Ryder System, Inc. (R) Q3 2011 Earnings Report, Transcript and Summary

Good morning, and welcome to the Ryder System, Inc. Third Quarter 2011 Earnings Release Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objection, please disconnect at this time. I would like to introduce Mr. Bob Brunn, Vice President, Corporate Strategy and Investor Relations for Ryder. Mr. Brunn, you may begin.

Thanks very much. Good morning and welcome to Ryder's third quarter 2011 earnings conference call. I'd like to remind you that during 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 expectations 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 today's call are Greg Swienton, Chairman and Chief Executive Officer; and Art Garcia, Executive Vice President and Chief Financial Officer. Additionally, Robert Sanchez, President of Global Fleet Management Solutions; and John Williford, President of Global Supply Chain Solutions, are on the call today and available for questions following the presentation. With that, let me turn it over to Greg.

Well thanks, Bob, and good morning, everyone. Today we'll recap our third quarter 2011 results, review the asset management area and discuss our current outlook for the business. And In addition, we're going to provide you with a brief overview of several future enhancements that we plan to make with our financial statement reporting, and after those remarks, we'll open up the call for questions. So let me get right into an overview of our third quarter results. On Page 4, for those following the presentation online, net earnings per diluted share from continuing operations were $1.10 for the third quarter 2011, up from $0.76 in the prior year period. The third quarter results included a $0.01 tax benefit from acquisition-related costs incurred in the prior year. Excluding this benefit, comparable EPS was $1.09 in the third quarter 2011, up from $0.76 in the prior year. This is an improvement of $0.33 or 43% over the prior year period. Third quarter EPS was also above our forecast range of $0.98 to $1.03. We delivered on our targets in Fleet Management, with strong results on Rental, acquisitions and Used Vehicle sales. We exceeded our plans in supply chains due to acquisitions and strong performance in both existing accounts and from new business. Total revenue grew 19% from the prior year. Operating revenue, which excludes FMS fuel in all subcontracted transportation revenue, increased 17% with double-digit growth in all 3 business segments. The increase in revenue reflects both the benefit of our recent acquisitions and organic growth. Page 5 includes some additional financial statistics for the third quarter. The average number of diluted shares outstanding for the quarter declined by 700,000 shares to 50.8 million. During the third quarter, we repurchased approximately 203,000 shares, at an average price of $46.90 under our 2 million share anti-dilutive program. This program remains active with approximately 415,000 shares available at quarter end. As of September 30th, there were 51.1 million shares outstanding of which, 50.8 million are currently included in the diluted share calculation. The third quarter 2011 tax rate with 35%. The tax rate reflects the benefit of $600,000 from acquisition transaction costs incurred in the prior year. Excluding this item, the comparable tax rate would be 35.7% in the third quarter 2011 versus 36% in the prior year. Page 6 highlights key financial statistics for the year-to-date period. Operating revenue was up by 16%. Comparable EPS from continuing operations were $2.52, up by 61% from $1.57 in the prior year. Excluding tax law changes from earlier this year and other items, the comparable tax rate was 37.5% in 2011 versus 39.2% last year. Adjusted return on capital, which is calculated on a rolling 12-month basis was 5.5% versus 4.5% in the prior year, as growth in earnings outpaced growth in capital. We now expect a positive spread between adjusted return on capital and cost of capital of a positive 20 basis points for the full year. This is above our previous forecast, which estimated a breakeven spread for the year. It also represents an improvement of 150 basis points from last year. I'll turn now to Page 7 to discuss some of the key trends we saw during the third quarter in each of the business segments. In Fleet Management, total revenue grew 16% versus the prior year. Total FMS revenue includes a 28% increase in fuel services revenue, reflecting higher fuel cost pass-throughs. FMS operating revenue, which excludes fuel, grew 12% mainly due to higher commercial rental revenue and acquisitions. Contractual revenue, which includes both Full Service Lease and Contract Maintenance, was up by 4%. Full Service Lease revenue grew 5%. The average lease fleet size increased 7% from the prior year's third quarter. On a sequential basis from the second quarter 2011, the average fleet was up 6% reflecting recent acquisitions. Excluding the acquisitions, the U.S. organic lease fleet grew slightly from the second quarter, resulting from both improved retention rates on expiring leases and new business wins. We're very pleased to see this positive inflection in our U.S. lease fleet and expect the global fleet to also increase from current levels on an organic basis by year end. Miles driven per day, per vehicle on U.S. lease power units were down 1.5% from the prior year. We realized strong growth in Commercial Rental revenue of 40%, reflecting improved global demand, higher pricing and an increase in the fleet size. The average rental fleet increased 30%, and was up by 12% excluding acquisitions. Global utilization on rental power units remained strong at 79.3%, up 10 basis points from last year. Global pricing on power units was up 11% versus the prior year. In Fleet Management, we also saw stronger Used Vehicle results during the quarter, reflecting a continued strong demand environment. I'll discuss those results separately in a few minutes. Improved FMS results were partially offset by higher compensation-related expenses and higher maintenance costs on our older lease fleet. We expect increased maintenance costs resulting from the lease fleet age to continue in the fourth quarter. Net Before Tax earnings in Fleet Management were up 35%. Fleet Management earnings as a percent of operating revenue increased by 150 basis points to 9% in the third quarter. Turning to the Supply Chain Solutions segment on Page 8, both total and operating revenues were up 26% with operating revenue growth in all industry verticals. Revenue increased due to the Total Logistic Control acquisition in December, higher volumes and new business startups. Revenue growth in these areas largely drove the improved earnings in this segment. Earnings also benefited by approximately $2 million from favorable insurance development, foreign exchange gains and a facility sale. Increased SCS earnings were partially offset by higher compensation-related costs. In total, SCS Net Before Tax earnings were up by 47%. In Dedicated Contract Carriage, total revenue was up by 31% and operating revenue was up by 26%. This growth reflects the Scully acquisition and higher fuel cost pass-throughs. DCC's Net Before Tax earnings decreased 3%. And while earnings increased as a result of the acquisition and better operating performance, these improvements were more than offset by increased compensation-related expenses and legal claims. As a result, DCC's earnings as a percent of operating revenue were down by 170 basis points to 5.6%. Page 9 shows the business segment view of our income statement, which I just discussed, and is included for your reference. Page 10 highlights our year-to-date results by business segment. And in the interest of time, I won't review these results in full detail, but will just highlight bottom line results. Comparable year-to-date earnings from continuing operations were $130.5 million, up by 57% from $83.1 million in the prior year. At this point, I'll turn the call over to our Chief Financial Officer, Art Garcia, to cover several items beginning with capital expenditures.

