萊德系統 (R) 2002 Q3 法說會逐字稿

Good Morning and welcome to Ryder's third quarter 2002 earnings conference call. All lines will be in a listen-only mode until after today's presentation. At the request of Ryder today's call is being tape-recorded. I would now like to introduce Ms. Amy Wagner, Director of Investor Relations for Ryder. Ms Wagner you may begin.

Thank you and Good Morning. Welcome to Ryder's third quarter 2002 earnings conference call. As a reminder, the statements, which will be made in today's call, may include forward-looking statements as defined under the US Federal Securities laws. These statements are based upon the company's current release and expectations and are subject to risks uncertainties and other factors, which could materially affect actual results. Presenting the call today is Greg Swienton, Chairman, President, Chief Executive Officer, Corky Nelson, Senior Executive Vice President and Chief Financial Officer. Additionally, Tracy Leinbach, Executive Vice President of Fleet Management Solutions, Gene Tyndall, Executive Vice President, Global Supply Chain Solutions and Tony Tegnelia and Bobby Griffin of Supply Chain Operation will be available to answer any questions you may have at the conclusion of our presentation. With this I would like to turn the call over to Greg.

Thank you and Good Morning and I would like to personally welcome you to the call today. We will cover about five major items. We will be going through our third quarter results. We'll touch on our key initiatives update, we'll cover our asset management activity, cover our forecast and expectations for the fourth quarter and then we will have a special section on the pension update.

Just let me begin before we actually go to the numbers. I would like to make some general comments about the third quarter. In general, transportation activity, demand, and revenue really continued to be soft and I think that's reflective of the economy in which many of our customers are on the sidelines not making a lot of confident business decisions right now. We expect revenue will probably be soft until the economy shows some consistency and sustained improvement. However in our own case, we were encouraged by several positive indicators including improvements in our European operations and volume and revenue increases in our US based automotive sector.

Leasing demand does remain weak. Year-over-year revenue comparisons were negatively impacted due to reduced transportation miles, lower fuel consumption and some weakness in net leasing sale. And it's this area specifically where we have experienced an unwillingness on the part of many customers to really make long-term leasing decisions. So there is an economic driver there.

Commercial rental revenue showed sequential quarterly improvement. Higher rental utilization on a smaller fleets really lead to increased revenue and margin per unit. So the margin gain we have had from that product line has come from the fact that we have been able to better manage our fleet size and match demand.

Regarding assets management on a continuing theme, when an effort began over two and a half years ago, the whole asset management area again performed quite well in the quarter primarily driven by the team's focused effort in reducing the number of no-longer revenue earning equipments. Stepping up used truck sales activity and redeploying and term extending existing equipment. And I will specifically cover that and show some graphic information later on in the presentation.

And finally in the area of cost management, that focus has really helped us to drive down costs in all overhead areas, in fact central support service costs and overhead were reduced for the 7th consecutive quarter. So while revenue had a slight decline, every business segment and the company overall had improved profitability. With that let me turn it over to Corky Nelson to specifically take you through the numbers.

Thank you Greg and welcome to all that's attending by phone here, for those who are following on the PowerPoint presentation on the call turn to page 4, will give us our earnings per share calculations for the third quarter. Earnings per share increased to 54 cents for the third quarter 2002 as compared to our loss of 9 cents per share in the year earlier period. This quarter's EPS of 54 cents did include a one-cent recovery; want to emphasize recovery benefit from prior year restructuring accruals. Our reported EPS figures before recovery restructuring of 53 cents compared favorably with the external consensus estimate of 51 cents. Primary drivers of the variance include better-anticipated asset management results as Greg touched on earlier, stronger rental utilization and better results in our US Automotive Logistics and our European transportation operations. I should also point out as a reminder that the earnings per share in 2001's third quarter included 58 cents of restructuring charges and other items as mentioned in previous calls, and 5 cents for goodwill amortization, which was eliminated effective January 1 of 2002.

Our corporate effective tax rate was 36 percent as compared to slightly over 20 percent in the prior year. The prior year's third quarter effective tax rate was impacted primarily by the tax benefits derived from the earnings loss in the quarter and by the non-deductibility of some restructuring items. The increase in shares outstanding from 60.2 million to 62.8 million in large part was due to the number of share options exercised during the year and to the increased number of shares or options that are in the money as a result of the share price appreciation.

