Ryder System, Inc. (R) Q3 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the Ryder System, Inc. Third Quarter 2012 Earnings Release Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, 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 2012 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; Robert Sanchez, President and Chief Operating Officer; and Art Garcia, Executive Vice President and Chief Financial Officer. Additionally, Dennis Cooke, 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.

Thank you, Bob, and good morning, everyone. This morning, we'll recap our third quarter 2012 results, review the asset management area and discuss our current outlook for the business. In addition, we'll introduce an enhancement to our financial reporting that we plan to implement in 2013. And after our initial remarks, we'll open up the call for questions. So let me get right into the overview of our third quarter results. On the PowerPoint slides, turning to Page 4, net earnings per diluted share from continuing operations were $1.26 for the third quarter 2012, up from $1.10 in the prior year period. Third quarter results included a $0.02 charge from a tax law change in the U.K. The prior year's third quarter included a $0.01 tax benefit from acquisition-related transaction costs. Excluding these items, in each period, comparable EPS was $1.28 in the third quarter 2012, up from $1.09 in the prior year. So this is an improvement of $0.19 or 17% over the prior year period. Our results also represent an outperformance of $0.06 to $0.13 versus our third quarter forecast of $1.15 to $1.22. Our outperformance this quarter reflects contractual revenue growth and strong used vehicle sales. Results were also supported by the timely actions we took a few months ago to adjust both our cost structure and the rental fleet size given current market conditions. Although total revenue was unchanged from the prior year, operating revenue, which excludes FMS fuel and all subcontracted transportation revenue, increased 2%. And the increase in operating revenue reflects organic growth in Full Service Lease. Page 5 includes some additional financial statistics for the third quarter. The average number of diluted shares outstanding for the quarter declined slightly to 50.6 million. During the third quarter, we purchased approximately 87,000 shares at an average price of $39.86 under our 2 million share anti-dilutive program which expires in December 2013. As of September 30, there were 51.1 million shares outstanding, of which 50.6 million are included in the diluted share calculation. The third quarter 2012 tax rate was 35.6%. And this tax rate reflects the negative impact from a tax law change in the U.K. Excluding this item, the comparable tax rate would be 34.7%. The prior year's tax rate of 35% reflects the benefit from acquisition-related transaction costs. And excluding this item in 2011, the comparable tax rate would have been 35.7% last year. Earnings per share, excluding the nonoperating portion of pension expense, was $1.37, up by $0.22 or 19% over third quarter 2011. Page 6 highlights key financial statistics for the year-to-date period. Operating revenue was up 6%. Comparable EPS from continuing operations were $2.87, up by 14% from $2.52 in the prior year. Adjusted return on capital was 5.6% versus 5.5% in the prior year. And the spread between adjusted return on capital and cost of capital is 70 basis points for the trailing 12-month period and continues to be forecast at 80 basis points for the full year. Earnings per share, excluding nonoperating pension costs, were $3.15 versus $2.68 last year, up by $0.47 or 18%. I'll now turn to Page 7 to discuss some of the key trends we saw during the third quarter in the business segments. In Fleet Management, total revenue grew 1% versus the prior year. Total FMS revenue includes a 3% decrease in fuel services revenue, reflecting fewer gallons sold partially offset by higher fuel prices. FMS operating revenue, which excludes fuel, grew 3%, and this increase reflects organic growth in Full Service Lease. Contractual revenue, which includes both Full Service Lease and contract maintenance, was up by 4%. Full Service Lease revenue grew 5% versus the prior year due to higher rates on replacement vehicles and organic fleet growth. At quarter-end, the lease fleet size increased organically by approximately 2,500 vehicles or 2% versus the prior year. On a sequential basis, the organic lease fleet increased by over 500 units from the end of the second quarter this year and was up by 1,100 units, including the Euroway acquisition. In addition, the contract maintenance fleet grew organically on a sequential basis by 700 units this quarter and was up by 1,200 units, including Euroway. As we discussed on our last call, the lease fleet age began to improve late in the second quarter which was earlier than we had initially planned. The lease fleet age continued to modestly improve in the third quarter due to the use of new vehicles on higher renewals of expiring leases. Miles driven per vehicle per day on U.S. lease power units increased 2% compared to the prior year. Commercial Rental revenue was down 1%, reflecting lower demand. Rental demand was down 3% compared to the prior year which was slightly below our expectations. The average rental fleet decreased 1% versus the prior year. As a result of lower demand, rental utilization on power units declined 190 basis points to 77.4% from 79.3% in the prior year. Year-over-year, rental utilization comparisons improved significantly over the first half of the year. The first half of the year, we were down by around 360 basis points. And these better results were due to our timely actions to adjust the size of the rental fleet and more closely align it with current demand conditions. Global pricing on power units was up 3% which was in line with our expectation. In the used vehicle area, we saw a continued strong pricing and demand environment. And Robert Sanchez will discuss those results separately in a few minutes. Overall, improved FMS results were positively impacted by lower compensation-related expenses and organic growth in the lease fleet. These benefits were partially offset by lower Commercial Rental results. Earnings before tax in Fleet Management were up 21%. FMS earnings, as a percent of operating revenue, were 11.1%, up 160 basis points from the prior year. Turning to Page 8 in the Supply Chain Solutions segment. Total revenue was unchanged versus the prior year as higher operating revenue was offset by lower subcontracted transportation. SCS operating revenue was up 2% due to higher fuel cost pass-throughs and both increased volumes and new business in the automotive sector. Included in higher operating revenue was an 8% increase in revenue from our dedicated services. Improved earnings in the segment were driven by lower compensation-related expenses and higher revenue in our automotive vertical segment. The improvements were partially offset by higher medical benefit costs and lower performance in the consumer packaged goods and high tech sectors. Supply Chain's earnings before tax, as a percent of operating revenue, were 6.6% unchanged from the prior year. In total, SCS earnings before tax were up 2% from the prior year. But please note that in the third quarter of 2011, SCS earnings benefited by $2 million from favorable insurance developments, foreign exchange gains and a facility sale. If you exclude these items from the third quarter of last year, SCS earnings would be up by 10%. Page 9 shows the business segment view of our income statement, which I just discussed and is included here 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 detail but will just highlight the bottom line results. Comparable year-to-date earnings from continuing operations were $147.3 million, up by 13% from $130.5 million in the prior year period. So 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 were $1.7 billion, up $468 million from the prior year. This growth reflects an increase of $530 million for purchases of new lease vehicles to fulfill sales to customers for renewal and growth of their long-term contracted fleets. This capital spending reflects an increase in the number of leases renewed, growth in the fleet size and a higher investment cost per vehicle, which is being priced into customer rates. Capital spending on Commercial Rental vehicles was down $53 million. Our full year gross capital expenditures are expected to be near the low-end of the $2.1 billion to $2.2 billion range we communicated at the beginning of the year, reflecting somewhat lower spending in Rental. We realized proceeds, primarily from sales of revenue earning equipment, of $310 million, up by $86 million from the prior year. This increase reflects more units sold versus last year as well as higher pricing. We also executed a $130 million sale-leaseback transaction on vehicles during the second quarter due to attractive lease financing rates. Including these items, net capital expenditures increased by just over $250 million to almost $1.3 billion. Turning to the next page. We generated cash from operating activities of $768 million year-to-date, that's $15 million below the prior year, as higher cash-based earnings were partially offset by increased pension contributions. We generated almost $1.3 billion of total cash year-to-date. This was up by just over $200 million and included the proceeds from the sale-leaseback as well as higher used vehicle sales. Cash payments for capital expenditures increased by $530 million to approximately $1.7 billion. The company had negative free cash flow of $436 million year-to-date. Free cash flow was down around $300 million from the prior year's negative free cash flow due mainly to higher planned investments in vehicles that will generate revenue and earnings in 2012 and future years. This was partially offset by the sale-leaseback proceeds. As a reminder, last quarter, we adjusted our full year free cash flow forecast to a range of negative $270 million to $330 million in order to reflect the sale-leaseback transaction which was not included in our initial plan. We continue to anticipate our full year free cash flow will be around this forecast level. Page 13 addresses our debt-to-equity position. Total obligations of just over $4 billion are up by approximately $600 million compared to year-end 2011. The increased debt level is largely due to higher lease capital spending. Total obligations, as a percent to equity at the end of the quarter, were 274%, that's up from 261% at the end of the year. As expected, our leverage ratio declined from 284% in the second quarter, which was elevated due to our seasonal purchase of rental vehicles. We expect leverage to continue to decline for the balance of the year towards the lower end of our forecast range of 261% to 265%, excluding any year-end pension adjustment. This forecast leverage is at the lower end of our target range of 250% to 300%. Our equity balance at the end of the quarter was $1.5 billion. That's up by $160 million versus year-end 2011. The equity increase was driven by higher earnings. At this point, I'll hand the call to our President and COO, Robert Sanchez, to provide an asset management update.

