萊德系統 (R) 2003 Q3 法說會逐字稿

Please stand by for realtime transcript.

Good morning and welcome to Ryder's 2003 third quarter earnings release conference call.

All lines will be in a listen-only mode until after the presentation. Today's call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to introduce Mr. Bob Brunn, Group Director of Investor Relations for Ryder.

Thank you, Mr. Brunn. You may begin.

Thank you.

Good morning and welcome to Ryder's third quarter 2003 earnings conference call.

I'd like to apologize for getting started a couple minutes late but we had a lot of folks getting lined up in the queue and we wanted to give everybody the opportunity to dial in.

We'd like to begin with the 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. More detailed information about these factors is contained in this morning's release and in Ryder's filings with the Securities and Exchange Commission.

Presenting on the call today is Greg Swienton, Chairman, President and Chief Executive Officer, and Tracy Leinbach, Executive Vice President and Chief Financial Officer. Additionally, Dick Carson, Senior Vice President of Fleet Management Solutions, Tony Tignalia, Executive Vice President of U.S. Supply Chain Solutions and Bobby Griffin, Executive Vice President of International Operations are available to answer any questions you may have at the conclusion of our presentation.

I'd now like to turn the call over to Greg.

Thanks very much, Bob. And good morning to all of you.

As we've done in the past, we're going to review, princiaplly, our third quarter results this morning. We'll also update you on some of our inititives, some of the details behind the numbers. We've worked on a deail of asset management. We'll provide an outlook for the remainder of the year, and because there were particular questions on the subject, we're going to provide a status on our pension plan. Then, as always, we'll allow adequate time to open up the call for questions.

Let me begin with the third quarter results, and for you that are following on the PowerPoint presentation, if you'll turn to Page 4 in the Overview.

Earnings per diluted share before the effect of the accounting change, or the accumulative effect of the accounting change, were 63 cents for the third quarter, compared to 53 cents in the prior year. You'll also note that there was a positive 2 cent impact due to a net positive recovery of restructuring of other charges. And we'll provide some further detail on that when we cover the EPS.

In Fleet Management Solutions, Fleet's revenue was down slightly, year-over-year. Certainly it is still disappointing that although we've got a good, robust pipeline of good business proposals, there is still a lot of reluctance among customers and prospects to commit to new, long term lease contracts. It's not that we're discouraged by the opportunities, they have just not been converted yet.

In commercial rentals, we've continued to have success. This is the fourth consecutive quarter of improvement. The rental fleet is up slightly. Rental results largely reflect the steps we've taken to more effectively manage the assets in the fleet. We have had improvements in rental pricing. So there is certainly evidence that our own marketing and sales efforts, and in particular, that this is a transaction business that the performance has been strong.

Next, we have had an increase in growth in fuel revenue, although for those of you that have followed us for some time, you know that fuel costs are largely passed on to our customers. Our margins are usually not significantly impacted even as those revenues move for fuel.

Asset management continues to perform particularly well and it did again this quarter. We had a reduction in non-revenue earning equipment of over 1200 units, or 15%, compared to third quarter last year. Tracy will cover additional detail in her comments.

From an earnings standpoint, Fleet Management Solutions results were impacted by lower lease revenue that I mentioned earlier and that segment, again, has absorbed most of the increase in pension expense and, again, we'll touch on that with a little bit more detail later.

If you'll turn to Page 5 in Dedicated Contract Carriage, margins were down as a result of lower revenues, and from contraction of existing account business, and there was a more significant increase in higher insurance costs from previous periods.

In supply chain, revenue was down due to the slow economic conditions, at least for the customer segments that we've been serving, and some customer contracts that were not renewed late last year that show the impact this year. These impacts were partially offset by some new business, but not totally.

And while existing customer volumes held up better than we originally expected during the quarter, the market for both renewal of existing contracts and new business additions remains very, very, and highly, competitive.

In the international area our operations in Canada, Asia, and Latin America posted increases in revenue although they were somewhat offset by declines in Europe and there were some favorable exchange rate translations compared to the prior year, principally in Canada and the U.K.

For supply chain returns and the bottom line, and certainly, especially, compared to the last couple of years, we're pleased to report that for the third consecutive quarter the unit was not only profitable but also significantly improved results for this segment, this year. Our commitment, as you know, was to make this segment profitable for the year and to achieve break-even or better every quarter and we have also done so in the third quarter.

