萊德系統 (R) 2003 Q2 法說會逐字稿

Good morning. And welcome to Ryder System, Inc. 2003 second quarter earnings release. All lines will be in a listen-only mode until after the presentation. Today's call is being recorded. I would like to introduce you to Mr. Bob Brunn, Director of Investor Relations for Ryder. You may begin.

Good morning and welcome to Ryder's second quarter 2003 earnings conference call. We would like to begin with a reminder that in this presentation you will 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. For detailed information about these factors as contained in this morning's earnings press release and with Ryder owe filings with the SEC. Present today are Greg Swienton President, Chairman and Chief Executive Officer and Tracy Leinbach, Chief Financial Officer. Additionally,Dick Carson, SVP of Fleet Management Solutions, Tony Tegnelia EVP of Supply Chain Solutions are on the call today and available to answer questions you may have at the conclusion of our presentation. I will turn the call over to Greg

Thank you and good morning, everyone. I personally would like to welcome each of you to today's call. As we have done in the past we will be reviewing the second quarter results. We will touch on an update on our various initiatives including asset management, cover the earnings outlook an we will have a special section just to talk about FIN46. As is common right now in the marketplace. We will give you an overview of that and the impact to Ryder going into the future. And after that is over, as always we will open it up then for your calls.

Let me begin with the second quarter results overview. Earnings per diluted share were 55 cents for the second quarter as compared to 47 cents in the prior year period. Now, I'll provide a little bit more detail on quarterly EPS results in just a few minutes. A full service lease revenue was down slightly year-over-year. There still is softness in the economy and uncertainty in the marketplace regarding decisions to committing to new long-term contracts. However, even as demand remains slow, we have seen some signs of modest improvement. And while lease sales remain slow, we have been a little bit encouraged by the activity we have seen in discussing issues and opportunities in the pipeline with our customers. We have continued to show year-over-year improvement in commercial rental revenue again this quarter. That's the third consecutive quarter. I think that that still is largely the result of the steps that we have taken as an organization. We have been able to realize improvements in rental pricing in a relatively challenging market environment. That has helped to fuel increases in revenue and margin for the commercial revenue, commercial rental product line.

We also had an increase in the market prices for fuel, which has contributed to some of the top line growth in fuel revenue as you are aware, certainly those of you who follow us, fuel costs are largely as pass-through to our customers. Our margins are not significantly impacted by that activity.

Supply chain revenue was down as we had expected it to be due to slow economic conditions. However, the decrease was less than we anticipated as we began the quarter. The automotive volumes were not as low as expected. We also added some additional new business. In the international area, our operations in Canada, Latin America and Asia posted increases in revenues although they were somewhat offset by declines in Europe. Some of the revenue in UK and Canada was affected by favorable exchange rate translations From an earnings standpoint, Fleet Management Solutions results were impacted and hurt a bit by lower lease revenue that I mentioned earlier. In addition, this segment does absorb or did absorb most of the increase in pension expense that we'll also touch upon in a short while. The improvement in commercial rental results and in the asset management areas helped offset some of these negative impacts in Fleet Management.

We are also pleased to report for the second consecutive quarter a significantly improved result for the Supply Chain Solutions Group. Our profitability improvement in this segment is really the result of numerous margin improvement actions that have been worked on and taken on in this segment over the past 18 to 24 months. As we also said coming into this year when we laid out our plans, we said our commitment was not only to make this segment profitable, but that we would achieve break even or better every quarter of the year. So we are pleased to have delivered on that commitment in a substantial way Dedicated contract carriage revenue was basically flat and margins were consistent with last year as well. The asset management area continued to perform very well again in the quarter. We had a reduction in non-revenue earning equipment of over 700 units or 8% compared to the second quarter last year. And these results were driven by the team's focus on retail vehicle sales, reducing early terminations of contracts, as well as redeploying used equipment and term extending maturing lease contracts. Tracy will cover a little bit more detail on this later in the presentation Again we have had strong cost management focus across all overhead areas. Our central support service costs were reduced for the tenth consecutive quarter. It helped our ability to support the business operations more efficiently and make us more competitive in the marketplace.

For those of you who are following on the PowerPoint, if you turn to page six you'll see the earnings per share numbers. Earnings per share before any restructuring or recovery improved 15%. That is 54 cents versus 47 cents last year. Adding one cent of recovery, our total EPS was 55 cents versus 47 cents last year. Also on the memo item up's note that we noted the impact of pension expense of 21 cents in the second quarter of 2003 versus the eight cents of 2002 which is the 13 earnings per share differential of which most of it actually impacts fleet management solutions. Page seven indicates the year-to-date earnings per share. EPS before the cumulative effect of accounting changes is 88 cents year-to-date versus 74 cents last year, up 19%. The, there was a cumulative effect of changes in accounting principles last year of 30 cents, which was SFAS 142 an this year of two cents of SFAS 143. On that basis below the line on EPS, below the effective accounting changes, 86 cents this year versus 44 last year, or 95% improvement. Again we noted the impact of pension expense in that memo item. Forty-one cents this year versus 15 cents last year.