Thanks, Art. Page 15 summarizes key results for our asset management area globally. At the end of the quarter, our used vehicle inventory for sale was 9,100 vehicles, up from 5,100 units in the third quarter of 2011, but in line with our expectations coming into the quarter. On a sequential basis, from the second quarter 2012, ending inventories declined by 100 units. Used vehicle inventories are elevated beyond our typical target range of approximately 6,000 to 8,000 vehicles. This reflects a planned increase in lease replacement activity. It also reflects the planned refreshment of our rental fleet as well as out-servicing of rental units related to our recent rental fleet downsizing. Used vehicle inventories are expected to remain in the 9,000 to 10,000 range during the balance of year. We sold 6,200 vehicles during the quarter, up 35% compared to prior year, reflecting continued strong market demand for used vehicles. Pricing for used vehicles remained strong and was slightly ahead of our expectations. Proceeds per unit comparisons were negatively impacted by increased use of wholesaling to manage inventory levels, as we discussed coming into the quarter. Compared to the third quarter of 2011, proceeds from all vehicles sold, including wholesaled units, were down 2% for tractors and 4% for trucks. From a sequential standpoint, tractor pricing was up 4%, and truck pricing was down 7%, again including the increased wholesaling activity. Retail pricing was up by around 6% on a year-to-year basis. Given our current inventory levels, as well as anticipated strength and lease replacement activity, we expect to continue somewhat higher use of wholesale channels next year. The number of lease vehicles that were extended beyond their original lease term increased versus last year by about 440 units. This reflects, and is consistent with the higher volume of renewal activity this year due to a heavier lease replacement cycle. Early terminations of lease vehicles declined by about 500 units or 21%. Early lease termination remain at the lowest level in the past decade. Our average commercial rental fleet was down by 1% versus the prior year, and was down by 3% or 1,400 units since the second quarter of this year. With the seasonal de-fleeting during the fourth quarter, we expect the ending rental fleet to come down by another 3% or 1,200 units to end the year at approximately 38,000 units. This is about 4% below the prior year-end and also below our initial forecast for the year. At this point, I'll hand the call back over to Greg to cover our outlook and forecast.