The cost management focus and the process improvement that we've had going on for some time continues. We have obviously had that contribute positively to the bottom line result. It's also important to note that it's not just for the bottom line that this is done but these efforts help to make us more competitive and pricing in the marketplace.

And finally, on Page 5, we'll note that we did, as previously described that, we would be adopting FIN 46, the regulation regarding the consolidation of variable interest entities in the third quarter, and we'll touch on that a little bit more in the presentation.

If you turn to Page 6 in the first chart, again, earnings per share before the cumulative effect of accounting change increased by 17% to 63 cents per share as compared to 54 cents last year. As we anticipated and discussed on the second quarter call, FIN 46 in the quarter resulted in the 5 cent cumulative impact due to this change in accounting principle.

As you will also note we have some memo and foot notes there that the 63 cents were also positively impacted by the 2 cent recovery resulting from a previously disclosed vendor settlement, which was partially offset by some severance charges. And I know whenever some severance is mentioned there's always a question, how significant is it. It's not some large reorganization. There were about 20 positions that are spread throughout central support for a run rate of about $2 million in annual costs. We've broken that out separately for your information.

You will also see highlighted in the memo down there, again, for pension expense and in the quarter overall pension expense totaled 20 cents per share compared to 7 cents last year, and that 13 cent difference, most of it, impacts fleet management.

You'll also notice in the memo there that the average diluted shares have increased by a million and a half to 64.3, largely the impact of employee stock purchases and option plans, and as you are aware, we also recently announced the two year, $90 million share buy-back which is intended to largely offset the dilution cost by those exercises that have occurred since the start of this year.

So, actually, we're providing a lots of detail here and in the press release but we think it provides better visibility for you into the results of the company.

On Page 7 on the year to date basis for EPS, earnings per share improved 18% compared to last year at $1.51, versus $1.28. Last year we had to adopt SFAS 142 on goodwill. So when you see the cumulative effect of change in accounting principal in 2002 of 30 cents, that is what that refers to. And the 6 cent effect of changes in accounting principles for 2003 was due to earlier this year SFAS 143 on asset retirement, then then FIN 46 which was adopted this quarter.

Again, we've footnoted in the memo there the impact of pension expense increasing to 61 cents a share from 22 and the positive recovery in both years from former restructuring net positive impact this year of 4 cents and last year of 2 cents.

On Page 8 as you get into the business segments, I think as you know, we do allocate the vast majority of our Central Support Services cost to the business segments and you will note, that although the aggregate revenue is down 2%, earnings increased strongly by 20%.

Fleet management total revenue was flat, dry revenue which excludes fuel was down 1%, fleet management earnings were down $3.5 million but that was driven largely by the $12 million extra in higher pension costs.

In supply chain, operating gross revenue was down 5%, but operating revenue, which excludes freight under management expense, decreased 4% in the quarter, and again you can see the results of their performance that this year they earned $12.2 million for the quarter as compared to a loss last year of $700,000.

The results this quarter were impact a little bit by a full forward of some benefits that weren't expected until the fourth quarter but that's worth about $1 million on a percentage basis. NBT this this quarter for SCS was 5.2%, again up from a loss last year, but with the benefit of a little over $2 million from operating tax refunds in that earlier than anticipated resolution of the customer contractual matter. If you take those out, the NBT for the quarter would have been 4.2% which is still stronger than had been realized in the past. In DCC, or Dedicated Contract Carriage, earnings were down $2.7 million largely due to higher insurance costs experienced in the quarter. Earnings, after all the central support costs, improved by 17%, and after the $2.7 million net recovery, earnings were up 20%.

On Page 9, on a year-to-date basis, the total, especially if you have the page in front of you that breaks down the pieces, fleet management revenue, up 2%, supply chain, down 3, dedicate carriage, flat, total revenue, flat, but earnings before the effect of accounting changes, up 20%. Net earnings, after accounting changes, up 50%.

Those are the highlights of the numbers, and at this point I'll turn it over to Tracy who will cover a number of items, beginning with capital expenditures.

Thanks, Greg.

Page 10 outlines capital expenditures. Year-to-date spending totaled $575 million, that's up $132 million from prior year. This increase is due entirely to our purchases for our commercial rental fleet. As you may recall we spent almost no capital in our U.S. commercial rental fleet last year so this year we're taking the opportunity to refresh that fleet.