In the business segments, and I think those of you who follow us are aware, we do allocate the vast majority of essential support service costs to the business segments. When we are comparing, we are down to the net before tax fully allocated basis for each of the segments. In total, revenues declined about 1% and earnings in the segments was up 12%. Fleet Management basically had flat revenue. There were some ups and some downs, depending on which segment of Fleet Management we are looking at.

There was a decline in U.S. leasing revenue. It was offset by increases in commercial rental and improvements in Canada. Total revenue which includes fuel was flat quarter over quarter as I said, but dry revenue was actually down 2%.

Basically Fleet Management Solutions revenue, flat. Fleet Management Solutions earnings was down about $3.3 million or 6%. That's basically driven by the extra $12 million of pension costs that attributes to that segment.

Supply Chain solutions revenue was down about 4%. That was anticipated. It was down less than we had anticipated in our last outlook. And the positive news again is in the net before tax for that segment. Last year the segment lost $2.2 million. And this year it gained -- earned 7.4 million for a swing of 9.6. Dedicated contract carriage revenue was basically flat and earnings were down 1%, but basically flat.

So earnings after our all central support services improved 15 percent at 53.7 million versus 46.5. And with $800,000 recovery from prior restructuring our earnings before tax were up 17% and our net earnings as reported in our press release were up 18 percent with earnings of 34.7 million this year versus 29.5 million last year. n page nine on the full year-to-date basis, total revenue is up 1%. Earnings were up 20% before the impact of accounting changes. And after the accounting change impact, net earnings were 54.5 million versus 27 last year or up 99%. With that, I will turn it over to Tracy to cover a number of items, beginning with capital expenditures

Thanks, Greg. Page ten does outline our capital expenditures. Year-to-date $413 million, that’s up $133 million from last year. The increase in spending is driven solely by our increased purchases for our commercial rental fleet and last year, if you remember, we had almost no capital spent to support our U.S. commercial rental fleet. So we are taking this opportunity to refresh the fleet and we are timing our new purchases and the disposal of our older units to make a slightly larger fleet in the U.S. market into our busy season. We expect the rental fleet during the busy season to be up two to 3% this year. Turning to lease, as Greg mentioned, we are continuing to see softness in the market and our lease spending is down 12% from last year. That's attributable to the softness as well as to higher levels of redeployment and term extensions than we had originally planned for 2003.

As a result of those dynamics in lease, you can see from

page 11 we are revising our capital expenditure forecast for the full year, down from the original $890 million that was in our plan to $750 million. As a reminder, we only spend lease capital after we have signed contracts from our customers. So this revision, this revision is tied to our outlook for the remainder of the year. We, with softness in the lease market and higher anticipated levels of redeployment and term extension I will comment that those redeployments and term extensions are consistent with our asset management initiatives. They continue to have good marketplace acceptance. And they continue to deliver good return for Ryder.

While we are revising our full year forecast down, going forward we believe the original plan of approximately $900 million represents a more normal maintenance level of capital expenditures for the company. Turning to the next page, you can see that based on our preliminary consolidation, company generated $126.3 million in free cash flow through the first half of the year.

That's compared to $198 million last year. The year-over-year reduction of $72 million is driven by the increase in capital expenditures that I previously mentioned. I would highlight that continued improvement in net earnings, proceeds from sale of assets, and working capital management are all continuing to contribute to positively to the cash flow numbers.

On page 13, you can see we continue to reduce our debt levels and bring down our debt to equity ratios. Ryder's total obligations including securitization were down $180 million from the beginning of the year. And as a percent of equity total obligations were 173% of equity compared to 200,000 -- 200% at the beginning of the year. These total obligations include borrowings that will be impacted by finance that Greg mentioned. I'll touch on that later.

As we discussed in previous calls we believe in this economic environment it is important to use our positive cash flow to reduce our debt level. However, as we continue to improve our profit margin and in a stronger economic environment we believe the business can support a higher level of debt while maintaining or improving our credit rating. Moving now to our key initiatives on page 15. In December of last year, we shared with you our full year 2003 goals around our initiatives of 44 to $49 million in pretax earnings.

These initiatives are focused around sustainable cost reduction and process improvement in some of the key areas of our business, including maintenance, asset management, supply chain operations, insurance, safety, and overhead. Through the second quarter, we've realized approximately $23 million in benefits from these initiatives and while there's more work to do, we are on track to achieve our full year goal. While we have had success in taking cost out of the business over the last several years we are by no means at the end of that opportunity. We continue to see significant cost reduction and process improvement opportunities in the business beyond the 2003 horizon. And we plan to vigorously pursue those regardless of the economic environment.