Again, let's turn to page five and briefly discuss year-to-date EPS results. Earnings per share before goodwill accounting changes increased over three times to one dollar and 28 cents for the first nine months of 2002, up from the 30 cents for the same period of last year. Earnings per share in the year earlier period did include 89 cents per share charge for restructuring and other items, 15 cents for goodwill amortization, which again was eliminated effective January 1, as well as an 11-cent one-time tax-benefit relating to a Canadian Tax Law change.

As mentioned in last quarters, this years year-to-date earnings per share include a 30 cent one-time charge relating to the change in accounting for goodwill effective January 1 of 2002. Ryder's completed the adoption of a Standard of Financial Accounting Standards 142 entitled 'Goodwill and Other Intangible Assets' and recorded a non-cash goodwill impairment charge of approximately 19 million dollars associated with our Supply Chain Solutions' Asian operation. I do want to stress that this change resulted in the application of the new impairment methodology prescribed under the new accounting standards and has no effect on the company's operations. Before we leave this slide, I think there is three really two important take-aways from the slide. Profitability is up significantly and the quality of earnings and performance are significant. As you'll see in this year's results, we don't have a lot of non recurring items that show up.

If you turn to page 6, which depicts the third quarter performance in each of our various business segments, we should keep in mind that and as a remainder that each business segment now records and reports all costs associated with the operation of the business including the allocation of central support services. When comparing this year's consolidated results to the previous third, year's third quarter results, revenue was down 2 percent and pre tax earnings increased to 52.8 million as compared to a loss of 6.9 million, a year ago and fleet management solution area we saw continued decline in revenue in the US leasing of other sales and service activities and in fuel offset by solid quarter-over-quarter performance improvement in our European operation.

Overall, wet revenue declined 4 percent, quarter-over-quarter, and dry revenue was down approximately 3 percent. US rental utilization was almost 77 percent in the quarter, up from the 71 percent in the prior year. Rental revenue is positively impact by the better vehicle management activity and through price increases. Additionally, the smaller fleet has driven better utilization leading to higher margins on the year-to-year basis. The company's worldwide rental fleet was down some 15 percent or 6,000 units as compared to the year-end 2001 number. Fuel was down some 8 percent, primarily driven by lower volumes and reduced fuel prices and revenue was still soft in the least in maintenance product lines, primarily driven by fewer miles driven. But a quarter-over-quarter basis, US least product line mileage is down some three percent.

Even though, revenues were down 4 percent. Segment MBT improved 1 percent that was a result of the improvement in rental utilization, reduced asset management cost, good UK operation results, and the decrease in interest expense, which I will touch on here shortly, resulting in lower interest rates, and lastly, debt. The positive factors were more than offset, the quarter-over-quarter, FMS pension expense increased about 6 million dollars. In our supply chain solutions area, revenue decreased about 1 percent quarter-over-quarter, primarily, I should say increased 1 percent quarter-over-quarter, primarily due to contined strong automotive volumes and a ramp up in new contracts. Segment MBT loss of 700,000 was also 700,000 better than the third quarter of 2001 and also sequentially better than the previous quarter's 2.2 million dollar loss.

On an on going margin improvement initiative activities on profit and profit from new business is helping offset volume declines in certain US industries and in our international operations. In Dedicated Contract Carriage, we saw a 3 percent decline in quarter-over-quarter revenue, also the result of slower volumes and some loss of business. On the positive side here, we also see on the slide, that both central support cost in the unallocated portion of central support cost was down 4 percent on the quarter-over-quarter basis and as Greg mentioned for the sixth consecutive quarter, we have realized expense reductions due to the ongoing cost management issues by our organization.

Real quickly, page seven depicts our year-over-year performance in various business segments. On a consolidated basis, the revenue for the first nine months of 2002 was 3.6 billion, down 6 percent from the 3.8 billion number in the same period of 2001. Revenue was down in all three business units. On a year-to-date basis, revenue both fleet products, solutions and supply chains solutions segment MBT were up. Despite year-over-year pension expense increases of approximately 18.5 million and a 7 percent revenue decline in our fleet management solutions business segment, cost-approved initiatives have picked up and rental utilization and the focused effort on asset management activities and a decrease in interest expenses enabled this business segment to produce year-over-year improvement. Focused margin improvement initiatives, volume increases on our automotive sectors previously mentioned and the purging of unprofitable accounts has enabled our supply chain solutions business segment to improve their year-over-year loss by some 52 percent despite the 6 percent decline in revenue.

Our dedicated contract carriage activity is down some 1.5 million on a year-over-year basis. On a consolidated basis earnings before accumulative effect of the account principle changes that we have mentioned are up over 3 times.