Our spending on full-service lease capital was down 16% from last year. Greg's already mentioned that we're continuing to see softness in our leasing activity. This softness, combined with continued high levels of redeployment and term extensions, is holding our spending levels below our original plan. And below what we consider a normal maintenance level of capital spending.

For the full year, we expect capital expenditures to be within the $750 million level that we communicated on our last call. And as we shared previously, that compares to what we'd consider a normalized annual maintenance level of CAPEX for the company of roughly $900 million.

On Page 11, you can see we continued to reduce our debt levels and bring down our debt to equity ratios. Ryder's total obligations are just under $2 billion as of the end of the quarter, that's down $267 million from the beginning of the year.

As a percent of equity total obligations at quarter end stands at 159%. That's down from 201% at the beginning of the year.

As we've discussed on prior calls, we believe in the economic environment we've been in these past few years. It has been appropriate to use positive cash flow to reduce our debt levels. As we continue to improve our profit margins and in an improving economy, we do believe the business can support higher levels of debt while maintaining or improving our credit rating.

The presentation of our debt has been impacted by the aadoption of FIN 46 so I want to take a moment to review the FIN, which we adopted effective July of this year. As a reminder, FIN 46 covers the accounting for variable interest entities and resulted in the consolidation of three previously off-balance-sheet entities for Ryder. These included two vehicle securitizations and one leasing transaction. And those transactions were entered into in the 1999 and 2000 time frame.

We provided a detailed description and an estimate of the impact of this FIN on our results during the second quarter earnings call. And the actual impact of the aadoption very closely mirrored our estimates.

As Greg mentioned, we did incur this quarter a 5 cent earnings per share charge due to the cumulative impact of the change in the accounting principle. This non-cash charge represents the difference between leasing and owning these assets since the inception of the transaction, and those go back, again, to 1999. The 5-cent charge represents a timing difference and will reverse out into the next three years into operating earnings. As a result of the consolidation of these entities, total revenue earning equipment on the balance sheet increased by $421 million, and on-balance-sheet debt increased by $414 million.

It has been our practice to include these total obligations, these obligations associated with these variable interest annuities, or entities, in our total obligation number and in our debt-to-equity ratios in our reporting, so the FIN 46 adoption did not significantly impact our total obligation figure, but you can see from this chart, that there was a shift between off-balance-sheet and on-balance-sheet categories.

We've provided a schedule in the appendix that gives you more detail on this balance sheet consolidation and the leverage ratios now under the FIN 46 adoption, and that's on Page 33 of the presentation. Then there's additional detail on the FIN adoption and our second quarter earnings presentation which is available on our website.

If you turn to the next page you'll see that based on our preliminary consolidation, the company generated $265 million in free cash flow so far this year. That compares to $289 million last year. This $24 million reduction is driven by the increase in the capital expenditures that I touched on previously.

Improvements in net earnings, proceeds from the sale of used vehicles, and working capital management all continued to contribute positively to our free cash flow results. I'd also point out that our 2003 year-to-date free cash flow numbers did benefit from the adoption of FIN 46 by approximately $25 million. And that's made up by an increase in depreciation expense add-back of $20 million and higher proceeds on vehicle sales of $5 million.

That $25 million benefit represents a one quarter impact of the FIN adoption and we would expect that improvement in succeeding quarters. We do believe the adoption of FIN 46 improves the visibility into the cash flows of the company as more of the equipment in our business now is treated as owned for financial statement presentation.

Moving now to our key initiatives on Page 14, in December of last year we shared with you our goal to realize P & L benefits of between $44 and $49 million dollars in 2003. These initiatives were focused on sustainable cost reductions and process improvement in several key areas of our business, including maintenance, asset management, supply chain operation, insurance, safety, and overhead areas.

We've realized approximately $31 million in P & L benefits year-to-date from these initiatives, and while we continue to work these specific areas of opportunity for the remainder of the year, they do not represent the end of our cost savings opportunities in the company. We continue to seek significant, additional cost reduction and process improvement opportunities in the business beyond the 2003 horizon and we continue to pursue these -- we'll continue to pursue these regard ms of the economic environment.

As an example, the margin improvement process that was instrumental in driving improvement in our supply chain business is now being used to look at other areas of the company. And we just recently launched those efforts as part of our ongoing process of continuous improvement.

Turning now to asset management on Page 16, this is a key initiative area that we continue to highlight because of its impact both on earnings and capital efficiency as well as cash flow. You can see on Page 16, as Greg's already mentioned, the total number of non-revenue earning vehicles at the end of the third quarter totaled 7,200 units. That's down 15% from the prior year.