Thanks, Greg. Turning to Page 11, year-to-date gross capital expenditures totaled $1.25 billion, which is up $354 million from the prior year. Spending on leased vehicles was up $127 million from the prior year, reflecting improved sales and higher investment costs on new vehicles. Capital spending on Commercial Rental vehicles was $580 million, due to both refreshment and planned growth of the rental fleet. This was an increase of $222 million over the prior year. Our total full year capital spending forecast remains on track with previously expected levels. We realized proceeds primarily from sales of revenue earning equipment of $224 million, that's up $62 million from the prior year. The increase reflects higher Used Vehicle pricing, partially offset by fewer units sold. Including proceeds from sales, net capital expenditures increased by $292 million to just over $1 billion. We also spent $362 million year-to-date on acquisitions, primarily related to the purchases of Hill Hire and Scully. Turning to the next Page, we generated cash from operating activities of $782 million year-to-date, down by $22 million from the prior year. The reduction is primarily due to changes in working capital, reflecting increased receivables. We generated $1.1 billion of total cash year-to-date, up by $38 million from the prior year as increased Used Vehicle sales proceeds more than offset the reduction in cash from operations. Cash payments for capital expenditures increased by approximately $300 million to almost $1.2 billion. Company had negative free cash flow of $113 million year-to-date. Free cash flow was down $266 million from the prior year's positive free cash flow, due mainly to higher planned capital spending on vehicles. Page 13 addresses our debt-to-equity position. Total obligations of approximately $3.3 billion are up $416 million as compared to year end 2010. The increased debt level is largely due to acquisitions and higher vehicle capital spending. Total obligations as a percent to equity at the end of the quarter were 225%, up from 203% at the end of 2010. As you may recall, last quarter, we commented that we expected year end leverage to be around 220%. Our leverage calculation includes the impact of a pension equity charge that's determined at year end, based on planned asset values and discount rates. At the levels we've seen recently in the market, our leverage forecast would increase by approximately 10 to 20 percentage points. The final calculation will be done as of 12/31. Looking ahead, changes in asset values and discount rates for our pension plan will likely also impact earnings in 2012. Again, this impact will not be determined until the measurement date on 12/31, but at recent levels, we estimated negative EPS impact next year of approximately $0.01 to $0.06. We'll provide the actual impact on both leverage and earnings on our fourth quarter call. Turning back to third quarter results. Our equity balance at the end of the quarter was $1.45 billion, that's up by $47 million versus year end 2010. The equity increase was driven by earnings, partially offset by dividends, currency translation adjustments and net share repurchases. At this point, I'll hand the call back over to Greg to provide an asset management update.