Thank you, Robert. On Page 17, a few comments about the outlook and forecast. Results in Fleet Management benefited from continued growth in Full Service Lease as well as solid used vehicle performance. We expect continued growth in lease based on recent sales and renewal activity as well as increased acceptance of new engine technology by our customers. Additionally, the lease fleet age has continued to come down which is expected to benefit FMS margins again in the fourth quarter. Rental demand was slightly lower-than-expected during the third quarter, and we expect these trends to continue in the near term. We also expect some future softening in the used vehicle pricing. We took timely actions to reduce the size of our rental fleet which enabled us to significantly narrow the gap between year-over-year rental utilization comparisons. We still need to dispose of some additional used vehicles to get our inventories closer in line with our target levels, and we plan to continue to have somewhat elevated levels of wholesaling next year in order to do so. In Supply Chain, volumes have been mixed by industry segment, and this is likely to continue in the near term given the current economic environment. We've had strong new sales activity in logistics, including dedicated services, and this positions SCS well for solid growth next year. Given these factors, we're providing a fourth quarter comparable EPS forecast of $1.06 to $1.11 versus prior year EPS of $0.97. And this represents an improvement of 9% to 14%. With this fourth quarter outlook, we're raising our full year comparable EPS forecast from a previous range of $3.75 to $3.90 to a new range of $3.93 to $3.98. And this represents an improvement of 13% to 14% from $3.49 in 2011. As I mentioned at the beginning of the call, we plan to enhance the reporting of our comparable EPS metric starting in 2013. So I'll turn the call back over to Art Garcia, so he can provide you with a brief overview of this future change.

Thanks, Greg. Page 19 provides a brief description of the change that we plan to make regarding our comparable EPS metric. Beginning in 2013, comparable EPS will exclude nonoperating pension costs. Nonoperating pension costs represent the interest, expected return and gain/loss amortization components of GAAP pension expense. We're implementing this change because we believe it will provide better visibility to the company's operating performance and reduce the volatility associated with these noncash items. As you may recall, our pension plans were frozen to all new and most existing participants several years ago. Despite this action, we and many other companies continue to experience significant earnings volatility due to pension accounting and changes in the investment and discount rate environments. Companies have been addressing this issue in several ways. Some companies have moved to annual mark-to-market accounting. This approach, however, can result in large noncash charges to earnings at year-end and as such, creates a lot of headline noise which we think is not optimal for Ryder. Other companies have excluded the nonoperating portion of pension costs from reported earnings, and this is the approach we plan to take as well. You may recall that starting this year, we improved visibility into the business segment's operating results by moving nonoperating pension costs below the segment line. We have also provided comparable EPS, excluding nonoperating pension costs, on a memo basis for informational purposes. Starting with our fourth quarter 2012 earnings call, we'll provide EPS forecasts excluding nonoperating pension costs, and then we'll begin reporting actual results on this basis in the first quarter of 2013. As we've done in the past for any reporting changes, we'll provide historical information under the new format for comparative purposes. Turning to Page 20. We've provided a 5-year history of full year comparable EPS excluding nonoperating pension expense for your reference. An annual history back to 2005 is currently posted to our website and a quarterly history will be posted to our website in January. The results shown here illustrate the significant volatility that noncash pension expense has had in recent years. For instance, the swing in EPS from 2008 to 2009 totaled $0.75 in that 1 year alone from this item, which is quite significant on our base of earnings. Looking at 2012's forecast, I'd like to highlight that under the new methodology, our current 2012 EPS forecast range is just below our peak earnings year of 2008. This reflects the significant operational improvements made in our business over the past 5 years. At this point, I'll turn the call back to Greg.

Thanks, Art. And that does conclude our prepared remarks this morning. So we'll move now to Q&A. [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 Alex Brand with SunTrust.

So, Greg -- and I'm wondering, as you look at your transition that now kind of got accelerated in the last few months from early cycle rental to, now, the core lease business, what are your thoughts about how your existing customers are turning over to new trucks and signing new leases? Are you at that point of the cycle and is this FMS lease growth accelerating to maybe a mid-single-digit growth rate going forward?

I would say that there are 2 relevant points that have supported our growth with existing customers, as well as potential customers, apart from our own expertise in selling and marketing. One is the average age of vehicles, which is still getting older -- has been old and getting older -- so there is a compelling need that as long as you're still operating a business and you have freight and goods to move, you need to replace those units. And the other, I think, has been the stronger acceptance of the new technology because customers are finding that they're getting better fuel mileage. So I'd say that those factors would suggest continued acceleration. If you then could add on somewhat of a healthier economy, I think that will continue to help that. But even without the healthy, robust economy, I think those other 2 factors are playing an important role right now.

And what about -- as it relates to also selling the maintenance, are the customers more interested in that because of increasingly complex engines and increasingly complex regulation?

I think that when you combine complexity, cost and CSA scores, which now also demonstrate how companies are doing, they very much value our maintenance. So whether it's standalone maintenance or maintenance in conjunction with lease, I would say the receptivity is definitely accelerating.