On the used vehicle sales front, we're continuing to see improvement in the pricing around our tractors, which have been the most challenging vehicle category for us over the past several years, and we've seen our third quarter of improvement with proceeds up 7% over that time period. We're also seeing our sales volumes increase, volumes being up 4% over last year.

While we're continuing to see improvement in the used vehicle sales area we're also focused on keeping vehicles earning revenue longer. And if you turn to Page 17, you can see that we continue to reduce the number of early replacements and early terminations of vehicles. This means we're continuing to do a better job of running vehicles for the full term of the lease contract, realizing the full cash value of our lease contracts. We expect these numbers around early replacements and early terminations to continue to remain low as part of our ongoing business model.

You can also see that year-to-date redeployment and term extensions are down over last year, but they are above our plan levels. In most cases these vehicles are running well beyond their original lease term. And, as Greg mentioned before, with customers reluctant to make new capital commitments, there's been good reception in the market to run trucks longer. And we've continued to see good pricing around the leasing of used equipment.

However, we believe it is appropriate that the number of redeployments and term extensions would continue to decline as necessary fleet replacement activity increases over the next few years.

At this point I'd like to turn it back over to Greg, and he'll take you through the outlook for the remainder of 2003.

All right. Thanks, Tracy.

And the outlook is on Page 9.

Before I cover some of the detail, because there's been a slight revision, I want to give you a little bit of context and perspective.

You may recall that when we did our initial plan last December our full year outlook for earnings per share was $1.95 to $2 a share. At the end of the second quarter we increased the full year forecast the (inaudible) to $2.10. We are now revising that slightly downward to $2.04 to $2.08, with reduction of 3 or 4 cents in the fourth quarter. And I want to share some of what's behind that.

One or 2 cents of that, perhaps, you can explain by 1 cent from the (inaudible) fourth quarter to the third, and about a penny of dilution which obviously we are attending to. But I think the bigger issue, and what I really wanted to talk about was, in this outlook for the fourth quarter where we see still the biggest challenge, and I say that largest factor would be the lack of revenue realization. And we would have expected a bit more net progress in net revenue from contractual business than we've seen. And I contrast contractual business from transactional business.

In the transactional side of the things we do, I think arguably we're doing quite well and we're doing more than okay. For example, commercial rental revenue was up for the fourth consecutive quarter and it was up 7% in the third quarter. In the used truck centers where we have the handling of trucks sales and handling of asset sales, those transactions are going positively.

And I make reference to the transactional because many of you follow other transports, and you're beginning to see some movement there on what I would call transactional activity. Our issue is not there. Our issue is really more with the contractual, and let me speak to that a little bit.

The positive rental growth that we have had is not yet converting to lease growth. And that, obviously, is a fairly significant and big driver in Fleet Management Solutions. And even though customers are willing to rent more and pay more to rent, they still have enough concern, caution or reluctance to believe that their business is really returned to convert those rentals to lease units or to add to their fleets. So I think there's obviously still some caution among that customer base that is applicable for the lease activity.

In Supply Chain Solutions, our customers and prospects are still talking and acting like they're rachetting down costs rather than adding volume, and hopefully those days will turn, but in terms of the things that we hear from them and the things that they are saying, they're still being pretty conservative and pretty tight on costs and being pretty cautious about the things that they're doing going forward.

So our value proposition I would say in Supply Chain Solutions has never been better, in terms of what we have to offer in quality and price, and maybe even to a lesser degree, in FMS as well, a very good value proposition. We've worked very hard on our costs over the last few years, and that's -- that was not just to improve the bottom line, but to ensure that we have a strong competitive value proposition. And we do.

Unfortunately, those conversions just haven't been occurring yet, and where we've had some lost business, which occurs in the course of time, that has to be made up, and it hasn't been made up fast enough. So if, hopefully, the economy is turning, we also know that we're going to have some lag from signature to ramp up, so I think we're going to have these challenges for the near term.

So in conclusion, as you look at the forecast, it says for the fourth quarter 53 to 57 cents, and then for the full year $2.04 to $2.08, I think my general conclusion is that our biggest gauge for our expectation about revenue realization comes from our customers, as opposed to general economic activity. Secondly, we have as robust a pipeline in proposeals as ever, and I think that they are as engaging and as an attractive offer as we've ever put in front of customers, but they still have to be convert. Third, I think we still have all of the leverage for accelerating margin performance that we've talked about before once we get revenue traction.

