vehicle-by-vehicle basis as Greg had mentioned, but also as a total portfolio by product line as well. But the pricing is stable. The issue really is demand for cube because the reduction in freight levels. And we monitor those margins by product line monthly clearly.

Okay. In terms of Supply Chain Solutions, is there a particular number in terms of kind of net operating income, net income before taxes that you think can get to. I think now you are right around 3% give or take a few digits. And is it... at some point, is this a 5% business, a 6% business? Maybe give us a little sense as to where you are going there.

The net before tax right now should be around 5.3% to 5.5%. So our objective on that measure is that we wanted over a number of years to get to 6% plus and be in the 6% to 8% range on net before tax. And we think that would probably be pretty much best in class or as good as you would get in this business. And then you have to remember that the returns on the capital and returns on equity would be very, very large in that segment.

Sure, sure. And just as a final statement and question, I actually think given the environment that you guys are facing, these results are excellent. And the fact that the jump... the thing that jumps out at me is the contractual nature of the business and how much of that is part of the revenue stream. And with that just to... by extension, that suggests that there is a lot less cyclicality that's been in the business than previous years, and Greg you mentioned that in your comments. And so kind of the final piece of that is do you go back to Moody's and Standard & Poor's and say hey guys, we've demonstrated that the cyclicality that used to be in this business, we essentially have pretty much taken out and our balance sheet's solid as rock. We should in the A category. Is that a conversation or a thought you ever have with them?

Well, you said many things there. First, thanks for you comments. We have worked very hard generally to improve the business model and we have a team of people who I think clearly are exceptional and the best in the industry in working through difficult times. There still obviously remains some cyclical effect and non-contractual effect that comes from commercial rental, but that's a key component of our business. But the contractual has become a larger piece. In terms of the rating agencies, first thing is you were right about the strength of our balance sheet and the solid progression of our earnings. And that is why the rating agencies, most importantly, in our conversations they understand our leverage targets, they support them, they believe in us getting to them over a rational period of time and not all in one fell swoop. And that's very important because we do want to improve the leverage, whether that's through acquisition or through share repurchase or a combination. In terms of a rating, that's ultimately up to them. We are not unhappy where we are at BBB plus, A2/P2. I think you know that serves us well and there would probably be marginal, if any, value to us to even move to A. But that's ultimately up to them.

Okay, good. Well, finally, Robert, congratulations Mark, congratulations to your position and looking forward to hearing from both of you in the future.

Great. Thanks for your comments.

Yes, thank you. Looking forward to meeting all of you and working with you closely.

Thank you. Our next question is from Ted... I'm sorry, Todd Fowler. You may ask your question and please state your company name.

Good morning, KeyBanc Capital Markets. Greg, in the earnings release you talk a little bit about some deterioration in fuel margins. I guess I was wondering if you can provide a little bit of color on what's happening there. I have always thought fuel was pretty much a pass through. But if you can talk a little bit about... if you can quantify the impact and then obviously the nature of what's driving the declining margins there?

Yes, fuel margin, although it's essentially a pass through, we do earn a certain number of cents per gallon, so X cents per gallon. And customers do take advantage of our buying power. The principal decline in this quarter has been due to just less gallons pumped, primarily in the commercial rental side of the business. So you get less volume, less gallons pumped; therefore, less cents per gallon. We usually don't disclose right down to that next level of detail. We keep it at the Fleet Management Solution level in total.

So it really doesn't have too much to do. It's not a function of the cost of fuel here in the quarter; it's more of volume type?

That's correct. This is not... as the price moves up or down, that is less a factor unless there is some incredible activity like hurricane related in the Gulf that drives the price up or down. But this is really a situation of gallons pumped and less volume due to commercial rental decline.

Okay, good. That's helpful. And then with the savings from the headcount reduction, should we expect to see the $20 million... is that going to be ratable in 2008? I mean would it be evenly throughout the year or will there be a bigger hit or kind of a ramp up towards the end of the year?

It's probably fairly equal. And how that plays out and how that may offset anything else anything else we are facing next year we'll disclose and share that when we do our 2008 plan in February.

Okay. And then just a couple two quick real quick ones. The share count and the tax rate that you are using in the guidance, would you care to share that?

There was an earlier question about tax rate. We said you can kind of figure about the same level or a little bit higher too from where we are. At the start of the year, we talked about roughly a 39% tax rate. And your other question?

The share count for the fourth quarter guidance?

Share account should be what it is today.

So 50... somewhere between 58 million --

58 million, we ended September 30th. I think we ended at 58 million shares.

Okay. And then just lastly, I know we'll see this when the Q comes out, but the actual or the dollar amount for the depreciation and the pension benefit in the quarter?

Yes, it's in the Q. Yes, it will be in there. I don't have the --

Yes, the pension was $10 million versus last year in the third quarter. And the other one was?

The depreciation benefit?

The depreciation was $3 million for the quarter versus last year.

For those of us who just can't wait for the Q to come out.

Okay.

It will be out later in the day.

All right. Thanks a lot guys.

Okay, thank you. And since it's about 11:05 and we have gone over our time and I know many of you have to run to other transport calls, we are going to end here. I thank you all for your interest and your questions and if there is any follow up needed, I know you can get with Bob Brunn, Investor Relations. Thank you all very much.

Thank you. This concludes today's conference. Thank you for participating. You may disconnect at this time.