Our next question is from John Mims with FBR Capital Markets. John R. Mims - FBR Capital Markets & Co., Research Division: When you look at the supply chain group -- and my sense is there was, within the retail and the CPG segment -- there's some exposure to food- and drought-related crop failures and whatnot in the quarter. Is there -- can you frame any potential impact that'll have in the fourth quarter, maybe bleeding into the first quarter as well? Or is that kind of a one-off thing that was third quarter?

Let me turn it over to John Williford in Supply Chain. I think he can cover that for you.

Yes. Thanks, John. Good question. Yes, I think that did have an impact in the third quarter. And I would say, we would expect that the drought, to have -- to continue to have an impact at least for 1 to 2 more quarters. We are seeing very strong sales in that sector, though. So certainly, after 1 to 2 quarters, we would expect the growth in CPG to really pick up. John R. Mims - FBR Capital Markets & Co., Research Division: Okay. And how big was that impact in the third quarter, just kind of drought-related?

We didn't point out the drought itself. You can see from the CPG numbers, they were down -- CPG/Retail was down about 5% year-over-year in the third quarter. I don't know, order of magnitude, this -- most of that is CPG and not Retail. And I'd say about half of that, or maybe a little less than half, is related to declines in volumes associated with the growing season. John R. Mims - FBR Capital Markets & Co., Research Division: Okay. And then just as a quick follow-up, can you give some parameters as far as -- obviously, the lease age is coming down, you're starting to see that show up in margins, et cetera. But kind of where you are on a monthly basis for the lease portfolio as far as average age? And where -- how far that can trend over the next 3 or 4 quarters?

All right. Let me turn it over to Dennis Cooke, who heads up FMS, to talk about the fleet age.

Yes, John. What I'll say is it's come down about 3 months year-over-year, and we're about 12 months from where we were back in 2008 which is when it was at its youngest age. So we still got a ways to go. But the age has come down more rapidly than we had predicted. So we're -- again, we're 3 months younger year-over-year. John R. Mims - FBR Capital Markets & Co., Research Division: So you're probably, say, that's 45-month-ish on a -- or is that right, on an average age?

A little higher than that.

Maybe -- 50 or more.

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

Greg, I want to make sure I understand the comments on rental utilization here in the quarter. It sounds like that demand was a little bit weaker than what you were expecting but utilization was still in the high 70s. Historically, my impression has been that you've been targeting kind of in the mid-70s as a normalized run rate or normalized utilization rate for the fleet. Has that changed? Or how should we think about kind of the sweet spot for rental utilization? And then any commentary for expectations for rental utilization over the fourth quarter would be helpful as well.

Okay. I think where we are right now in utilization is really pretty strong at 77%. But you compare that to what was happening last year when the market was really hot, and that's why you see that difference. So we'd be very pleased with 77%. And I think your earlier comments were right, in the mid-70s. As long as you're in balance, that's very good utilization in terms of demand and pricing and everything else. So unless -- anything you want to add to that, Dennis?

No. I think you could expect a similar utilization heading into the fourth quarter. And we focused on being able to respond quickly to what we see as market demand. And I think we did that pretty effectively in the second and third quarter. So in that high-70s is where we're going to target, and we should hit it.

Yes. Let me just add one thing. The high-70s is really for the third and fourth quarter. For the full year, the target is mid-70s. So usually utilization's a little lower in the first and second quarter.

Good point.

Okay. And -- I guess all that makes sense, but I mean just to clarify, I mean the comments about saying that rental demand wasn't as strong as what you'd expected in the quarter, and that's kind of an overall comment. But with where the fleet is, you've got the fleet to the right size to match with where industry-wide demand is. Is that the right way to think about it?

Absolutely. And in fact, you heard the numbers about the de-fleeting. So I think being able to do that expeditiously and timely is really important.

Got it, okay. That helps. And then just for my follow-up, I think that there were comments both in FMS and in Supply Chain about single reduction in compensation-related expense in the quarter. Does that relate to the headcount actions that you took midyear? Or is there anything that's related to reversing incentive compensation or bonus accruals here in the quarter?

Yes, both of those would be factors. So there were some, obviously, compensation from some reduction. But management incentives and bonuses are self-adjusting based on the performance of the company. And although we've recently raised our guidance again and are coming in just under $4, you'll recall that when we put out our plans at the start of the year, we were at $4 to $4.10. Now all things considered, to be as close as we are to $4, I think is great. But that also means that we were short of our original plans.

Sure, that makes sense. Do you care to quantify how much the bonus-related amount was in the quarter?

No, that's too much detail.

Our next question is from David Ross with Stifel, Nicolaus. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: The 8% increase in dedicated revenue, how are the margins in that business? And can you comment on the driver recruiting and availability in the Dedicated segment?

Yes. The margins are comparable. And some of that, I'll point out, is dedicated business for integral -- what we would call integrated projects with supply chain that probably would have showed up in the old supply chain numbers. We changed all that when we changed the reporting. And so the margins are comparable. The -- in terms of drivers, the driver openings and time to fill are both up a little bit, maybe about 15% on a year-over-year basis. And they're up mainly because of new business that we've sold, right? So I'll just remind you, we probably mentioned this before, we have a pretty low turnover relative to the trucking industry in general. We're under 25% in our dedicated business. And so when you see openings go up, it's usually because of growth. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: Excellent. And Robert, when you were commenting on the used vehicle inventory levels -- I couldn't quite write fast enough -- you're talking about remaining above the target range of 68,000 vehicles for a few reasons, if you could just kind of I guess restate those reasons?