But, the fact is it has not happened yet and that's what's not satisfying and sufficient, and that's a bis disappointing, and that cushions a bit our outlook and that's what we tanted wanted to share with you.

With that, before we go to general Q&A, I will have Tracy speak to the pension update because there have been questions about it.

Okay. Thanks, Greg.

On Page 21 we've provided some detail on our pension and we wanted to give you an update because we know it's of great interest to you.

First, we elected to make a $50 million contribution to our U.S. plan in the fourth quarter. While we weren't required to make this contribution, we did think it was appropriate, given our financial position, our pension funding levels, and the economics of the contribution.

You can see this brings our total cash contribution for 2003, when you include our international plan, to approximately $65 million. And after these contributions, the projected present value of our requirements over the next five years, looking out to 2008, for our U.S. plan the V is $135 million, and globally the PV is $205 million.

Moving to the P&L side of things, on our pension plan in the U.S., our 2003 assumptions, just as a reminder, are 8.5% on the long-term rate of return, 6.5% on the discount rate, a 5% rate of increase in compensation, and we amortized gains and losses in 2003 over an 8.5-year period.

In terms of our current plan results, through September of this year, we have realized actual returns on our assets of approximately 13%. Now, the current discount rate, if we looked at it at the end of the third quarter, and that's using a long-term corporate bond index, is at 6.25%. So the interest rate has actually worked against us if we were to take a snapshot at the end of the third quarter.

Based upon our year-to-date results on asset growth and the current discount rate, the 6.25%, we'd estimate our pension expense for 2004 would decrease by approximately $6 to $8 million. But, as you are aware, the final calculation in pension will be determined after we close the year and see what our actual asset returns were as well as what the discount rate is as of December 31st. And we'll provide another update on pension during our December 19th business plan call.

With that, at this time I'd like to turn the call over to the Operator who will open up the call for questions.

Thank you.

At this time, if you do have a question, please press star 1 on your touch tone phone. If you wish to withdraw your question, you may press star 2. Again, to ask a question please press star 1.

Gary Yablon, you may ask your question. State your company name.

First Boston.

Good morning everybody.

Good morning.

Greg, could you help us understand a little bit? You talked about the customer base not willing to let go of the commercial rental product and get into the longer term lease situation.

Per whatever you -- however you'd characterize it, how much more is it costing that customer for that flexibility? I'm guessing that's pretty expensive to have that added level of flexibility.

And is this really that unusual what, you're seeing? I'm guessing your lease business is a bit of a later cycle business and maybe it's what's going on is nothing more than that.

Could you talk to that a little bit?

Sure.

I think the first point on what it may be costing the customer base I'm going to turn over to Dick Carson, and I'll let him comment on that because I think he's closer to it.

The second point, if I interpret the question right, is this a bit unusual. Of course, I haven't been here as long as many people, but the history, I think, of those who are in the company and follow the company is usually commercial rental has been a first early indicator of some good economic turnaround and performance.

I'm not sure that that's been accurate, because we've had commercial rental improvement for four quarters, and it's not converting to lease. That suggests that we've maybe had a longer economic doldrums, or recession, than you might have anticipated, and customers are more willing to pay maybe even a short-term price of an increase rather than make the long-term commitment. So, at least as I'm trying to gauge history, and I've not been here the longest, I can ask others to comment, that's the way I see it.

But, let me turn that first part of the question over to Dick.

Okay. Thank you.

Hi Gary.

Hi, Dick.

Depending on the application, a full-time user of a rental truck might be paying somewhere in the area of 8 to 10% more for the vehicle than he would pay for it under a contract, under lease. And that's growing. We're able to command more of a premium for those full-time, longer term rentals than we have been in normal times.

There is an appetite amongst customers who have those situations for us to lease them used equipment in shorter terms, and a lot of requests for new equipment on shorter terms, even if they have to pay a small premium, less than the 10 but more than they would pay for a leased vehicle. So there's quite a bit of requests for flexibility, and we're trying to offer that up by leasing used vehicles and now offering new vehicles on shorter terms to meet those needs.

Dick, getting back to Greg's point, maybe it's a bit puzzling that people haven't converted over, although this has been a pretty long recession. Do you think there's anything more to the than that? In other words, we've seen truckload companies make inroads into the private fleet market, into the dedicated market to some degree.