Quickly I want to turn to capital expenditures on page 8. Capital expenditures for the quarter were 163 million dollars or about 51 million more than the previous third quarter spending. This increase in spending was due solely by the timing of asset purchase is in specifically around the focus of our strategy on the October engine admission rules that has been recently implemented. On a year-to-date basis we are down some 99 million dollars or 18 percent over the prior year and our forecasting capital spending to be within our full-year budget of 581 million dollars.

Quickly turning to the next page and covering free cash flow position, the company has recognized some 280 million dollar year to date based on a preliminary consolidation of some 228 million dollar as compared to the previous year's period of free cash flow of 52 million. We believe it is important to know that we have already met our full-year free cash flow target within the first 9 months. Again the primary drivers include our asset management initiatives and somewhat slower economy in the reduction of demand for new vehicles. Quickly turning to page 10, I want to provide a graphic depiction of the company's current and historical debt ratios and I think the graphs are pretty much speak for themselves and what I do want to emphasize is the couple of three may be three take aways on this slide. The company has reduced its overall debt. Again overall debt both on balance sheet and off balance sheet some 834 million dollars since September, 30th, 2001. Interest expenses down for the year some 20 million dollars about 2/3rd or 3/3rds of that is driven by volume of debt reduction and about a fourth of that is driven by the reduced price in the interest and also again I think an important take away from this slide is the important quality of the balance sheet positioning us for the future. With that and at this point, I would like to turn it back to Greg who will take us through an update on key initiatives and the asset management overview.

On page 12 in the presentation I wanted to make a comment and update on the key initiatives and the reason for doing so is that we would like to do the comparison to what we laid out in our original operating plan when we began the year at the end of last year, clearly we have a lot of focus on cost management and process improvement initiatives, some other things that we did last year, carry over value and we have added some new initiatives this year. So in the area of the standardization, asset management, fleet utilization, etc. We had a target for this annual operating plan of between 58 and 65 million dollars from bottom line benefit year-to-date from the carry over of new initiatives, we have actually realized about 42 million, so with three quarters of the year gone, we are about on target. On page 14, on the asset management update, I would like to comment again that I think very good progress has been made in a very difficult used truck environment.

The total number of non-revenue earning equipment is that level of 8,433 and at that level that continues to be a recent record low, it's the lowest level that we have had in forty-five months, so it's almost the lowest level in four years. But not yet earning vehicles of that component are 1,253, the no longer earning vehicles of that total are 7,180 and of those 3,666, our unit's held for sale at the used truck center. For those of you who have access to the web there is an appendix on page 29 at the end of this, that will not present here but you will see the progress over time in those numbers as we have charted it in the past, for just to give you an idea, in the third quarter of 2001, there were 12,040 non-revenue earning pieces of equipment compared to today's 8,433 and in December at the end of the year we had 11,000 so the numbers obviously reflect an awful lot of good progress in this difficult used truck environment.

Used tractor sales proceeds have also stabilized but we had some softening in the medium duty classes. The overall number of vehicles sold continues to trend positively. The 2002 year-to-date number of used vehicles sold actually have increased 8 percent compared to the same period last year. On the page 15 there are 4 bar graphs that also really show some trends moving in the right direction. There's been a lot of focused effort in this area to positively impact earnings and really help free cash flow. There are 4 graphs as you will note first is redeployment and redeployments are those areas where equipment is coming out of service but not going to the used truck lots. So our redeployments have actually improved, and increased since last year in this period by 14 percent.

Tractor extension has had a dramatic improvement, it's improved by 136 percent, this quarter over last year's quarter to 1,936 tractors being extended and if you measure this batch, when we are really looking at a baseline, we have got about a 4 to 5 times improvement since 1999. Thoroughly replacements, obviously, are intended not to have assets come out of service prematurely before they have fulfilled their economic life that has improved by 41 percent. So, that number was down to 649 on a year-to-date basis this quarter. So, those early replacements again if we compare to a base line, when we started paying serious attention to this with a base line of 99 we're at level about 1/7th or 1/8th of where we used to be in this regard and finally in early terminations, we have improved by 22 percent on a year-to-date basis compared to last year. For the fourth quarter we have put forth an estimate on page 17 of a range of 48 to 52 cents per share for the fourth quarter. Obviously, October is a key month and has a lot to do with volume in this business and many others and in many industries. With that 48 to 52 cent estimate I think that as you all know that the full year EPS therefore becomes a dollar 74 to a dollar 78 and those numbers compare favorably to the full year estimates that we put out at the end of last year and at the start of this year. You may recall we had a call to talk about our operating plan for 2002. We had that in mid December 2001, and we have talked about a dollar 51 to a dollar 58.