Yes. The primary reason we think we're going to stay at those elevated levels is really because of the amount of lease replacement that we have over the next, call it, 15 to 18 months. So as those vehicles get replaced with new ones, the old ones go to the used trucks center. We're going to have more than our normal amount coming in. So we've stated that we're going to be in that 9,000 to 10,000 range for a period of time. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: Okay. So they're coming in faster than you can sell them, basically.

Correct. That's why we're having to do a little more wholesaling than we normally would. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: I would say that's a good problem to have rather than the other way around.

You got it. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: And then, just a question for John Williford, maybe, on the high-tech slowdown. Are you seeing that in any specific segment to the high-tech industry? Is that consumer product-related, B to C? Is that B to B? What's going on in the high-tech market?

I'd say generally, it's across-the-board. It's probably strongest in consumer product-type of high-tech products, like laptops. But it is -- and it's not concentrated in 1 or 2 customers. It's a slowdown in high-tech that we've seen kind of accelerate a little bit, and it's fairly broad. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: And when did that acceleration start or the slowdown really begin?

Well, at least in the consumer part of high-tech, the peak season is -- there's -- for us, if you're doing a logistics for it, it's kind of September, October. And so the -- it's slowed down a little more there and the impact is a little stronger there because you have more business concentrated in those months.

Our next question is from Kevin Sterling with BB&T Capital Markets. Kevin W. Sterling - BB&T Capital Markets, Research Division: A quick housekeeping question. What is your end-of-period Full Service Lease fleet count and the end-of-period Commercial Rental fleet count?

I know we have that noted here. I'll let Dennis Cooke answer that.

Yes. So for Full Service Lease globally, it's 122,700. And then in our Rental fleet, end-of-period, finished at 40,000. I'm sorry, I'm sorry. It's 39,200. Kevin W. Sterling - BB&T Capital Markets, Research Division: Greg, you talked about your CapEx for this year kind of coming at the lower end of that $2.1 billion to $2.2 billion range. Could you help us think directionally how should we think about CapEx for 2013? Could you briefly talk about that, if possible?

Directionally, but without specificity? Kevin W. Sterling - BB&T Capital Markets, Research Division: Yes.

I think that due to the heavy replacement cycle, age of equipment, and unless you have an economic meltdown, I think you can expect to see a lot more units being renewed. And therefore, that's going to be capital that we will spend after the contracts are signed. So that we'll have future revenue and earnings that we can count on. I think that if you continue to see rental be less vibrant and slowing down, we'd spent less on rental than we did in the last couple of years. So I think you still may have some strength in lease capital, but softer in rental. I think directionally, that's probably broad enough, or give you an idea. Kevin W. Sterling - BB&T Capital Markets, Research Division: It does. That's very helpful. And then, I guess, you talked about Commercial Rental, this -- the weakness. Are you seeing these customers move into leasing at all?

Dennis, you want to comment?

Yes. I think, as -- the answer is yes, we're seeing some conversions. That's been strong this year, where customers do see the value proposition, the total cost ownership benefit with leasing. We are seeing some conversions.

Our next question is from Ben Hartford with Robert W. Baird. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Could you talk, maybe Greg, just -- if I can conceptualize the incremental margins within FMS during the third quarter relative to the second quarter, it was almost 100% pass-through if we look at EBT sequentially? And can we -- can you help me think about the contributions from utilization -- commercial rental utilization stabilizing, some of the cost reduction actions that you took in the second quarter having an impact and then the lower lease fleet age as well. Can you rank those in order of magnitude to think about how we should think about incremental margins?

I think Dennis can do that by order of magnitude, but without necessarily specificity.

Yes. I would say that the cost reduction, the cost impact would probably be number one. But number two, close behind it, would be Full Service Lease margin benefit. And then the actions that we took in rental mitigated the downside that we saw from demand. And I think, going forward, as the lease age continues to decline and we see our operational initiatives make an impact, which they already are, I think we're going to consider -- continue to see a benefit in lease margins. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Yes. Now that we've gotten to this double-digit threshold, I guess, it's reasonable to assume if volumes remain stable and lease fleet expands, utilization remains stable, that this 10% threshold is a new run rate as we think about '13 and beyond. Is that fair?

I think that's fair.

Yes, that's fair. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Good. And then, John, on the Supply Chain side, can you talk about -- in the context of kind of weaker volumes, specifically on the high-tech side. But generally speaking, forwarding volumes have been challenged. How competitive have the bids then in contract logistics over the course of the past 6 months? Could you talk a little bit about the competitive dynamics specific to that vertical, or that segment?

Well, the issue we faced in -- I'll answer that as 2-part question. The issue we faced in high-tech in terms of existing volumes is independent from the issue of our competitiveness and winning bids. What we're seeing is existing customers' volumes dropping -- softening during the year, and that effect. At the same time -- and I don't have this broken out even in my head by vertical -- but we are -- this year, we will set a record for new sales. So that -- I don't know if all of our competitors are setting records for new sales as well. I -- that I don't know. But I know that we're winning a lot of bids. And those bids now, we're signing them up now and throughout the fourth quarter. So we'll see a lot of startups in the first half of next year and our growth rates will come up to our target levels by the end of the year, next year. So -- and that's in -- some of that's going on in high-tech, and it's really going on across our business. So it's very encouraging to see. I don't -- I guess I don't see the softening volumes in high-tech or CPG, we're always -- where we also see that. Making the bids more competitive or more difficult to win or where we have to bid at a lower margin or something like that, I haven't seen that.