Is there some share loss to other product offerings that Ryder might not have that could be explaining some of this gap or differential?

It would be small. We have offerings that are like that, but also we're having trouble getting people to sign onto the long terms and dedicated offerings and offerings in the supply chain are in the same vain as these other molds and methods that compete with our lease offerings. So I think there might be some small amount of that.

There are a lot of people that were, I think, a little bit concerned about the technology that was introduced earlier this year by engine manufacturers. That held up some decisions. They prefer to run a used truck, I think, or a rental truck longer. That played into our whole discussion around extensions and redeployments.

People were very interested in not trying out new technology and not being the first one to try out new technology. We wound up using a lot of used equipment in applications where normally there would have been new equipment. And I think that's also played into some of the reluctance people have had around signing long-term contracts for new equipment with new technology aboard. A lot of that is playing out now.

We're seeing better -- people with more confidence in the new technology and we're gaining confidence in it because it's living up to the expectations that were created when the engineers told us about how it would perform. There is a degradation in fuel economy, which is concerning to people who run a lot of miles, and another reason why they want to hold on to a truck that produces good fuel economy longer.

Right.

So there's a lot of things in play.

I do think that the requirement for us to be more flexible around offerings is going to continue for a little while longer until people feel more secure about their own order bank and, you know, we get kind of past this period of uncertainty I think there is in the economy to a more stable footing.

Let me just throw one more quick question. I think probably also for you, Dick.

Now are your service rules coming into place at the beginning of next year. Some people are speculating it will create a need for more trucking equipment. Do you see that happening, if so, does that work to your advantage?

We're anticipating it, and it will. We have a large offering of trailers and we think, particularity around trailers, there will be a lot of demand. People won't be able to meet the windows and delivery schedules they're meeting now (inaudible) service take place. We're having to reengineer a lot of our own runs, and in the reengineering, it looks like there will be more equipment needed in our own offering around dedicated contract carriers.

Do you see it (inaudible) being a plus for you or maybe just a push?

Well, the good reason would be a little bit of a plus for us is that our contracts call of us to be able to change our pricing around scope changes like this. So, if we have to put more equipment and more drivers to work, we can go back to customers with contract in hand and try to renegotiate different pricing and --- to the extent we can't reengineer the costs out to be okay there. The equipment utilization will be a good thing there.

Thank you.

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

Legg Mason.

Good morning, everyone.

Good morning, John.

Couple of questions for you, getting back to this critical pipeline issue.

For a number of quarters now you've been suggesting that the pipeline is fairly robust. And I'm wondering how much of the lack of conversion is tied to the fact that most companies, if they haven't made, you know, a long-term commitment on CAPEX or full-service lease are just going to postpone that into next year.

Is that consistent with the feedback you're getting from customers?

Dick, do you want to deal with that from your segment?

Sure.

Some of it is being dragged out and postponed. I think some of it is becoming more critical for people to make decisions though. A lot of big fleets have to do something. They've already extended.

We have to do something. We've extended a lot of vehicles that now we're going to have to go and renew. They have to be renewed. They're running out of economic life. So I think that's coming into play with a lot of fleets that are delayed.

Everyone wants to hold on as long as they can. They're going to get less fuel economy out of new equipment, they have to sign up for a long-term, long period of time with new equipment, so it's not that they -- I don't think anyone wants to sign up for a six-year term on a tractor, but they have to in some cases, and we're seeing a lot of that. We're seeing a lot of people with trucks that they've run a year longer than they normally would or many miles longer than they normally would that are coming now and saying we need to do something.

And we're pursuing our own customers in the same vein. A lot of equipment we extended, we've extended thousands of vehicles, literally, all have to be replaced now with new.

The other part of the pipeline question, John, has to do with up supply chain and I could ask Tony or Bobby in international, because they do share some of the same customers. If they care to comment.

This is Tony Tignalia.

We are very excited about the pipeline. It has actually never been more robust. To characterize some of the opportunities within that pipeline, they are larger and they are more complex, which typically means that it takes a bit longer for them to sign the contract, actually work through the process, for those kind of type deals.

We do see decisions being made by the end of the year relative to those larger transactions, which would mean implementation and start-up and launch early into '04. So as it relates to the third quarter, Greg, is correct, but we do see some of those large transactions coming through for us into '04.

Just one additional question regarding the competitive landscape.