We revised that in April of this year to a dollar 67 to a dollar 74 because our pension expense would not have been a significant as we had estimated at the end of last year. So, with our current fourth quarter estimate to a full year dollar 74 to dollar 78 considering the economic difficulties that we have faced, and the fact that the economic turnaround that we and many others were expecting in the second half of the year has not actually occurred, and we are not sure when that may turn, all and all I think a fairly good result and performance compared to our original plan. The last section that we would like to cover before we actually opened the phone line, we have added an extra section and this was added due to the number of questions that we have had submitted, and therefore we thought it would be appropriate to make a presentation in order to be complete and that has to do with the whole subject of pension update. And this is a general area of thought, and is not just about our business, but it's in all businesses these days that have defined benefit plans.

So, I wanted to give you some general information on how this all works through our organization and in general and then give you some specific Ryder information. So, I have asked Corky Nelson to cover this topic on pensions at this time.

Thanks Greg. Let me try to navigate as simply as we can do a fairly complex mine field here and continued pressure on the capital markets. There has been much discussion in focus as Greg mentioned around the whole area of pension accounting and pension expense, both in terms of 2003's earnings per share pressure as well as the impact on current cash flow. Even though, we can't, cannot and are unable to calculate exactly the 2003 pension expense until yearend we do know that with a high degree of certainty that it will increase in an environment of falling interest rates, negative equity market returns, pension expense will from many US companies and including Ryder go up.

Although, Ryder will not be obligated under the ERISA minimum funding requirements to make a cash contribution and until late 2004. I do want to emphasize this as a required contribution and that's based on various assumptions that are made at the beginning of the year with the cash payments not required until September of the following year. In addition to our brief discussion here today, we will be posting on our web page within the next couple of weeks a white paper discussing the intricacies around pension accounting to further the understanding of this topic within the investment community as well as the implications to Ryder. Page 20 of the presentation here on, those following the webcast, we'd presented our funding status for our US qualified plans for actual 2001 year-to-date and our projected, on emphasized projected 2002 year-end.

Our projected 2002 year-end funding status is based on a negative 10 percent planned asset return and a 6.5 percent discount rate being applied to our projected benefit obligations or PBO. Our funding status is expected to decline to about 79 percent at year-end 2002 versus a 103 percent at year-end 2001. To put this in context, our projected 2002 funding status was the lowest in almost 10 years. We had ranges at low in the past of 90 percent in 1999 to high as 158 percent in 1998. I think these general trends as you probably have seen what most companies would be pretty much the same. The negative returns generated in our pension fund assets combined with lower discount rates applied to the benefit obligations creating significant downturn in our funding status. As many of you know and are aware, a cash contribution to the pension plan as regulated and determined by the rule set forth under ERISA. These are complex calculations that I will not go through in detail today but will be covered in more detail within the context of the white paper that we will be issuing shortly. Under those rules, the writer, as actuaries have determined that it does not need to make a cash contribution as I mentioned earlier until late 2004. Under these rules; however, I should point out that we can and may elect to make an earlier contribution than the required date.

Based on most recent available data, we have calculated that the present value of our required cash contribution over the next five-year period will be between a 125 and a 175 million dollars. Page 22 depicts asensitivity analysis, we performed around our US qualified pension plan expense area, these calculations exclude our international operations in our union administrated pension plans and I'll come back and touch on that shortly. You can see a negative 10 percent return in the planned assets for 2002 would result in a 2003-projected pension expense of about 54 million dollars.

A 15 percent negative return would create approximately a nine percent additional more expense or pension expense and total about 63 million. These expenses compared to our current year's comparable pension expense number of about 10.7 million. These expense calculations are based on several assumptions including a discount rate of 6.5 percent and an expected long-term rate on assets of 8.75 percent.

I should also point out that the US qualified pension plan represents the great majority of both our pension plan assets and obligations and changes in other plans were not much, will not affect the overall numbers significantly. As a wrap up, pension expense is very sensitive to actual and expected long-term asset returns and as a reminder, we've taken down our expected long-term asset return rate to reflect a more conservative assumption of 8.75 percent.

Pension expense can also be impacted by cash contributions made to the plan. A cash contribution to the plan in 2002 would increase the planned assets and thereby reduce the calculation, calculated pension expense for subsequent years. No matter how the overall equity markets end the year, we are expecting a significant increase in pension expense. We are therefore working diligently to offset these year-over-year increase and with additional operational performance improvements. We will cover this in more detail in the December call when we cover our 2003 business plan.