Turning to page 17, I do want to update you on one of these key asset, key initiative areas, and that's asset management. This initiative had significance can impact on our earnings as well as capital efficiency and our free cash flow. As Greg mentioned earlier we continue to bring our non-revenue earning equipment count down 8% over the same period last year, and that figure of just under 8,000 units includes over 3,100 units in our used truck operation.

We continue to see some improvement in the used tractor pricing, up 6% over the course of the last two quarters and up 10% over the same quarter last year year. But I would remind everyone that these prices while up are still off their highs of 1997 and 1998.

While we see improvement in the used vehicle sales market we continue to focus on keeping our assets earnings revenue longer and you can see on page 18 that the redeployment while flat in terms extensions while down slightly are still at very strong levels and as I mentioned earlier above our plan figures for the year. With market acceptance good pricing for leasing used equipment continues to make good economic sense for Ryder.

We also continue to reduce the number of early replacements and early determinations we take back into our fleet, which means we are doing a better job of realizing the full cash value of our leased contract. I'll turn the call over to Greg and he'll take you through our outlook for the remainder of 2003.

Thank you. In the plans that we shared with you at the end of December and as we updated in the first quarter of this year, our full year outlook was $1.95 to $2.00. Having completed two quarters and looking on through the rest of the year, we are increasing our outlook and guidance to a level of $2.04 to $2.10 a share for the full year. Our expectation is that in the third quarter we would have a range of 59 to 62 cents. That is in line with our 60. We have a range of 57 to 60 cents a share, compared to the 57 to 58 cents a share in the plan that we shared with you at the end of last year.

So that gets to the full year of 2004 to 2010. I want to point out that inputting forth these numbers that if we do have any types of restructuring charges, we take responsibilities for those and while we may separately comment or report on them for informational or required purposes, any such costs we would view as costs of operating the business. We hold ourselves accountable for that. And do not subtract that from achieving the projected results in these items that I just shared with you. If there should be any, we would not set them out. We would include them in the forecast that we are sharing with you.

The other thing that our forecasts do not include is the cumulative effect of accounting changes as these are mandated by the FAS B. And there have been several of them mandated over the last several years. You probably can anticipate there may be more in the future. We do not include the cumulative effect of accounting changes as these are mandated and not operationally driven. I just wanted to provide that clarification on both those items so you can be sure of what is included in those numbers we are giving you as a forecast.

We would normally now turn it over to Q and A. Before we do that, I do want to have Tracy go through on this presentation the impact again of FAS B. This would be FIN46. It is current across the business world. We wanted to share with you in general the principles that apply and how they would apply to Ryder. And so I will return it to Tracy before we actually open it up for questions.

Okay, thanks, Greg. This is a new financial interpretation. It is accounting policy change that is mandated by FAS B. Specifically concerns variable interest entities. It goes into effect July 1 of this year. So while this is a full impact, will impact our financial presentation for the third quarter as Greg mentioned, we do want to give you a preview at this time.

We have three -- we have three off balance sheet entities that we will be consolidating under this FIN. They conclude two outstanding securitizations and one lease transaction. As a reminder, we entered these transactions a number of years ago in order to obtain the best after-tax cost of financing an to diversify the company's source of funds. We have had a practice of including Ryder's obligations under these financings in our total debt numbers and leverage ratios, just as we reported to you earlier on this call. This change will impact the P&L balance sheet and the cash flow presentation to the company. I will touch on each one of those.

As a result of the adoption, we expect to take an estimated after tax charge of five cents per share in the third quarter for the cumulative effect of this accounting change. The charge represents the difference between leasing and owning these assets, since the inception and our oldest transaction goes back as far as 1999. This charge will reverse itself in regular operating earnings over the next three years ending in 2006. The earnings outlook that Greg shared earlier includes a one cent per-share positive impact for the second half of 2003 through the reversal of the charge just mentioned

Turning to page 23, and talking about our balance sheet, assets will increase by $421 million and debt will go up by $414 million as a result of these transactions coming on to the balance sheet. It is important to note that this will have no impact on the company's debt covenant or borrowing rates as a result of the changes to the balance sheet. The cash flow presentation is also going to change as a result of this adoption. Equipment rental expense now will be presented as depreciation interest expense, resulting in a higher level of depreciation add-back. We will also start recognizing proceeds on the sale of vehicles that are held in these transactions. As a result, operating and free cash flow ratios will increase due to the add-back of the depreciation and the addition of the asset proceeds.

Finally, cash used in financing activities will increase due to the fact that the principal payment now will be shown as debt on our balance sheet for, related to these transactions. For your purposes, we are sharing with you that the annualized rent payment for 2003 relating to these three transactions totals $116 million. I would highlight that's a full year number. If you apply a two thirds, one-third split to interest and depreciation, it should give you a good approximation of the impact going forward on cash flow.