Has the lack of conversion to the longer term leases also affected the other competitors, your one large competitor? Has that caused them to be a little more aggressive on pricing, perhaps? And have you seen the weakness in the long term leasing market accelerate the fall-out of some of your smaller regional competitors?

We see very competitive pricing. It's a part of every day life.

I don't know how it's impacting some of our smaller competitors. Some of them have had trouble offering leased equipment to customers and have seemed to offer anything else, maintenance contracts, something that doesn't involve capital. Now, I don't know whether that means they've got a change in their business or a change in their approach, but the daily give and take in the marketplace is very competitive. The landscape is -- you have to be on your toes, and you have to be very competitive with your offering.

Okay. Thank you very much.

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

My question has been answered. Thank you.

All right.

Our next question comes from Gregory Burns. Please state your company name.

Hi.

J. P. Morgan.

Following up on the question on pricing, because obviously it would seem like if your competitors were in the same boat there might be the temptation to book business on the books at lower prices.

I'm curious whether you can quantify sort of what the market rate is on pricing on deals that came up this quarter or what you're looking at next quarter, versus, say, at the start of the year. In other words, is pricing roughly flat, all things considered, on an apples to apples basis, is it up a percent, or is it actually down based on what you see in the marketplace right now?

I'm sure we don't have the specifics in front of us. I guess the best we can do is ask Dick if he sees a trend of getting worse, better, flat.

It's a little worse.

For awhile there it seemed like the pricing -- competitiveness around pricing had eased a bit, but it seems to be more competitive of late.

I think there are a lot of deals in play, a lot of large deals in play, and everybody wants their share, and I think the landscape calls for everyone to make sure that they have got their pencils sharpened and doing the very best they can to make a good, logical value offering to customers. And they certainly are. Customers are certainly asking a lot of the sales organizations about quotes and requotes and redesigns, trying to compare their own price and keep their own costs down.

And would that trend be filtering over into Supply Chain Solutions as well?

I wouldn't say it's filtering over, but it goes there independently.

I'll let Tony answer that, probably as well, or Bobby.

This is Tony.

There are two parts to our pricing, fundamentally, in supply chain. One is the start-up pricing we have prior to launch, then the steady state pricing post-launch. What we are seeing on the start-up side, where Ryder has become particularly more competitive than ever before, is helping us gain a lot of strides in the marketplace.

But the pricing and our margins, post launch, are largely steady state, and even though their total costs are lower, because we are more competitive, the quality of the earnings and the rate of the margin is still very steady state in the marketplace. Predominantly, we are distinguishing ourselves with the start-up piece and being much, much more competitive with that piece as a total pricing. Post-launch we're protecting our existing margins.

Great. Thanks a lot.

Our next question comes from Edward Wolfe. Please state your company name.

Yeah, Bear Stearns.

Greg, I think it was Tracy's presentation, actually, where she talked about that there's still more cost improvements beyond what you've done and bringing best practices from SCS to the other units and that kind of stuff.

What, I mean if you had to quantify, how much more is there to go on the cost side and at what point do you start to focus on revenue enhancement programs and what can you do on that side?

I'll take the second part of the question first. We've already started working on the revenue enhancement. We, for awhile, have indicated clearly during a difficult economic period that we had to control that which we could control, which was largely costs. We think we have done that to our benefit.

We've also done that to, as you heard from Tony, and I think Dick, enabled us to be competitive in the marketplace. And that is our intention level, and that is our focus level, and that is for all of our people to understand, which I believe they do, and that is the constant message on a daily basis, and that includes not just existing products and service but what other sorts of things that can he can be flexible in the marketplace to provide.

One of the other questions, a good one, talked about are we losing market share to other possibilities. I think that's a valid thing to be asked and for us to look at. That is why even in the Fleet Management Solutions area, you know, years ago we pretty much only offered full-service lease, now we offer finance lease with a maintenance package, we do maintenance only. So for those customers who, perhaps, don't want that, you know, previous bundled package only, I think we are ensuring that we've got all of the capabilities and offerings in the marketplace and now that we have costs in better shape and we can be more competitive, we're going to be aggressive about that.

And I think you get basically the same message in terms of that aggressiveness on the supply chain side and I think that the marketplace is feeling that. Now, I think it's also true that just by, you know, the evolution of our company and the things that we've got to become and evolved to in a competitive market, we have got to be always focused also on continuous improvement and cost management, so that's not the driving force but it's a continuing force.