And as a takeaway, I want to strongly state that the pension funding requirements are manageable relating to Ryder and relative to our cash flows and as again as I've mentioned earlier, we will be, we are in the process of developing a more comprehensive white paper on the topic, which will be available on the website in the next two or three weeks. So with that, at this time we want to open it up to questions and again, just as a reminder to get into the queue, press star one on your touch-tone pad and the operator will begin the polling process.

May I also remind some of the callers that sometimes you have your telephones on mute during these calls and if you would take it off mute before dialing star one that will ensure that your tone will be read and your call will be registered.

Thank you. Ed Wolfe from Bear Stearns. You may ask your question.

Yeah, hi guys.

Hello Ed.

Hello Ed.

Can you talk a little bit about the commercial rental utilization and you know, usually if the utilization goes up, you start to see the revenue go up and we are hearing about tighter capacity in both the truckload and LTL markets and some dislocations from the West Coast ports. I would have thought you would have started to feel some of that a little more. Can you take us through the quarter? Maybe, at the end of the quarter how it felt vs. the beginning and what you think going forward?

On commercial utilization, I think we are up around 76 or 77 percent, which is up substantially from a year ago and earlier quarters. Maybe, I will ask Tracy, if you would like to comment about what else is going on in your group and for substance from the marketplace.

Ed, we did see that increase from utilization, which we have been driving now for the last 18 months, but still on a relatively reduced fleet, I think we are down in the US market at least 10 percent on a fleet reduction. So, our revenue per unit keeps climbing. I think on a year-to-year comparison if you trace our three quarters, our comparisons on rental are improving dramatically and we are soon, I think just about at the breakeven point even though our fleet is down about 10 percent. So we are seeing that up tick in revenue. Now, we are being more selective than we used to be and that's what is helping us drive rates up. I think Greg mentioned earlier that we are pushing rental rates up. We are doing that because we are being more selective with a smaller fleet.

If you look at the customer base right now, how much of that is trucking company versus, you know, regular shippers versus where you were maybe a year ago or couple of years ago?

Yeah, I don't think, our mix has changed dramatically versus a year ago. So, most of our demand is coming from regular shippers. It is not, we do have some trucking business in there, but that is mostly from our broad customer base.

Yeah.

And you know, I think there is some strengthening there. Certainly when the economy does and when we do see that consistency in the economy improving it is going to come in rental. So, we watch that really closely, certainly the fourth quarter, you know, it all so much revolves around the Holiday season. So, that the question in the fourth quarter will always be when do trucks come back in the December timeframe.

When you gave out the CAPEX numbers, you gave gross numbers. Can you talk at what's the net of sales numbers have looked like through three quarters?

Yeah, let me grab those numbers here shortly.

Okay, and while you are doing that, Greg, can we talk a little bit about the new engines, what you are testing, and what your expectations for taking on new vehicles at your various units are with the new engines?

I know that we have been in the testing process with all our manufacturers and Tracy, if you would like to comment, I know there are some things that we have elected not to share publicly, but can you comment on what we have been willing to share publicly.

Sure, Ed. We are certainly prepared to introduce new engines and new trucks to customers. Of course, our strategy has been to talk to them about extension because we think that makes sense not only because of our asset situation but with engine life and with the uncertainty in our customers' business. But, we are prepared to run new engines. We have been testing a number of engines. We do have confidentiality agreements around those tests. So, we are not going to share those in public, but we are just in the midst of launching a modest campaign around this very issue. We are reaching out to our existing customers but also to the marketplace, talking about the options we have for them around new engines or use of existing equipments. So..

In the fourth quarter, are you taking on any new engines, trucks?

We will be. We don't do a speculative buy. We place orders as we have needs around the leasing business and you know rental, we will look at rental purchases end of first quarter next year. So, we will be buying, we will certainly be buying new equipments.

And roughly, what's the cost, you know the incremental cost of the new engine and what's the back-end residual value of them that you are planning to use when you depreciate them? Do you know that?

Well, I will tell you that our pricing from OEM is still a bit of a moving target. I think, you know, we all saw the published reports and I am sure, you saw the published reports about it. 3,000 to 4,000 dollar premium on the new truck engines, some of that has, some people are holding at that, others are discounting. And so obviously, we have picked really close to that to make sure we get our purchasing advantage. So, I would say the actual price on new engines will be slightly less than 3,000 to 4,000 dollar range.

Okay.

And then, you know again depending on the engine we have different maintenance in residual, you know, assumptions based on our, based on our testing and our evaluation of the engine.