As to proceeds, we estimate the proceeds on the sale of the vehicles in these transactions will be roughly $200 million. We would recognize those proceeds toward the end of the transaction, which would be 2005/2006 and most likely beyond if we hold the vehicles longer than we originally expected to when we did these transactions. I would say based on our past track record we expect to hold them 12 months longer

We’ve included an index on page 36 there's more detail on the balance sheet and the leverage ratios That concludes our remarks. At this time we would like to turn the call over to the operator. And open up the line for calls.

Thank you. At this time if you do have a question, please press star one on your touchtone phone. Again, that is star one to ask a question. If you wish to withdraw your question you may press star two.

Our first question comes from Jim Valentine. Please state your company name, sir.

Morgan Stanley. Fantastic quarter, you guys had a fight since you arrived there a few years ago. Great results. Maybe you can talk briefly about the logistics business. We had men low here citing examples of not being able to get the consulting revenue they would like that some of the contracts aren't being resigned in margin. They would like to see most applying maybe the three P&L business is getting tougher. Yet you are showing more resilient results part of which is your own restructuring efforts. I'm trying to get a feel for where you think the current marketplace is in terms of competition, in terms of margins.

I'll comment first. I'll turn it over to Tony Tegnelia who heads up the U.S. supply b chain. I think he's closer to it. I would say that when you have tough economic times, I think you can always anticipate it's going to be a difficult environment. That means incumbents will fight for the business harder and customers can be more demanding. At the same time, to be able to compete effectively for business means that you've got to do the right things internally. And that is something that we have been focusing on. So clearly, the marketplace, whether it's easy or a tough environment, is going to set the price. Our ability to compete successfully has to do with how well are we able to manage the costs and put forth a proposal that not only has value to the client but has a reasonable and good value proposition and a reasonable price.

So that is our job. That's what we have been working on, to reduce overheads, operating expenses and make sure that our side of the equation is done right. I'll let Tony comment further if he would like.

Thank you, Greg. We do see the market staying very keen. It actually has been keen for some period of time. We do see it staying there. However, we do see an extraordinary amount of activity and new opportunities. Now, it is imperative that it should be very, very cost competitive. That's why we're working very, very hard on our processes and procedures from an operational point of view. You see that from the earnings on our MIP improvement on earnings.

We are working hard to drive overhead costs down, so we are able to price competitively in this keen market. We are confident that the work that we've done with our overhead and with our operating procedures and operating costs will put us in a position to get our share of that business that's out there, that is very active right now and also priced competitively. And work through this environment right now, which is very keen.

Great, thanks, Tony. The second question if I can ask one would be to highlight the very big drop in the maintenance line at fleet management solutions. Maybe you mentioned it and I missed it. It looks like maybe there was a contract loss? I'm not sure what it is.

The other line?

Yes, the other.

There was a reduction there of principally driven by contract for ancillary services. And although we never specified individual client or where it is, that's what that was about.

Okay. I guess I'm cheating. I would ask you a question, Greg. Tracy seems to be doing a great job here as CFO. Initially it was supposed to be an interim role. Any thoughts there?

Nothing that I'm prepared to announce. Our decision will be concluded shortly. That will be reviewed with our board as to what direction we may take. But I appreciate your kind comments about Tracy because I absolutely agree, she has been doing a very good job.

Great. Once again, great quarter.

Thank you.

Thank you. Our next question comes from

Gary Yablon (ph). Please state your company name.

Hi, First Boston. How are you folks?

Great, thank you.

I want to go back to Tony and then ask a pension question, if I could. Tony, in terms of how you see margin going forward in your business, you were pretty emphatic in Q1 that we found a new base. Give or take. I don't want to pin you down, to an exact number, but we found a new base in terms of margin in this business. You proved that to be the case again in Q2. Does that still feel pretty good to you as you go forward, adding in all the puts and takes?

Yes, it does. Depending upon volumes, of course. You do need the revenue growth. But the work that we've done with our operating procedures and methodology from an MIP point of view, we are confident will stick. The work will be done in the overhead area, we believe will stick as well. Now, you do need volumes to help you out, obviously, from new business and also volumes returning with existing customers. But we believe that the fundamental work we've done with the structure will stick.

Okay . I want to jump over to the pension side for a second. Is what you were saying earlier, Greg, the $12 million head wind by and large is MSF?

Yes, the total was about 13 million which was in FMS. That's where we have the traditional work force that has the defined benefit to the plan.

So how do you as pension is always some kind of an issue, how do you think about the profitability? Let's say on a dry basis you reported 8.1 percent in FMS as MBT margin. How do you think about that? Is 8.1, should you add back 12, a portion of that? What do you really think is going on behind the scenes here beyond the number that we see?