Thanks, Art. Page 15 summarizes key results for asset management area globally. At the end of the quarter, our Global Used Vehicle inventory for sale was 5,100 vehicles, up by 400 units or 9% from the third quarter 2010. While the ending inventory was higher, the average inventory was down by 4% for the quarter. Additionally, our Used Truck inventory remains well below our target level. We sold 4,100 vehicles during the quarter, down 7% from the prior year due to lower average inventory available for sale. We expect the number of vehicles sold in the fourth quarter to be consistent with year-to-date sales, while in 2012, we anticipate sales volume to increase due to higher lease renewals. We saw continued strength in Used Vehicle demand and pricing in the quarter. Improved demand is a result of both relatively better market conditions and the desire of some truck buyers to obtain pre-2010 engines. Stronger demand combined with less available inventory in the market has allowed us to up-price generally, and in the U.S. market to increase the proportion of retail sales where we realize better prices. Compared to the third quarter 2010, proceeds per vehicle were up 39% on tractors and 20% up on trucks. From a sequential standpoint, tractor pricing was up 6% and truck pricing was up 5% versus the second quarter of 2011. Going forward, we expect continued strong Used Vehicle pricing in all classes. At the end of the quarter, approximately 7,600 vehicles were classified as no longer earning revenue. This was up by 700 units or 10% from the prior year and reflects an increase in lease replacement activity. As expected, the number of lease contracts on existing vehicles that were extended beyond their original lease term, declined versus last year. While extensions are still running somewhat above normalized levels, they're now below 2009 levels for the first time this year. This decline reflects an increase in new full-term lease contract sales instead of lease extensions by customers. Early termination of leased vehicles declined by 650 units or 22%. Early terminations were less than half what they were 2 years ago and were at the lowest level in the past decade. This continues to be a very positive indicator of improved leased demand and sales. Let me turn to Page 17 to cover our outlook and forecast. In Fleet Management, we've seen continued strength in Commercial Rental and Used Vehicle sales into early October, and are expecting these areas to be in line with our prior outlook. In Full Service Lease, our sales results have improved very nicely this year for both new business and fleet renewals. We saw the positive inflection in our organic U.S. fleet, that we've anticipated and we expect the global fleet to grow organically in the fourth quarter. Including vehicles from acquisitions, our lease fleet has already grown by 8%. We expect to benefit over the next couple of years from the need for replacement of aging private fleets, along with a higher cost and increased complexity of new vehicle technologies. In supply chain, the TLC acquisition has helped us more than double our revenue in the retail and CPG industries, and we're seeing very solid interest from customers in the services we can now deliver by combining Ryder and TLC's service offerings. Organic growth in our other industry business verticals is also helping us deliver improved earnings in this segment. While margins were somewhat higher than usual in the third quarter, we anticipate solid margins in this segment to continue. In DCC, while margins were down this quarter due to a couple cost items, revenues are up strongly from our acquisition and we're seeing a better new business pipeline. Given these factors, we're providing a fourth quarter EPS forecast of $0.92 to $0.97 versus a comparable prior year EPS of $0.65. This represents fourth quarter EPS improvement of $0.27 to $0.32 or a 42% to 49% increase. And this range is consistent with the fourth quarter guidance implied in our prior forecast update. With this fourth quarter outlook, we're increasing our full year 2011 comparable EPS forecast range from a previous $3.33 to $3.43 to a new range of $3.44 to $3.49. Our full year EPS forecast range represents a 55% to 57% improvement above last year's comparable EPS of $2.22. As I mentioned at the beginning of the call, we plan to make several enhancements to our financial reporting format starting in the fourth quarter. So I'll turn the call back over to Art to provide a brief overview of these upcoming changes.

Thanks, Greg. A brief description of the enhancements to our financial reporting and their effective implementation dates are provided on Page 19. First, we're going to revise the format for the Ryder System consolidated income statement. Our current income statement format is more typically seen for transportation companies and presents a single line for consolidated revenue. The new presentation is more consistent with the nature of Ryder's business model, which includes vehicle leasing and rental, as well as other services. You'll see this change starting next quarter with our fourth quarter reporting. Second, we plan to combine the financial reporting for the Supply Chain and Dedicated Contract business segments. These businesses have become more integrated over recent years from both an operational and sales perspective, and therefore, it makes sense to combine them from a financial reporting view as well. The third enhancement will exclude the non-service portion of pension costs from segment earnings and report this cost separately. This will provide better visibility to the segment's operating performance, as well as to the performance of our frozen pension plans. The segment changes will be effective with our first quarter 2012 reporting. As we've done in the past, for any reporting changes, we'll provide historical information under the new formats for comparative purposes. The next several pages outline the format of the new financials for each of the 3 changes. Page 20 shows the current and future formats for Ryder's consolidated income statement. The current format shows one number for consolidated revenue. Under the future format, you'll see the revenues for leasing and rental activity, other services and fuel. The new format also separately provides the direct cost for each of these 3 revenue items, along with some additional detail on other costs such as SG&A expense. Key items such as depreciation, that are no longer separately listed on the consolidated P&L, will be shown elsewhere in the financials. This presentation provides a more detailed breakout of revenue and expenses, and better aligns the expenses with the type of revenue supported. Page 21 presents the revised segment reporting format, which will show combined results for Supply Chain and Dedicated contract. Current DCC segment revenue will be presented in the relevant industry vertical along with Supply Chain segment revenue. In addition, we will show as a memo item, the combination of standalone DCC segment revenue with DCC revenue previously reported within Supply Chain. This change aligns our reporting format with how the businesses are being operated. It will also provide you with a combined view into total dedicated activity throughout the company, which was previously included in 2 separate segments. The last reporting enhancement will exclude non-service pension costs from segment pretax earnings. A comparison of the current and future presentation is provided on Page 22. Our pension plans have been frozen for several years. However, non-service components of pension can drive significant pension expense volatility because of changes in equity markets and the overall interest rate environment. Currently, this pension volatility is presented in segment results. Going forward, segment margins will more accurately reflect the true operating performance of the business rather than being skewed by pension. You'll also be able to see the impact of the pension plan on Ryder's results separately. Again, we'll provide historical information both in our earnings call materials and online for comparison and modeling purposes. At this point, I'll turn the call back over to Greg.