Our next question is from Scott Group with Wolfe Trahan. Scott H. Group - Wolfe Trahan & Co.: So just a follow-up on that earlier CapEx question, Greg. Is it a fair thought that given what's going on in rental, that rental CapEx could come all the way down pretty close to 0 next year? And just with your CapEx views in mind overall, and what your thoughts are on used truck pricing and wholesale versus retail, can you give us maybe some directional thoughts on gains on sale and depreciation for next year?

Well, you have a few things there. The -- your first question was about rental going down to 0, I think that would be much too extreme. I think we'll have to have some replacement CapEx for rental. We may be at the lower ends of normal for that replacement, but I would not expect it would go to 0 unless we had cataclysmic financial meltdown in the environment. On used vehicle sales, I think that -- we mentioned that over time, some of that pricing may soften, but we still see this as a pretty strong, robust market with good pricing. In terms of the wholesaling, we're going to continue that through 2013, is our expectation. Because as, I think Robert had said earlier, we've got a lot of replacements coming at us and we want to be able to move the equipment out rapidly and not have increasing inventory. So although we might prefer an 80% retail, 20% wholesale, it might be more like 70-30 kind of directionally for next year perhaps. Was there another piece in your question? Scott H. Group - Wolfe Trahan & Co.: Yes. I guess when you add those 2 things up, how do you think that -- what do you think that means directionally for gains on sale next year, up or down? And then just to follow up on your earlier point about rental, what's your view of rental maintenance CapEx? That's probably a better way to think about it, you're right.

Robert or Dennis, you want to comment?

Yes. I think on the gains, we don't have that mapped out yet. But we're expecting a similar picture as to what you saw in 2012. Still a lot of volume going through. Pricing continues to remain strong. So unless there's a change in that, we're expecting that through next year. The -- we're still selling pre-'07 engine vehicles which are highly desirable, and we're still going to be selling a lot of those through next year. So we expect that to continue to be a positive part of the story. As we look at rental, I think rental, we probably saw in the second quarter and in the first quarter, we saw a step-down. We're seeing it kind of moving flat at this point but you said, "a little bit below our expectation, but not significantly." So we'll see, as we get into next year, what the economy holds. But that -- right now, that's what we're seeing.

And just to elaborate a bit, in the Appendix, if you go back to the pages on Page 41, we had, obviously, in 2009, that was a very soft environment during that financial environment. And then you go to the end of 2010, we had $20 million -- $29 million in gains, in net gains in vehicle sales. $63 million at the end of -- by the end of last year. And we've got $68 million through 9 months. So these are still pretty strong net sales gains numbers. So what they will be precisely? We'll let you know when we do the business plan, or give you a better idea of the business plan, but they're going to still be quite healthy in terms of contribution to our bottom line. Scott H. Group - Wolfe Trahan & Co.: Okay. That's very helpful. And if I can just squeeze in one last, just a real quick one for Art. What's your thought on what the pension headwind would have been for 2013 that we now need to take out of the model?

Well, if you recall from last year, I provided some guidance and I was awful in that, and I was tarred and feathered from all over the country here. So I think, at this point, it's hard to predict what the final number's going to be. As you know, there's a lot of moving parts in there. The discount rate, what the actual assets return at by the end of the year and then setting the expected go-forward rate. So we haven't really done that work there. I would tell you that we put a white paper out on pension, that's on our website, that you can access that provides some sensitivities of changing. If you make assumptions about changes in discount rates, expected return and actual return, that could be helpful for you in trying to make that determination right now.

Our next question is from Art Hatfield with Raymond James.

This is Derek Rabe, in for Art. If I recall correctly, the acquisition you made in August, I believe that was the first one you've done since June of 2011, can you just talk to some of that dynamics in that, in the acquisition market right now? Have you seen some of the factors that may have limited opportunities over that period start to ease a bit? And then, could you just talk about the current pipeline?

Yes. I'll let Robert talk about that.

Yes. We're -- as we've said on the call before, we're always looking for opportunities and the right opportunity for acquisitions, especially around our Fleet Management business and also around Supply Chain where we're adding new capabilities. The environment is still, I would say, healthy in terms of discussions. But it does boil down to when companies are ready to sell and when they're ready to make the move. So I would say there hasn't been -- there probably hasn't been much of a change from what we've seen over the last 12 months, and we're continuing to look for opportunities. And we'll certainly -- we're certainly in a position to act on them as we find them.

And then as a quick follow-up, I was hoping to get a little bit more color on the contract-related maintenance. We did see that decline a little bit more than we had expected. Just going forward, can you discuss some of the puts and takes in that business, just in the current environment? Should we expect to see some of the similar declines in the next couple of quarters, maybe given the tough comps and also the decline in fleet age?

Well, we'll make sure we got the definition right because you said contract-related. The -- that we distinguish from contract maintenance, which is really what we proactively sell. Contract-related maintenance only occurs if there might be some damage or abuse, and it's called contract-related because then we do that work and then charge the customer outside the contract because of that. So it -- that can be a little bit random in terms of is it snowy? Is it icy? Is it rainy? I mean what could be causing damage to vehicles? So that moves a little bit, but a big movement up or down is not due to something fundamental.