I think in principle it's fair to add back a good portion of the 12. Not the total 12, because one of the things that drives the pension calculation on a P&L basis is not only just where the stock market is and where those investments end up but also the discount rate.

Actually we are in the interesting irony that it's probably a good time we wouldn't mind interest rates moving up a bit. Because that discount rate impact has a large impact on the calculation for the P&L expense for pension. So predominantly, and I say predominantly because if the interest rates do move up over time we do have a little bit of impact of interest expense.

So you can't take, I don't think you can take the full 12, but I think you can take the vast majority of the 12 and say that in more normal times and more normal interest rate levels you would have a large proportion of that flowing back to the bottom of FMS.

Right. Just to wrap up, in terms of how people get compensated and bonuses and Bogeys and what not in that business, how does that work? Do you make an adjustment for something that obviously folks can't control? How does that work?

It's pretty straightforward. Our incentives are quite straightforward across the corporation as well as the business segments. As you know, we have been measured and been measuring by EVA over the last number of years. That is the big driver. We have also added a net operating revenue component after things like fuel and freight under management, which are not really what we would consider to be core operating revenue. So there are two pieces in there. They are well defined. Identified before the year began and how our people would be extended across the organization, across the segments. And we are pretty rigorous about it, very rigorous about it

Fair enough. Thank you.

Thank you. Our next question comes from Jeff Kauffman. Please state your company name.

Thank you. Folcrum (ph) global partners. I just wanted to point out that since Tracy came on board, you have been increasing margins consistently. Don't let that influence you.

Jim asked a little about the FM S division. I would like to ask about the unallocated central services support costs. Again you guys took the bar higher. Is this sustainable at this level of about 5.9 million a quarter or was there something different that went on here?

There are all, there's a wide variety of things that are in that unallocated segment. That's the smallest piece of total central support costs.

Right.

Central support costs in total declined 5 percent for the quarter. And I think last quarter the unallocated went up a little bit. This one it went down about 5%. We look at the total because there are some things that go on behind the scenes that we don't delineate and deliberate on that have impacts. They have to do with bonus calculations and Rabbi trusts and a number of other things that get complicated in there. We generally believe we can keep moving the general central support costs and the overhead levels down. Tracy commented in her comments when she talked about the initiatives that we don't feel we have run out here on the string of what we believe we can identify in process change, process improvement, and cost reduction.

Okay. Greg, the nickel that you mentioned charge, that is baked into your third quarter estimate, I take it?

No, the five cents FIN impact is not in that impact. The one cent we would begin to recover, we said of that five cents we would see recovery over three years? One cent of that is in the last half of the year.

Okay. Finally, kind of a thinking question. Follow-up on Jim Valentine's question earlier. I mean, G.M. is your larger customer. There is a lot of anxiety out there about where auto production is going. We are starting to see weakness on auto car loads on the run rate. You say you are not seeing it yet. Can you give us some kind of assessment if there was, say, a general 10% reduction in G.M. production, just across all their product lines -- we are not going to differentiate one model against the other -- how deeply would that impact the company and across which businesses?

Tony, you want to comment on that?

Take your best shot.

You are right to distinguish between models. The plants you serve and the models that you serve makes a big different . A lot of our material is inbound movement. Tony, would you like to address that?

Let me address that. Predominantly our volumes with General Motors are on passenger cars. And as it relates specifically to your question, those volumes with regard to the plants that we have, have been down greater than 10%. So we are adjusting our cost structure and our operating networks in order to accommodate those kinds of reductions.

If it was across the board overall, we wok would be impacted less so because, as I said, the predominance of our participation with General Motors is in models that have dropped even much greater than that . There would be, obviously, an impact on revenue with the SUV business that we have coming in from Canada and other activities. But again, we would adjust our cost structure. We would redesign networks. We would move product from different carrier capabilities to company owned capabilities and so on in our restructure point of view and try to mitigate it as best we could.

But frankly, we have been coping with production declines greater than your hypothesis suggests. And we work with it. And it is projected in our third and fourth quarter. We will work through it.

Okay. Beyond S.C.S., any sense for the impact to the FMS or rental business with the indirect impact?

Hmm, obviously we do a lot of in bound. Some of that has to do with Ryder providing the assets and the equipment, in some cases the driver. We also don't just utilize Ryder as a supplier. When we provide a solution that we think works best for our client, it is often a combination of outside providers as well as Ryder. And I think, you know, we would obviously preserve as we would have a further wind down, we would probably cut out other third-party providers so we would maintain our equipment and our own activity because of the way we design those solutions we have that latitude.

The point being there is some defense ability?

Yes.

Thank you.

Your welcome.

The next question comes from John Larkin. Please state your name company name.

Legg Mason. I would like to complement you on the clarity of your presentation. We transportation analysts wish all companies could present their quarterly results this clearly. Thank you for that.