Thanks, Art. That does conclude our prepared remarks this morning and we'll move on to the Q&A portion. [Operator Instructions] So at this time, I'll turn it over to the operator to open up the line for questions.

[Operator Instructions] Our first question today is from David Ross with Stifel, Nicolaus. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: In the FMS segment, Contract Maintenance is down 2% year-over-year, can you just comment on why you think that was and what's holding back kind of the increased maintenance outsourcing?

Sure, let me ask Robert Sanchez to comment on that.

Yes, David. If you look at the -- although the revenue is down, the fleet count is up, and that's really because of a change in the mix of units that we have in there now. We lost an account that had heavier duty equipment, picked up an account that has lighter duty-type vehicles. As you know, we're trying to expand our -- and broaden our service offering. So that's really just a change in the mix of business that we have. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: And have you any issues with mechanic recruiting? There's -- you talked about driver shortage but I also hear that mechanics are difficult to find.

We are -- as with everybody in the industry, we're seeing certainly a little more difficultly in recruiting technicians than maybe what we had 5 to 10 years ago. But we actually view that as an advantage for us because we're very good at it, and especially as compared to private fleets that are maybe doing maintenance on their own, that are having to go through this on their own, we view that as an opportunity for us.

And just the last numbers that I've seen from HR, this year, in 9 months, we've hired 1,100 technicians. I mean that's due to a lot of retirements and really some of the aging out of people who've been in service here for 34 years. So you're going to have some of that over time, so were doing a lot of hiring, obviously, when you can hire 1,100 you have access to a lot of people.

Our next question is from Kevin Sterling with BB&T Capital Markets. Kevin W. Sterling - BB&T Capital Markets, Research Division: Greg, as I look at this cycle, maybe compared to previous cycles, it feels a little elongated this time, as we keep seeing strength in Commercial Rental, I think given the uncertain economic environment, do you expect Commercial Rental to remain strong with economic uncertainty that continues to dominate the headlines?

I would say that this cycle is both elongated and probably different than a lot of things we've seen in the past. And that's why people ask, is there a new normal? I would say, in our case, for Ryder's case, I think what we expect to continue is very strong Commercial Rental and simultaneous growth in new lease, Full Service Lease sales. And that's what we predicted and that's exactly what we're seeing now. We have an inflection and an upward turn in our lease replacements, as well as new business sold, as well as very strong 40% Commercial Rental growth. Kevin W. Sterling - BB&T Capital Markets, Research Division: Okay, great. Another question. You've talked about, I think maybe some higher maintenance costs in Q4 because of the lease fleet age, do you anticipate maintenance cost moderating some in 2012?

Robert, you want to...

Yes, I think that they will moderate, but it's -- we're still probably 12 to 15 months out from it really turning the corner, because you've got the vehicles that were signed in '06, which are now entering into the fifth and sixth year. And that as those units begin to go through a replacement cycle, you'll then see maintenance costs and you'll see that average fleet age start to come down. But in the near term, we expected it to still continue to be somewhat higher.

Our next question is from Alex Brand with SunTrust Robinson Humphrey.

This is Sterling in for Alex today. I wanted to ask about revenue in the fourth quarter, with all of the improving trends you've mentioned, growing lease fleet, the trends in Commercial Rental, I guess I'm not sure if we should expect revenue to be up sequentially in the fourth quarter? And if you can walk us through, at least in FMS, qualitatively the different segments and whether or not we should expect upward revenues sequentially.

I think generally they'd certainly be up considerably over the last year. Sequentially, maybe, Art, if you've got that available?

Yes, Greg, to your point, they're going to be up year-over-year reflecting the benefit of acquisitions and organic growth. We do see some seasonal declines in rental, as well as in our automotive business and supply chain, and then also with the acquisition of TLC, the CPG business has a little bit of seasonality in the fourth quarter.

Okay. And fair enough, and just as a follow-up to that. The Full Service Lease revenue with organic growth starting in that segment, should we expect sequential increase in revenue there?

Yes, you're going to see revenue be relatively flat sequentially, but continue to be up year-over-year. We should see it up somewhere in the 5% range, year-over-year.

Okay. That's very helpful. And I just wanted to last ask about the DCC segment. I understand reporting is going to change there. But the cost increases you saw in salaries, is that -- I assume that's mostly driver pay, is that something we should continue to expect to escalate?

Well, it's partially driver pay, but you may also recall that over the last 2.5 years, we've also had management salary freezes, so part of the increases are due to just giving people increases again and probably paying them in line for the results this year. So on a year-over-year basis, you get a disproportionate impact. So I wouldn't hang all of that on just driver pay. So that's something else that, of course, is an industry issue, and we manage but you have to consider the other compensation restoration that are in there.

Our next question is from Anthony Gallo with Wells Fargo.

Could you say what Full Service Lease growth was sequentially if you were to strip out acquisitions?

In terms of units, it's probably around 300, sequentially, on Full Service Lease net.

And what will be realistic numbers to think about, maybe a range over the next couple of quarters?