Yes. On the sales proceeds, year-to-date the sales proceeds on assets, about 110 million and that compares to last year about 140 million.

Should we just add, you know, fourth to that or third to that to our fourth -?

Yeah, that's about right, through the balance of the year.

Okay, and Greg one last thing, you've obviously done a good job recently of getting down the level of non-revenue earning equipment, but it is not so clear to me, we are seeing it in the numbers and if you take away amortized goodwill a year ago, the pretax numbers don't look so different year-over-year, what should, I mean, when should we really start to see this sort of bottom line and what is the leverage to getting this equipment down?

I think that when you see the bigger impact is when the general pricing in the used truck market moves up substantially. We have seen a little movement up on tractors, we've seen a little bit more volume, but, you know, we are orders of magnitude away from where we were a couple of years ago. So even though we have had more gains on sale of used vehicles this quarter and year-to-date than we did last quarter, those are marginal improvements, but to get to the big step up, you'd almost have to return to the same environment you had a couple of years ago and that's going to - I'm not sure that it'll ever be quite that good again, but there will be some step up improvement that I think will take, will take some time as you absorb what has been a glut in the market of both new and used equipment.

Okay then one last one and I will pass the baton time, this is dedicated logistics number is down a little bit, it's been for there while now. What's going on that side of things? Is there any problem with the availability of drivers? Is it just more competition in the market, weak economy? What are the issues?

And dedicated contract (Inaudible), there's a reflection they are obviously impacting number of miles driven. That is a clear reflection of demand and transportation demand in the marketplace. In terms of individual contracts, Tracy could comment if she would like because we have announced a new contract. I am not aware at this point that we have any issues about drivers unless someone would note otherwise. I am not aware of any.

No, it in fact probably drivers are a little bit easier in this market to find drivers that meet our rather high standards. We are not seeing anything relative to drivers.

Also on this performance improvement here, don't let the pension expense increase of some 18 to 19 million dollars for the three quarters of the year for Fleet Management Solutions mask the improvement that they are making in the business. So there is another 19 million dollars there that's being covered by this pension expense increase item.

How much of that was in the quarter year-over-year?

It's about 6 million.

Okay, thanks a lot everybody for this time. See you.

Thanks.

Gary Ablem, Credit Suisse First Boston. You may ask your question.

Thank you. Hi, guys. How are you?

All right Gary.

Could you talk a little about the pension expense increase or even might be for next year. I am guessing that could be a pretty big number cents per share, talk about offsetting that with cost, that would a lot of cost. So, I just want to make sure, I'm understanding what is the magnitude, that sounds like a high number to be, or tax guys have estimated 33 cents per share, I'm not asking you to comment on that specific number seems big and I'm not sure how you get them off unless you (Inaudible).

You are fading a little bit...

My question was, how you offset that pension expense probably you have to do deal with 2003, to what extent is it, cost reduction to what extent might it be funding to the plan a bit?

Well, we are obviously looking at all those options right now, as we develop our 2003 business plan, which we planned to share with you in mid-December, that decision has not, those decisions have not been made as yet, but Tracey and Gene's areas and Bobby's areas are focused today on building initiatives for the 2003 business plan, which we will be rolling out as part of our review with you in December and that's being, that's one of the objectives of how we are going to cover that, aside from how we do the funding.

Let me add a little more flavor to that as well Gary. There is obviously three ways in which that numbers influence. It varies at the market close at the end of the year and we don't know that for sure. That has an impact. The second is the actual cost reduction activities that we would engage in and that's what we are working on now is rebuilding our plan for 2003 and as Corky had said the potential for some funding in to the plan and 2002, you know, all of that is, is not planned yet, it is not determined which courses we will take, all of those are pieces that have to fit together and those will be reflected when we have, you know, our board meeting in December, which would prior to our talking about the annual operating plan to may be further put in context, you know, over the last few years, we started a process improvement and cost management initiative program that was in advance of knowing where the economy was going, where the stock market was going and what, you know, potential negative impact of this would be.

So when we began our work, you know, a couple of years ago we cut costs by about a 113 million. We are looking at initiative this year about 58 to 65 and you can say well that's going to get tougher, you know, because you take the low hanging (Inaudible) of all and so you get the easier things first and then you continue. But we have, you know, we have quite a number of things on the table that we are working with our team. So, we can't be definitive on an answer, but you know, we are obviously intending to continue to work on process improvement and cost management as that is a piece of, you know, the entire context of the pension impact, whatever it turns out to be, but end of this year.