Thank you.

First question relates to the pension expense increase which obfuscates the tremendous market expansion at fleet management solutions. I remember Corky Nelson talking about the concept of immunizing the pension portfolio so it would not happen in the future. I was wondering if you made any progress on that thought process.

John, this is Tracy. We certainly have done a vigorous review of our pension expenses, as well as how we fund the pension plan and invest. There are, you know, different things that we have reviewed and we would consider in the future relative to our investment strategies that could take some degree of volatility out of the plan. Of course, we it would always be dependent on market conditions. There is a cost volatility. We will at the appropriate times and as market conditions change, there are some things around the investment side of the plan that we'll look at. But I don't think, there certainly aren't any free lunches here relative to eliminating volatility.

Thank you for that. Second question regarding the fleet management solution business as well. I think Greg was hinting that there are some preliminary signs that there's some strengthening out there, perhaps some customers looking like they are about to pull the trigger here. I was wondering if perhaps either Tracy or Greg or perhaps even Dick could comment on, given that the cost structure is on a cost basis now through some of your initiatives, with a kind of operating leverage we might expect if in fact you were to see a five or 10% step up in volume with an economic recovery?

Well, I will turn it over to Dick, but I think you captured the basic idea and the principle. That is, the reason -- among several reasons, but one of the big reasons that we tried to be very effective in our cost reduction, cost management efforts is to ensure that we could compete for business and be effective in competing and still have a good return.

And frankly, I like the way that we are positioned right now. You know, we have had to go through a couple of very difficult years of trying to get this platform right. And I think the foundation is right. And what we've said on previous calls is that over a reasonable horizon that incrementally when we get some incremental revenue growth to the top line, at least for a reasonable horizon without a big step up in cost, we would get some good disproportionate returns. We said that consistently. With that I'll turn it over to Dick. He's a lot closer on the day-to-day basis with his sales people on what is going on in the market

Thank you, Greg. We do have some capacity that we could use with some additional business without adding investment of any kind in overhead that would produce a better return.

If we can get the grow. We are looking for customers, we are seeing customers with more interest in adding vehicles back to their fleet if they have had a fleet reduction. A lot of opportunity around customers who are considering leasing, coming from other modes. So we expect if the market gets active, we will get our share as well as get a good return out of a lot of it because we won't have to add overhead to do it.

Thank you, that's helpful. One final question regarding the strength that you all have seen for three quarters now in the commercial rental business. I guess I'm wondering if that's sort of a precursor to perhaps some strengthening in the full service leasing business or whether part of that strength is a function of refreshing the fleet. And/or perhaps intensifying your sales and marketing effort?

Part of it is around the sales and marketing effort. Not much of it is around the changes in the fleet. A lot of it has to do with pricing. We are--we have been able to, up price, transactional pricing which is shorter term rentals, somewhere in the five to 10% range, and pricing around agreements that are embedded in lease agreements or tied to lease agreements. We have contracts around them, at a smaller range of increase. We don't think that the improvement in rental returns speaks to an improvement in the overall economic condition that is coming. We think it's a replacement for people having to commit capital to a solution of their own and they are using rental as a way to delay that decision or delay that investment. So realizing that, we have tried to price into that and get a better return for our service [inaudible].

That's very helpful. Thanks a lot.

Our next question comes from Andrew Fineman.

Please state your company name.

Meridian Financial Management. I had Indian asset management. Can you tell me how much of the 750 in. how much of the cap ex is contracted out at this point?

Yeah, well, on a year-to-date basis anything we spent on leasing is contracted out.

Which is about 211 or something like that?

That's the year-to-date figure you have there --

413, yeah.

We have certainly an amount of vehicles that we have on order. Andy, I don't have that number in front of me. But most of it for the second half is not contracted out yet. We will spend that when we get the contract. We'll make the spending investment.

Okay . Can you tell me what the cash balance was at the end of the quarter?

I can. Cash and cash equivalents were 117 million at the end of the second quarter.

Okay. And the -- okay. Now, you gave 900 million as the steady state careful spending level going forward. But what I would really need is the steady state net capital spending level. You know, since your capital spending is really two numbers. It's cap ex less asset sales.

Would be the more meaningful number for me. So can you give us any kind of a ballpark estimate for the steady state number we should expect there? Net cap ex?

Well, I think probably the best guide certainly for 2003 would be to look in our first six-month performance.

And other than the FIN adoption and that impact, and I think we gave you some numbers to work there, I would not expect, you know, major step ups or step downs relative to our sales proceeds. As we move forward, that number should improve as we bring some of the remaining off balance sheet leasing that we do that is not being captured under FIN 46, which we gave a lot of disclosure on. As we bring those units back on to the balance sheet when we replace them. We would expect that number to ramp up accordingly.