We'd like to be able to do that or better. If we continue the trends that we have seen in the recent past in terms of improvement of retention, lease replacements and new business growth, we would expect that number to accelerate. The specifics, especially for the second quarter out, we're not commenting on yet for 2012, but I think directionally, that's what we would expect.

Okay. And is that net of -- that's net growth, correct?

That is net growth, yes. Net organic growth.

Okay. And then instead of asking another question, I'll ask Bob. Is it possible to provide the new formatted historical information ahead of the next release? I'll just throw that out as a request for you to consider. Just give us some time to update our models before you actually print the number.

Yes, I think, Anthony, we'll look at some of those. I think the ones around segment reporting and the exclusion of that non-service portion of pension from the results, we'll be able to provide those, I think earlier on. The piece on the Ryder's consolidated income statement, that's something that we're completing, and I think if we're ready to do it, we'll get it out. If not, it will come out right around the same time as the earnings call.

And so Art answered and Bob was nodding his head, yes.

I'm just figuring out who will have to do all that work.

Well, mostly it's Art and actually his staff.

Our next question is from Peter Nesvold with Jefferies. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: I'm going to try to ask my question very high level, because I'm struggling with it a little bit. So third quarter numbers come in better than expected. We have a fading macro backdrop throughout most of August, a lot of uncertainty. The Full Service Lease business actually starting to accelerate, which gets me kind of intrigued because that's where the late cycle leverage is and that's where numbers can really move. And then fourth quarter, the guide, it's kind of consistent with what you saw 3 months ago. And on the one hand, beggars can't be choosers into a fading macro backdrop, keeping guidance for fourth quarter flat with where you were 3 months ago, it should be considered a victory. But I'm just trying to understand, am I missing something that changes in the business as the late cycle business ticks up. Do you kind of lose some of the Commercial rent fees or is -- or maybe this cost in the Dedicated concert business coming in more than I anticipated or -- so I'm just throwing out there kind of high-level, open-ended question.

Well you sort of have 2 categories in the question. One is the macro trends and then maybe some specifics regarding the fourth quarter. I think that in spite of sort of the uncertainty that you hear in the marketplace, we do have a lot of macro trends going for us. I think, generally, when things are difficult and things get more complex and more expensive, which is in the case both in Fleet Management and supply chain, that the outsourcing proposition and specifically our outsourcing value proposition in which we can show to customers that we can perform these functions more efficiently and cost-effectively, that serves us well. So regardless of the economic climate, we believe and we are committed to selling through that. Of course, a strong economy is always better and easier, but we think we can continue to sell through that and sell the value proposition. And I think that a lot of that was reflected in the third quarter and actually carries into the fourth quarter. So many macro trends in our favor including aging fleets and outsourcing and all the rest. Regarding the fourth quarter, yes, we hailed the same as we did in the previous quarter. Because you tend, at least historically, to have a bit of a seasonal falloff. Our first quarter is always the lowest, the second quarter picks up, we peak in the third, and we usually flat or falloff a bit in the fourth. That's just something that happens by the nature of the business activity we're in. We could do better and that's why we put a range on it. And we thought all things considered, and we've been somewhat accused sometimes of being a bit conservative, we thought it was appropriate to maintain that level of forecast that we had 3 months ago. But there's certainly nothing that would indicate that Commercial Rental is going to slow down, or that our sales are going to slow down. We are as committed as ever to be able to sell and drive that value proposition, we expect to do it. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: Great. I do have a really quick one for Art. Art, is there any update you can provide from the pension funding levels and what we might anticipate in terms of the pension income headwinds on a consolidated basis for next year?

Yes, I mentioned -- I had that in my comments earlier, Peter. It's -- right now, if you look at current levels, kind of what we're seeing in the market around equity returns and the discount rate environment, we'd be looking at an increase in pension expense next year of $0.01 to $0.06, depending on how it plays out. And that it also would impact leverage. We had -- I had previously given an update of forecast around 220 at the end of for leverage, baking in what we're seeing around pension volatility, that could increase that number 10 to 20 percentage points.

Thank you. Our next question is from Todd Fowler with KeyBanc Capital Markets.

Greg, maybe one more on the seasonality question. As I look back on Commercial Rental, it seems like if I go back, the fourth quarter was always a little bit stronger from a utilization standpoint. That hasn't necessarily held true in the past couple of years. What would your expectation be from utilizations, sequentially with the rental fleet going into the fourth quarter? And also what should we expect for the size of the rental fleet, maybe on a year-over-year basis?

Robert, you want to comment?

Yes. Tom, in terms of utilization, we typically see it come down a little bit. But more importantly, we normally bring our fleet down in the fourth quarter as just part of the normal cycle. As we get into the tail end of the holiday season, the business slows down a bit, and then we start -- we outsource vehicles, try to get them out that the fleet so that we start the first quarter with a smaller fleet that's more aligned with the demand for the first quarter.

So on the average, the size of the Commercial Rental fleet in the fourth quarter means it's going to be up 25% year-over-year or 20%?

Sequentially, you'll probably see it go down any -- right around 1,500 units.