Okay. So do you typically see that track any of your metrics, maybe lease miles driven, something along that front?

Yes. I think you saw a little bit of -- if look at the year-to-date number, it's pretty high. Some of that is because of the acquisition that we did. And we've -- that's what drove some of that growth in the first half of the year. But what you're seeing now is more of a normalized rental, when you take that out. And I think, as Greg mentioned, that could be up 1%. I think single-digits, up or down, is probably what you'd expect in a normal quarter.

Our next question is from Peter Nesvold with Jefferies & Company. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: I guess if I were to sum up the quarter in a sentence, I might say that you saw earnings growth reaccelerate to 17%, maybe split between self-help on the cost side and late cycle leasing leverage. You mentioned that you're nearing past peak earnings this year. At the same time, you're going into this fading macro backdrop. And I don't want to try to jump ahead to the January outlook, but what can you tell us directionally about earnings growth next year, if let's say, we're in a 1.5% GDP-type scenario next year? Can you continue to grow earnings at least high single-digits?

Well, without going out on a limb and being specific, you would think so. Because we not only count on what's going on in the economy -- and 1.5% would be pretty modest but that's not to be unexpected -- but we also take a look at what we're doing in contractual selling. And as you heard from our comments, from the press release, from listening to John Williford and Dennis Cooke in their respective segments, we are signing up business at a fairly healthy pace. So as long as that continues, that's going to start billing at some point next year, and that's going to have good flow-through. In addition, a big part of that improvement, as you also referred to in FMS, is the fleet continuing to get younger. So when you have all of those things moving together, you tend to start seeing an acceleration on the bottom line, kind of like we had back in 2008. Remember in 2008 -- there are some similarities today -- in 2008, we had a rapidly growing, rising share price, not just because we had record revenue and earnings but we were beginning to distinguish ourselves from many transportation-related companies. And that's kind of what's happening now. You've seen a lot of transports do negative pre-announcements, and we've just raised our forecast. In addition, in that 2008 period, rental was not very strong. But contractual was and continued to be solid. And that's where we're now entering. So our expectation, if you want to use history as an example, we've got a couple hundred more basis points that we expect to get through adjusted FMS for a combination of reasons. And that is going to, I think, suggest, coupled with the strong contractual sales, that we've got very good days ahead of us regardless of kind of the weakness or strength of the economy. And whatever it is, we're pushing to sell the value proposition. I think it's being well received. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: Yes. And then as my follow-up, if assuming you do grow next year, and it sounds like you've high conviction on that, you would deploy cash. And that is the model, whether it's organic through the lease fleet or through acquisition. You're at the targeted leverage ratio today, so how do you think about leverage next year, if you were to use cash next year? Do you have to increase the targeted ratio? Or is there some other way that the capital structure changes a little bit?

Well, we naturally delever. So I'll let Art cover that.

Yes, Peter. I mean, I would keep in mind that this year, even with the amount of spend that we talked about, right, which is at the low end, that $2.1 billion capital spend, we're actually, if you exclude any kind of year-end pension adjustment, we're saying we would have delevered from the prior year. So when you factor in what we talked about earlier around rental, probably spending less on rental in '13 than we did this year, that would be made up -- that would imply a lot of growth in lease if you kept spending at the current level it was. So I don't really see leverage being that much of an issue when it goes back to Greg's point that the business tends to deleverage. You actually have to be fairly large, negative free cash flow to lever up.

Our next question is from Matt Brooklier with Longbow Research.

Yes. Just a quick one on lease fleet average age. I think we know we're seeing some margin benefit this year as we have a greater number of older trucks within the fleet coming up for renewal and replacement. How should we think about that in 2013? Do we have a kind of a similar potential rate of fleet age replacement and average age coming down? Does that quicken next year? Or does that decelerate? I know there's a lot of moving parts to it. But just kind of your general thoughts as we look out over the next 12 months.

Yes. But in 2006 or 2007, there was a large buy before a technology change in '07. And what you're seeing now is those units come to term. So you've got a big replacement cycle that's occurring, and that's going to be significant in 2013. So as we replace those units, I think you're going to continue to see the fleet get younger. And again, as I mentioned before, there's also operational initiatives that we have in place that are going to continue to drive maintenance costs in a favorable direction.

Okay. But it would be fair to, I guess, categorize 2013 as being another increased year of -- the pace of average lease fleet age coming down on the prebuys?

That's correct.

Our next question is from Jeff Kauffman with Sterne Agee. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: I have a couple of questions on pension for Art, and I may have to take a number of these off-line. But really just 2 or 3 I'll focus on now. Number one, what you're not going to show on the income statement, you are going to have on the cash flow statement, right? Because you're not really changing your pension obligation. So are we going to see an increased negative operating consequence to operating cash flow? Because you are going to get hit for interest costs and amortization and stuff like that on -- or I guess it's noncash but...

Yes, it's noncash. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: Okay. So the cash flow will be enhanced as well is what you're saying.

No. The cash flow, we'll treat it as is. We'll treat pension contributions as part of free cash flow. We talked about that, I think, on the last call, a little bit of -- with the -- they made some pension adjustments with the highway bill that are going to reduce pension contributions next year. So that's probably a $30 million to $50 million reduction in our required contributions for 2013. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: All right. But we won't see an income statement benefit necessarily when those rates reset because we're really only counting, what, service costs?