But that's going out a number of years and, Andy I can just guide, direct you to the disclosures we have around our lease payments that I think we have in our annual as well as our 10-K. But we don't have a run rate number that we can share at this time.

Okay. The same quarter, your capital was 265 and the first quarter was about 150. So I guess I'm just trying to figure out about what that means in terms of the pick up you're seeing in leasing demand . Where are you starting to see it? And was it mostly in June? You know, how I it going in July? Are you still seeing it?

The -- I'll let someone else answer that. We saw some modest signs towards the end of the quarter. We are always cautious about declaring that a major trend. But it is a sign around some of our lease sales activity around some of the pipeline and the miles that our lease customers are driving on their fleet. We saw an up tick in the number of miles per unit. That's a, you know, a statistic that we have been watching. Of course, flow the last several years we have seen fleets reduced and we've seen the miles driven on each of the trucks go down as well. So there are some areas that we are watching very closely. I think we saw those signs that Greg alluded to at the end of the second quarter.

Okay. I appreciate that. The only other question I had, if interest rates stay where they are right now, maybe go up another half a point between now and the end of the year, what does that mean for next year for your pension expense? Do you have to, you know, have another step up?

Well, we are, for FAS purposes, our discount rate that we are using for this year is six and a half percent. The last time I checked our index, we were at closer to six and a quarter. I think that was at the beginning of this week.

So depending on rates where they move between now and the end of the year is the important time for us. We fix that rate-based on the last day of the year. Obviously if it moves beyond the six and a half percent, which we are using today, that will help our pension situation for next year relative to FAS.

So you're in pretty good shape, I think. Because, you know, it's easier to make a case that at least it will go back to six and a half, I think. Let me just say that you are doing a great job and I particularly want to say that I think Dick Carson is doing a good job at capital and cost discipline. I wanted to point that out

Thank you.

Thank you, I appreciate that.

Thank you. Our next question comes from Greg Burns. Please state your company name.

:JP Morgan. Hi, guys. Quick question for Tony on the logistics side which is supply margins have been higher in the second half, both in 02 and 01. I'm curious whether that should be our expectation as we move from the second half.

We are anticipating it will soften more as we go into the third and fourth quarter. Typically in the third quarter we have the re-technology and plant shut down and vacation activity. That piece is anticipated. This year we do feel that particularly as it relates to the plants that we serve, not just General Motors, others as well, that it will be a bit of a softer market in the third and fourth quarter. And we will be seeing that impact our financials. However, as I said earlier, we are working very, very hard to keep our overhead low and even to lower them further. And stick with our operating procedures and methodologies to

maximize the MIP performance and we believe that will help us offset a weaker third and fourth quarter in 2003 than you may have seen in 2002.

If I hear you right you will be happy with flattish margins relative to what you did in the first half; is that accurate?

Generally speaking, yes.

Greg, I'm curious. There has been a lot of talk on automotive, but I'm curious what you saw in the technology area. We heard some commentary from UPS and others that there's stabilization there. I'm curious what you guys have seen.

I don't know that we have full stabilization, but

I'll let Tony comment because there's still a lot of weakness there.

Well, we have a number of platforms that we use, particularly for our much more complex, highly integrated solutions. One of the major portions of the highly integrated solution is the warehouse management system. We have moved during 2003 to a warehouse management system that is less complex to modify, to implement, and also to operate, as we go on into the life of a project. We feel from a cost point of view and also from an operations point of view that our IT environment is improving dramatically and stabilizing, because of our movement to less complex portions of our highly integrated solutions that do have the complex IT areas.

All right, thanks.

Thank you. Our next question comes from Ed Wolfe. Please state your company name.

Bear Stearns. Just a question follow-up to Ed's

question. What WMS (ph) did you switch to.

B3. We were using PKMS and still do. It depends on the application. But where there is flexibility we would choose the less costly, more easily integrateable solution.

Okay. Greg, just shifting back and I'm sorry, we have been running in and out of different calls, but the

pension impact of let's call it, you know, 55 million or so for the year in 03, have you given any guidance in terms of what that could look like? I know you don't know where the discount rate is going, but is your sense it is going to be dramatically different from that in '04?

Probably not. We haven't given any guidance. This gets concluded on the last day of the year, on where the markets are, what the returns are and what the discount rate is. If you figure that the market is where it is now on the improvement it has had since the first of the year and the discount rate is going to be hanging around six and a half percent, you would anticipate not much change.

Thanks. In terms of the accounting change, I'm guessing that means going forward it does reduce a little bit of the flexibility. That's securitizations are less likely to occur with the way you buy your assets?

Not necessarily. You know, with, it would depends on the whole mix, of course. We have to consider our secured as well as our unsecured creditors in our funding strategy. But it is an asset based financing for us. We know how to do them. We have the back office structure to support it. And depending on conditions, we would continue to look at those down the road.