Okay. Second question, can we talk about the supply chain side of the business? I am guessing, while markets are tough, it's still been fairly disappointing to you, Greg you are taking that under your wing, could you give us a sense that you are comfortable, it's going in the right direction?

Well, I do believe we are going in a right direction and alot of things have been started over a fairly long period of time. We are trying to give the segments with Gene's announced retirement, we are trying to get a little bit more focus between the International and the domestic, because there are some differences by region and we want to make sure that we can give local attention to the things that Gene has started. For example with operations excellence in each part of the world. People like Tony Tegnelia and others and Bobby Griffin have been working on margin improvement and we want to make sure that we drive all of that.

So, we think that the fundamentals for improvement are substantially in place. But we have a lot of hard work to do. You know, we have a lot of things to work through overtime and because of kind of things that happen overtime or over history with contracts that we have to work through. We have real focus on improvement both for customers and for ourselves. You know, we have a real desire in order to make ourselves efficient in the marketplace, as well as to give the right returns on (inaudible) sharing with customers. The right orientation in focus, I am making sure that we are well managed and cost focused in doing these. So, I think the foundation is there. I think that what we have done thus far in the year and since we started this would prove that that's there, but we have a lot of tough challenges ahead of us yet.

Okay. Thank you.

James Valentine from Morgan Stanley. You may ask your question.

Actually it is Mike , Jim had to step off, but I just have a question for Corky on the free cash flow, obviously, it was very strong year-to-date. Do you know what you guys are seeing with the economy right now? I know the '03 is not prepared yet. I have to imagine that CAPEX would be down sequentially, but weaker than, lower than historic levels in 2003. What do you guys anticipate along with the pensions there right now knowing the debt levels and so forth used just for the free cash flow going forward?

We have not done that work on free cash flow for 2003 to be asked about it. We are working with the business units and specifically trace this organization on capital level obviously is the main driver of it. So, it is premature to even talk about that, but where we have got that in our radar screen and we will be rolling that out in December as part of our business plan, but I think it is fair to say that we may see some increase in capital next year based on the quick look at the fleet, the age of the fleet, and some of the work that we need to do to upgrade the fleet to minimize running costs. So, that's kind of where that stands.

So, looking at your debt levels right now, do you see yourself wanting to come, go much lower than where you are at right now, do you think the balance sheet is in very good shape?

Well I think the balance sheet is in very good shape today. It will go lower. It is really not so much a function of paying down debt. It is one of the opportunity to reinvest in the business and that's what we will be focused on going forward in 2003 business plan. We've gone through a significant, what I kind of view is kind of four phases in the company. We started out with kind of getting well in top of capital expenditures and some of the low hanging fruit. We went through a significant restructuring which is in the kind of second page. We initiated through the leadership of the operations margin improvement, which is all about process, and business changes and we are now focused on what Tracy and Gene launched in March of this year. What I have really referred to is the kind of the fund part of the business, new products and services and new development services. We want to take to our client in customer base and it's all about growing the business. So, we are focused on growth going forward and profitable and we are looking at opportunities and we think we've got a balance sheet that will support making the right decisions on the right opportunities that come along.

And while speaking about growth it seems like Europe is supposed to add [Inaudible] quarter was strength. I just wonder if I could get some more color in terms of what you are seeing there? If there is any particular market that is strong in Europe with the demand, you know it is coming from as a from new service offerings, It is going to little bit better handle-on what is taking place there?

I was just there couple of weeks ago. So I can probably speak with some first hand evidence coming from actually all the segments. There has been improvement in the leasing business. There is improvement in the equivalent of what we call dedicated contract carriage and there has been some new activity on the supply chain side. And I think we have, I think we had press releases before on automotives as well as to [Inaudible] went with that when was I there. You know, the Duke of Kent was something grand to open a new warehouse. So there is lot of positive things going on in Europe overall, and I think it cuts across all three segments.

Okay great. Thanks guys.

Thanks.

John Emric from Burke Capital you may ask your question.

Thanks. Two unrelated questions I'll ask separately. On the asset the pension issue going from 10.6 -- 10.7 million in 2002, is that right the expense?

Yes.

To 54 or 63 million dollars depending on performance, I got the range courses 45 to 55 cent, kind of, in the whole to start off the year. Well I just only bring that up because someone brought up 35 cents earlier I want to make sure I wasn't missing something?

You know again that this is not precise obviously there is a significant formula based on this but our estimates, what we just covered based on that the latest information you got a, as Greg mentioned put a stick in the sand 12:31 to get the actual number. And this is our best estimate based on the assumptions we are using today.

And also based on asset performance to the date.