Okay. And then for the follow-up, I think when you laid out the guidance at the end of the second quarter, you talked about Hire Hill (sic) [Hill Hire] being $0.12 to $0.17 accretive in the second half. Do you have a number of where that came in for the third quarter and what the expectation for that would be for the fourth quarter?

Hill Hire, it was probably a little bit better than our forecast, but not significantly. So that our $0.12 to $0.17 range is still a good placeholder.

And are you seeing anything different with the trends in Europe versus here domestically, given some of the things that are going on in those markets?

Actually not. We found that Commercial Rental on both sides of the Atlantic have been very strong and new lease commitments have also done well.

Our next question is from Ed Wolfe with Wolfe Trahan. Edward M. Wolfe - Wolfe Trahan & Co.: Can you talk a little bit on the logistics side? John, big quarter, obviously with Supply Chain, but $22.4 million, I think, is a record in a quarter versus $15 million a year ago and $17 million last quarter. Is there some things in there that are onetime in nature or is this a fair run rate going forward?

Well, yes, thanks for pointing that out, Ed. I think it was a record and I think we mentioned that there were a couple of kind of onetime things benefiting us in the quarter. The third quarter is always our best quarter, anyway. I think 6.9% might even have been a record. I think there's maybe about $2 million of things that you could categorize as good outcomes or onetime benefits, then there's about $0.5 million of tsunami cost working against us and that's all out now. So I think if you've factored and netted that out, it would still have been a really good quarter, but it wouldn't have been kind of off the charts good. Edward M. Wolfe - Wolfe Trahan & Co.: Sure, but if I take that $1.5 million away, it's still $21 million, that's a fair number to work off in this quarter at next year?

Well, next year is a long way away. We've been saying for a long time that this business can do for a year, and keep in mind that third quarter is the best quarter, but that for a year, we can do in the fives, and that we're hoping to get up to around 6 eventually. And then that's what I've been saying for a while. I think we're making good progress on that, getting up to 6 for a year, although I don't want to commit to that for next year. But I think we're improving our margins, and we're getting up towards that. Edward M. Wolfe - Wolfe Trahan & Co.: And as the second question, more general for Greg or Robert. I know you haven't set your CapEx budget next year, but directionally, at this point, would you expect giving current trends CapEx would be directionally up flattish or down at this point?

I would expect CapEx to be up, and that would be a sign of a very good news, because it would mean that we're replacing a lot of existing leases and we're selling a lot of new business.

Our next question is from Art Hatfield with Morgan Keegan. Arthur W. Hatfield - Morgan Keegan & Company, Inc., Research Division: Just one question for me this morning. Looking at the daily miles driven by -- in those lease fleet being down 1.5%, second quarter in a row, that number's been down. Can you address that and talk about if something unusual is going on there, and if we need to be worried about that directionally?

Robert, you want to comment?

Yes, Art, it's down 1.5%. Last quarter, it was relatively flat. So it is -- I think it's too early to tell if it's something that's really, something to worry about. I think some of it is -- as customers are beginning to look at leases, bring lease vehicles into their fleet, give back some of the rental units, there's a little bit of noise there. So we're expecting, going into the next -- going into the fourth quarter to -- that it will be down again about 1% year-over-year. So not a significant drop. It hasn't hit the peaks in terms of miles per unit that it hit in '07, so there should still be some room for those numbers to move up, but probably a little early to tell in terms of -- if it's some type of trends we should worry about.

Our next question is from Ben Hartford with Baird. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: I was hoping to address the used truck pricing strength just conceptually. What do you think has been the driver of this strength here year-to-date. Is it more of a -- is it simply a scarcity function given the age of the fleet and the limited availability of 3- to 4-year-old trucks. Or do you see a trade down of some of the customers that might normally deal with dipping down into buying used equipment. How much of it is demand and how much of it is supply?

I think both parts that you mentioned are relevant. There certainly is a supply and demand issue. There's more freight to move than a year ago, and used trucks are obviously, if they're well-maintained by Ryder, they're reliable, and they're a good bargain for their purpose. I believe that we are seeing some new buyers, because there always is a core of used truck buyers, but we do believe, that the extra surge in demand affecting the supply-demand relationship is a reflection of a desire for pre-2010 engines, which are a lot less expensive than buying a new one. So I would say both are the case. And Robert, I'm not sure if you want to add anything...

Yes, I think that the trade down that we're seeing the most is folks who would normally buy maybe a 3-year-old used piece of equipment, are now buying a 5- or 6-year-old, because there's not enough of the 3- and 4-year-olds. If you look at the average age of what we sell, it's anywhere from 6 to 8 years old. So we do see customers coming in who would normally be buying maybe a 3- or 4-year-old vehicle, now looking at buying something older because there's just not availability. So we're certainly happy with what we're seeing in the market. We're seeing strong pricing and a lot of, certainly a lot of demand from customers that are looking for equipment, and we expect that certainly, that trend, if you just look at fleet agings across the network, we expect that to continue. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: And then I think related to that, can you talk about the lease pricing dynamics. There is some reluctance to take new equipment, demand is stable, but still relatively weak. Have you seen any changes in the lease pricing dynamics here in the third quarter, and what your expectations over the next 6 to 9 months as you kind of turn the corner on organic lease fleet growth.