Yes, yes. It's just service cost. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: Okay. And then is there any effect on income tax rates as a result of this?

From -- no, no. Pension is a timing difference. So it doesn't affect your tax rate. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: Okay. So effective tax rate is the same.

Yes, effective tax rate is the same.

Our next question is from Anthony Gallo with Wells Fargo.

Just wanted to go back to this average fleet age question. Based on your comments about '07 being the bulk-buy year, is it fair to say that the -- what's called the 50-month average is not a true average? You've got some vehicles that are -- you've got a big chunk of vehicles that are a lot older. Is that the right way to think about that?

Yes. Yes, it's inappropriately leaning to the right.

And there were -- just one other thing, Anthony, they're '06s and '07s. So there was a prebuy right before the '07 engine came out. And those are the ones that are aging now and getting to the end of their life.

Okay. And as you sell those into the used market, there is still strong demand for that vintage, is that fair to say as well?

Yes.

Okay. And then if I could just jump to the dedicated market. We've heard of some successes by the 4 higher carriers in replacing one of your larger competitors in some of the private fleet business. That doesn't appear to have happened in your recent results. So just a little color around what you're seeing in the competitive framework for the dedicated business.

Well, the dedicated business is a very competitive segment. We're one of the leaders. We do face truckload carriers who have dedicated trucking divisions. We have positioned ourselves, I think, very effectively in areas of the market where we think we are strongest, and that tends to be integrated projects where dedicated trucking is integrated with our other services, or projects that require specialized handling or specialized equipment where the truckload carriers don't have quite the advantage. We do compete broadly in the market, though. But in those areas that we're really targeting, we feel like we have a very strong competitive position. We haven't seen any major change in that. What we've been doing is just focusing more on that area, and that is helping us grow.

Our next question is from Brad Delco with Stephens.

This is actually Justin Long, in for Brad. I had a quick question on the trends you're seeing in rental, just curious how those progressed throughout the quarter. I know if you look back earlier this year, you saw some weakness in May. Things started to stabilize in June and July. But just curious what you saw in August and October -- or August, September and thus far, in October. Has there been continued volatility in that segment? Or are things still just kind of stable?

I think we'd call them stable.

Yes.

Okay, great. And then on the cost savings for my second question. You guys have outlined the $0.18 of EPS savings you expect in the second half of this year. I would assume most of that is headcount-driven. But as we look into next year, are any of those savings sustainable if we see an environment where demand starts to accelerate?

Yes. And first, it's not just headcount-driven. There are other costs as well. And I think when we spoke about it, we expected over a 12-month or 4-quarter period about $0.36. So it'd be $0.18 in the last 2 quarters of '12 and $0.18 in the first 2 quarters of '13.

Our next question is from David Campbell with Thompson, Davis & Company. David P. Campbell - Thompson, Davis & Company: Yes. I just wanted to ask related to the decision to take nonoperating pension costs off the comparable earnings per share next year, why not do the same for vehicle sales -- the gains on vehicle sales, which have been generally up, but could be also erratic?

Yes. I think, David, we're going to -- we view vehicle sales as core to our business. It's integral to what we do. We're -- remember, we own hundreds of thousands of vehicles. We've got to sell 25,000, 30,000 vehicles every year. So it's just a core part of the business. I look at that as really an adjustment of the depreciation at the end of the day. So it really wouldn't make sense for us. We generate $300 million, $400 million of cash from that. So it's really core to the business.

Right. I think that's the point. It's not an issue of volatility, it's what's core to the business or not.

And due to time constraints, our final question today is from Thomas Kim with Goldman Sachs.

I just wanted to ask on the Supply Chain side, I noticed that autos continued to perform extremely well. Could you just give a little bit of color as to whether you're seeing any signs of slowing in that side of the business? And then also, related to the supply side -- supply chain, retail we noticed had weakened in the third quarter relative to the year-to-date performance. And I was just curious as to whether you see this as a near-term trend that persists? Or if there's something else going on there?

Okay. Well, our auto business has been strong. A lot of that's new business we've won. Some of it is growth in volumes because the auto sector had a big decline in new car sales in the downturn years, and that's been coming back. We do expect new car sales nationwide. I don't have the number, it's a well-publicized number. But we expect continued growth in new car sales for next year. We also expect to keep winning our share of bids next year. So we do expect to keep growing in automotive. As far as your question on retail. Yes, the number we report is retail. We combine retail and CPG. As you can see, it's become a very big part of our business when you combine it. And also, when you combine in our dedicated transportation business, too, into those numbers. Retail, I think what you're seeing in that combination is, that is more of a decline on the CPG side, consumer packaged goods, which is mostly food and beverage, and not so much of a decline on the retail side. And like I said, that we talked before when there was a couple of our big customers who sold business units and we knew we were going to have a little bit of headwind there, and then that was exacerbated a little bit by especially this drought during the growing season where we kind of -- there are a couple of parts of our business in CPG where we expect a spike in volume during that season where we would -- just didn't get it this year because of the drought. So that's really what happened there.

This does conclude the question-and-answer session. I'd like to turn the call back over to Mr. Greg Swienton for closing remarks.

Sure. Well we're a little after noontime, so I appreciate everyone hanging on an extra 7 or 8 Minutes. But we got through at least one set of questions from each asker, so thank you for that. Thank you for your interest, and have a good, safe day.

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