Yeah that's correct.

Which you, I don't think I heard you say what it was but I am assuming you provided the ...

About 11 percent down for the year, you know, our portfolio mix.

Then the question that is follow up to the CAPEX question, you haven't done your '03 budget yet but can you speak to any certain areas that you held back the most on saying in the current period both directly related trucks or IT spending or anything like that, that might be the beneficiaries next year. Should cash continue to free up?

Well I'll like Tracy talk about this a bit from her business point of view. But let me give you an overall context about it. While we been looking at overall capital and focused on getting the return for capital we haven't intentionally starved any part of the business as well as they could justify a return for the investment to be made and again I think, the great progress that Tracy and her Asset Management team has made is the whole area of better utilization of the assets that she has got under her control. So I will let her comment about that.

I think the leasing side which is the biggest driver of CAPEX because last year, this time really two things happening one is the economy and customers probably more interested in downsizing their fleet than growing and more interested in extending their leases than renewing and the extension piece worked well for us because of our asset situation and all those assets not earning revenue and not wanting the equipment to come on fleet. So between the economy and what our customers are looking for and our asset situation, we really -- we are much in alignment around using existing equipment and all of that drove down lease CAPEX. We still have lot of activity around leasing and although decision making throughout, we will be there, when customers and prospects start making their decisions about their business. So, we expect more lease capital next year. We are confident in our pricing around the use of that capital. We have good process and visibility in place around that and our sales force will certainly have the capacity to go out and do that where as this last year, the sales force like the rest of the organization is very engaged in putting the assets we already own to work. So again we are waiting for some of that decision making to free up but we are, and we remain and will be very active in the market place around leasing and would expect lease capital to be higher next year and as Corky said around good return.

One other thing, kind of finishing up on the, may be adding to the other question on pension expense area. Let me give you a quick overview because this question has been asked by a number of people and I would just kind of cover it here as a group that the portfolio mix in our current asset represents about 71 percent in the equity markets, about 13 percent in non-equity markets, about 24 percent in fixed income and there is a small amount in alternative investing of about 0.6 percent. So again we have just recently, through our tactical asset allocation strategy increased the equity position of about 16 percent, but that's been recent move.

Thank you.

Michael Plover from Clovis , you may ask your question.

Yes, thank you very much. Good job in the cost saving guys. Actually my other question has been answered. I appreciate the call.

Welcome, thank you.

Sol Tipkin from ISI Inc. You may ask your question.

Yes, I was wondering if you could frame the West Coast port lockout and what impact that has on any and all parts of your business in particular when it might impact your business now in terms of the, you know, the actual lockout and also to the extent that when the 80-day period is over and another strike occurs, you know, when that might impact your business starting in 2003? Thanks.

Let me make a general comment and then I will turn over to both Tracy Lienbach and Gene Tyndall. I think that generally compared to many other companies in this business our impact is probably, considerably smaller on the down side and then on the up side as you are probably aware we have a transportation management center which handles the flow of goods in transportation by us on behalf of our customers. And through that center and through that activity we actually gained some time of business due to pricing although we have regular customers but our ability there is to reroute and go around problems on behalf of our clients as we contract with other transportation providers. So for us it isn't all down side and maybe some up side. With that general information let me turn it to Tracy and then Gene (ph) .

I think from the, on the rental fleet side there is some impact both in the up and down sides as the situation changes. As the Carrier group that goes into the port typically is not our main customer base. In fact at this point we are pretty pleased with our tracking utilizations, (Inaudible) which pricing [Inaudible] . You don't have a lot of excess capacity around our tractor fleet. We will see just some modest activities. Certainly there can be a trickle through impact with our traditional customer base but again we haven't seen any dramatic impact at this.

Would you be able to quantify at all what the impact is? Certainly it sounds like it is small.

No. Because it has been small we really haven't gone through great efforts to sort of isolate those particular activities down to a transactional level.

Okay, whatever impact there was, small as it was, was it a part of, did it impact third quarter results at all?

I don't think from the rental side no.

[Inaudible] show up on the [Inaudible]

No Bill and this is Gene Tyndall from Supply Chain side. We anticipated like many shippers did, you know, the problem is, we had a lot of it re-routed as Greg said, there are some containers obviously there, that the delay was felt, but it was a very small percent, as was Greg and Tracy said.

Okay. Thanks very much.

Thank you.

Alright. If there are no further questions, I thank everybody for their questions and for their participation. Thank you and all have a good safe day today. Bye now.

That concludes our conference call. We would like to thank you for your participation. You may disconnect at this time.