Yes, Ben, we're seeing certainly stable pricing in the market. We are seeing that the recapture, if you will, of the higher costs in that and we do -- we do see it, we're seeing a lot of activity on the lease sales side where we have a very strong lease sales. Sales for us is new contract signed. We had a strong quarter in the third quarter and the pipeline is very strong right now, so we like where it's going. We are seeing customers that are now willing to put pen to paper and sign new contracts as their fleets have gotten older and as they're making decisions on whether to buy trucks or lease vehicles. We're beginning to see more interest on that side also. So we're happy with that trend and where it's going.

Our next question is from Matt Brooklier with Piper Jaffray.

Just quickly, expectations for your fourth quarter tax rate. I know there's been kind of a little bit of volatility into the end of the year, but just is there a decent number for us to use?

Yes, Matt, our -- the rate for Q3 was 35.7, which it is seasonally lower in the second half for us, and we expect that to continue in the fourth quarter, so that's the rate I would be using, the high 35s.

35.7 in fourth quarter?

Yes.

Okay. And maybe you could talk to how demand trended in the quarter, into September and thus far into October, how things are feeling from a demand perspective within your lease and your rental business. And also maybe talk to some of your larger rental customers, and in terms of how they're positioning themselves into what feels like it could be a smaller peak season, but just generally how are they positioning themselves from a rental product perspective?

Well, on the rental side, we're -- October seems to be following the same trends that we saw in the third quarter, so still relatively strong. We are seeing the seasonal customers that normally come to us in the fourth quarter are showing up. And they are going through a similar pattern as they go in this time of the cycle. So I think continued strength in rental is really the story so far in October. On the lease side, as I mentioned earlier, we had the very strong third quarter. It was actually the second strongest third quarter sales quarter for us in the last decade. So only in 2006 did we see more sales here in the U.S. as it relates to lease contracts. So we're happy about that, we're seeing that continuing in October and we think that marries up well with our expectation around the replacement cycle that we're seeing in the OEM sales that are out there.

Our next question is from Jeff Kaufman with Sterne Agee. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: Greg, I want to come back to Peter Nesvold's question. Because I think that's what the market is kind of scratching their head over today with the shares. You basically, you guidance by $0.08 or $0.09, and you're kind of forward guiding flat versus your previous expectations, each of the last 2 quarters, you raised your guidance. Is this -- the way I interpreted your comments, is this you not just wanting to get over your skis because there's a lot of good things happening, you don't want to overpromise or is there really something here beneath the surface where you're kind of slowing down your speed on the mountain here.

Well, we banked everything that we've made and we pushed that forward, and as you say, we've maintain the fourth quarter. I wouldn't say that there is something that we're seeing that causes us any concern in the fourth quarter. You can make your guess as good as anybody else as to whether we're going to have some slowdowns, whether we're going to have a slow Christmas, whether it's going to be low volume. We just don't know either. But I would say if we're -- right now, if you're on the meter of bullish versus bearish, we're a little bit more on the bullish side, because we haven't seen a slowdown yet. Robert just talked about the strength that we're seeing thus far. This is October 25, right? So were one month into the last quarter, and we haven't seen it slowdown yet. If it keeps up, then we're going to be very happy. But in terms of making predictions or, as you say, not getting too far over the front of your skis, yes, we're going to be appropriate and prudent, and kind of down the middle. And we'll see how it plays out, but there's nothing that suggest to us now that it’s not going to another solid quarter. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: Okay. And a follow-up question for John Williford, please. John, I always thought of the logistics business as we really shouldn't look at operating margins, it's not the right way to look at it or pretax margins. And to Ed Wolfe's point, here you are north of 5%, and that's something you really didn't think this business could do. Is that the right way to think about what you're achieving in the business or is there something's changing where 6% is becoming a margin we think we can do?

Yes, I tend to say don't focus as much on operating margin, focus more on growth and profits. Our business and SCS is so big in that types of projects are stable enough that it can be -- really be a way to think about growth and profits is to compare operating margins from year-to-year, but it really is what I think about. And what I'm happy about for the quarter is we grew our NBT by 47%. So and I think we can continue to grow our NBT at good levels and probably at levels that are a little faster than our growth in revenue, and that when you look that over a big portfolio of business, and it probably does cause our margin to start to climb up from what people are used to of around 5% in a good year to something that starts to get above 5% and closer to 6% over time. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: If we think about kind of what's different and what might be causing this. Is this more you, just controlling your overhead well, is this you're into new businesses that might afford you better numbers, is this better customer mix? Kind of what's changing that's leading us to be able to do this, outside of executing very well and doing a great job?

Well part of it is execution, I think. Part of it is growing the business with the roughly the same size or less growth rate in the overhead than you have growth in the number of projects than the profit coming from projects. I also think we're tending to focus on more higher value projects and more integrated projects as we're growing into new segments and new industry groups like the CPG verticals, has been very good for us, and we are selling lots of our -- a big part of our pipeline. Actually, half of our pipeline is in CPG right now. And a lot of that is integrated projects where we're combining different functions for our customer. And those tend to be a little more profitable on a margin basis.