Okay. Where did, Tracy, where did the total debt end? I didn't see a balance sheet.

We are at two, including the off-beat, off-balance sheet items -- I'll get you the exact number.

Also I'm trying to get a sense directionally how much is fixed and how much is variable.

Yeah, I can get you that.

On the, we are, front five on balance sheet an just over 2 billion including the off balance sheet and the securitization. On the variable side we are over 30% variable, probably 32, 33% variable.

Okay. The other two thirds basically is fixed for what duration ?

We typically try to have an overall duration of four to five years. So, you know, obviously we play in a lot of different durations there. That includes our variable rates as well.

Okay. On the will logistics margins, I know you said earlier that the auto weakened, but you managed it. Is there, you know, the lags two quarters there has been this nice swing from negative a couple percent to positive 3% or so margin.

Is there more to do on the cost side right now? Is there, you know, you've taken out some hedge, you've done restructuring. Are there obvious next moves to get from 3 percent to 5%?

First let me say that we don't believe we are ever finished on the cost side, either from an operations continuous improvement point of view or from overhead.

And the longer pool beyond 2003, our objective would be in line with your comments. But for the balance of this year, our objective is to, as we discussed earlier, maintain profitability through a softer automotive environment for the next two quarters.

And just one more time, how much is auto as a percent? And how much of that is finished and how much of that is parts?

Our automotive revenue in total is about 63 percent of our total business. Our in bound operations, the assembly piece is actually about 31 percent of our total.

And do you know what percentage is after parts, not parts that make new vehicles but parts that service old vehicles?

Our tier one business is about 13%.

Is that additional to the 63?

I'm sorry, the tier one is a component parts in bound. Are you talking about after market parts?

Yeah.

That is about, oh, 10% or so.

Is that included in the 63%?

Yes, all of that is included in the 63.

Thank you very much. Thanks, everybody for the time.

Thank you. Our next question comes from Eric Shake (ph). Please state your company name.

Guggenheim partners. Thank you, my question has been answered.

Next question comes from Jeff Kauffman, please state your company name.

Folcrum global partners. Actually my question has been answered as well.

The next question comes in Gary Yablon.

Please state your company name.

First Boston still. Just to follow up on some cash flow. I guess this is for you, Greg . All in debt to equity is what, about 2X right now? Is that about right?

Less than that.

Less than that. My model only goes back to 1990 or so. But I'm guessing it's rarely touched that kind of level. What I'm getting at is, you know, I think it's fair to say -- correct me if I'm wrong -- that you have a very under leveraged balance sheet at this point in time. What are you thinking about, Greg, as you get your legs up running well and the organization is starting to really do the things you would like it to do? What crosses your mind?

First of all, you're right, it is under leveraged. Certainly due to our leasing side of the business, that's where we could have considerably more leverage. In this environment we have continued to use that cash to pay down debt. And that's largely, as much due or more due to the total external environment than it has to do with us. We obviously, and you would agree and others agree, we could accept more leverage. But rating agencies are obviously very sensitive in the market in general. Top priority for us is our credit rating . We believe that we have reason to believe we could be on the verge or should be considered for an upgrade at some point. That's job one.

That's what we would like to accomplish because that is most significant for us. Until rating agencies feel comfortable about the market in general, I'm not sure that they are going to grant those sorts of rating increases. So our priority therefore still has to be utilizing the funds for debt reduction, just to give us as strong a position as possible when the external environment turns. We would increase the leverage.

Now, what we do with the funds, if we are not paying down debt at the rate we have been, we think we have a lot of opportunities for investment in this business. We think that the platform that we've established enables us to want to invest in this business and get very good returns for our shareholders, which is what we committed to and that's our intention. We also have other uses for the funds to perhaps do some additional funding that is not required for the pension plan. So that's another option.

So we will weigh all of that. But I wanted to give you the bigger context to the bigger part of your question initially

All right. Where are the rating agencies on you? Where do they stand right now?

Fitch (ph) is at Triple B plus. S&P is at triple B and Moody's is at B double A 1.

If you get an upgrade across the board one notch, does that -- how much more competitive does that make you in the marketplace ?

Well, clearly is there is a spread difference. We renewed our revolver last quarter. We have been in the market on some MPMs. And the spreads we are enjoying probably fall more in the triple B plus range, a consistent triple B plus range already. So you know, I hesitate a little bit on the immediate incremental impact. But over the longer term, that is somewhere between 50 and 100 plus basis points.

Okay. Fair enough. All right, thank you.

You're welcome .

Sir, I show no further questions. I'll turn it back over to you.

All right. As there are no further questions, we're just about at the one hour mark anyway. I thank all of you for your participation. Have a good, safe day. Thank you.

That concludes today's call. You may disconnect at this time.