Our next question is from David Campbell with Thompson, Davis & Company.

Greg, you've talked a lot about the fourth quarter, and I appreciate your answers. Just to sort of clarify for me. In order to earn $0.92 in the quarter, you probably had to have some disappointing and sudden change in the Commercial Rental growth. Everything else is pretty visible, isn't that right?

Most of what we do is long-term contractual, and unless there should be some sudden volume decline, yes, we could count on the longer term rental. I think in terms of the transactional maintenance, we're through pretty much the month of October, and we're feeling good about that. I think the one the other factor you still have to continue to keep in mind is the maintenance impact from the older fleet. We're still facing that as a headwind. But everything else looks real good.

Our next question is from David Mack with J. Goldman.

I have a question on the full service NBT, excluding fuel. And your thoughts, longer term, about getting back towards the margins that the business had back in '06, '07. What are the barriers to getting back to those margins, and can you talk about some of those puts and takes?

Sure. Robert...

Probably the biggest barrier left is the actual fleet itself, and 2 things need to happen, is the fleet needs to get younger and the fleet still need to grow some. Because even though if you look at total fleet count were back at those levels, that fleet count includes a number of trailers that we acquired through Hill Hire, the Hill Hire acquisition that obviously aren't -- don't generate the same revenue and profit as a tractor would. So we're still short, our tractor fleet, probably about 5,000 units. So we still need to grow some and we need to get younger. That -- to put it in perspective, it's probably -- you're probably several quarters out, maybe 12 months out before those '06 units that are the ones that are driving the units that we purchased in 2006, are the ones that are driving a lot of that fleet age. Once those units get to the end of life and turnover into new equipment, you'll see the fleet age start to shrink, and that's when fleet starts to get newer, maintenance costs come down, and you'd see the profit level start to return.

And in terms of pricing on your new deals. So you would say that pricing is where it needs to be when you combine it with the factors you just mentioned to get back to those types of margins?

Yes.

Our next question is from David Ross with Stifel, Nicolaus. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: Yes, just another question on the engines. You guys look at more Class A tractors than anybody else out there. Do you have any comments, Robert, on the use for life, miles per gallon, life cycle costs of kind of the '07 engines versus 2010 engines? Or maybe just on the '07 if there's not enough new data on the 2010, anything you're seeing surprising.

Probably the most interesting thing we're seeing is that we are seeing improvement in fuel efficiency on the 2010 engines. And that is something that is certainly helping with the purchase of the new equipment and certainly convincing more customers to go ahead and purchase new equipment versus continue to run the eight [ph]. Because although the cost to the equipment is higher, the fuel savings certainly helps to offset, if not all of it, a good portion of it. And that's become a very important factor. So really the SCR technology, we are seeing some fuel efficiency improvement there. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: And most of the new customers that are signing up for these 2010 engines are looking at the SCR versus the EGR?

As you know, certainly over the last several years, the larger portion of our lease fleet is with freight liner which is SCR. So we are continuing to see that this year. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then for John, on the retail side. Any comment on retail inventories coming on activity as the retail customer base in October?

Yes. Retail, we're still growing the retail industry group. And so our exposure maybe isn't as broad as it someday will be. What we've seen though is a smaller peak, the smaller summer ocean peak than you would have expected and in general, the customers we work with, working to cut their number of SKUs and cut their inventories in their stores relative to their sales, and better manage inventories, and I do think that's kind of worked its way through the ocean and maybe a little bit now through the transportation pipeline.

Our next question is from Peter Nesvold with Jefferies. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: Just a quick follow-ups. I get this question all the time, thought that I put it to you. Can you talk to little bit about your incremental borrowing costs? And given that there's sort of a finance company overlay here, what would cause your funding costs to, at the margin, to start to go higher?

Well our incremental cost, Peter, if you look at today, we borrow typically longer-term 5 to 7 years to match with the asset. The funding costs are probably around 3.5%, and if we go 5 years, maybe 25 basis points less; 7 years, maybe 25 more. And so obviously that -- the U.S. Treasury's drive and then we have a spread over that. So those are the items that mainly impact our borrowing cost. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: Okay. I mean, the fact that you took your targeted spreads for the year, was that a function of your returns getting better? Is it the borrowing costs getting better? Is it both?

Function primarily of earnings, earnings being better.

Our final question today is from Anthony Gallo with Wells Fargo.

Just briefly, you mentioned or I thought I heard you say that there were strong lease sales contracts or strong volumes recently signed. Can you remind us from the time of the signing, what's the typical period of time until a revenue is recognized? I know you sign them and then you go out and acquire the new equipment. But from signing until revenue, what's the typical length of time?

That depends to fluctuate, Anthony. But right now, we're more in the 4- to 6-month range based on OEM lead times. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: That's a little bit longer than normal?

It is. It is a little bit longer than normal.

And I would now like to turn the call over to Mr. Greg Swienton for closing comments.

Sure. I'd like to thank everyone for adhering to our request to keep to 2 questions. It enabled everyone to get their questions asked and people could get in queue again, so thanks for that. I appreciate your attendance. Have a good safe day. Bye now.

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