In terms of expectations, Tracy, I don't know if you have any, you know, broad kind of areas that you think we can go after, that you can comment on.

Yeah, Ed, I don't -- we can't say we've sized the entire opportunity, because we learn something new every day. The initiatives that we've been working on, in many areas we find additional opportunity.

And then,as you mentioned, we're taking best practices where we've had success around a process, we're taking best practices to areas of the company we haven't addressed yet. I don't know that we'll ever size the entire opportunity because that would suggest there's an end to the opportunity's continuous improvement.

We will, however, on our call in December, obviously, share our view of what the opportunities are for the 2004 horizon and share some detail in terms of where those opportunities are coming from.

Is it fair to say that the opportunities for '04, meet some of the easier stuff that is now behind you? That's going to get, you know, it's going to get trickier from here. You're going to need some revenue growth to really grow it at some point?

Well, yeah, clearly, as Greg said, this is a combination of continuing to find the cost improvement so we can be competitive in the marketplace and revenue growth. It's not an either/or for us.

Does it get trickier? None of this is really easy. You know, the thing that works for us, though, is our learning, and what's worked really well and what's, you know, where do we still have challenges in terms of driving good ideas throughout a diverse organization.

So I don't know that I'd say it gets trickier. It just continues.

On a different front, I was a little surprised at the gains on equipment sales weren't a little stronger in the quarter, at $2.8 million, down from 4.2 last quarter.

You did comment in one of the slides that the volume of the vehicles you're selling more vehicles and pricing seems to be firming.

Should we expect that the gain on equipment sales start to ramp up from here going forward?

We expect some improvement in gains going forward. We're certainly not building our model to be dependent on the gains that we saw probably back in the mid- to late-'90s, but we would expect to see continuing improvement, we'd expect to see continuing improvement on the proceeds side as these truck markets continue to improve, and obviously, just the accounting aspects of now showing more of our units as owned verses leased will have an impact as well.

You had mentioned that tractors, which had been weak, were firming in pricing. Is the implication that straight trucks and trailers maybe went the other way, or are they firming also?

No, I mean, we didn't see -- we highlight tractors because that's where we've come off our historical high so significantly. We're still off our highs of 1997 and 1998, and that's what, not only we've been struggling with, but the industry has been struggling with, has really been the tractor proceeds.

The other categories, the other power categories, straight trucks, you know, there's some movement up and down but those tend to be more specific market conditions. So those really haven't moved like the tractors have over the last couple of years.

Then one last question on the logistics side.

The million dollars or so of pull-forward benefit, can you refresh me what exactly that entails and what that means going forward?

This is Tony.

Typically, during the course of business, we do have activities with our customers on certain financial issues and we did positively resolve this issue with a customer. We anticipated that it would not be resolved until the fourth quarter, depending upon how the contract really ran, but we were able to positively resolve that during the third quarter.

It is typical business issues relative to performance, relative to gain share activities and things of that nature.

So the $12.2 million contribution margin from SCS we should view really on an ongoing basis, closer to 11? Something like that?

That's correct. Yes.

Probably even closer to 10 because there was another advantage of some tax activity, So you can take about 1%, or $2 million, in total, off of there.

Okay. Thank you.

Our next question comes from Mike Manelli. Please state your company name.

Morgan Stanley.

My first question was, with regard to hours of service regulations, our understanding is that the grocery food distribution business could be impacted more so than some other industries as a result of this. Just wanted to know what your exposure was to that market on the lease side.

We have a very large presence in grocery and food distribution business.

Okay.

We anticipate some growth from customers in that business.

Great.

And then on the -- with regards to dedicated this quarter, I just wanted to understand, you know, we talked about insurance being up there. Is that an increase in premiums driving that or is that just adverse claims experience?

That was -- I'll answer that.

That was claims experience. And this really is a function of our self-insurance position. We insure the first million dollars of any claim.

So you will see, from quarter to quarter, fluxuations as a result of that self-insurance, and this quarter was a challenging one for our dedicated contract carriage business.

Is the $1 million of self-insurance retention, is that pretty consistent with what you guys have historically run there?

Yes.

Okay. Then my next question was, I guess more of a clarification here on two issues, one the pension.

My understanding, about a 25 basis point change in discount rate that can impact pension expense by about $5 million either way. Is that order of magnitude correct?

I would say 4.5.

4.5?

Second question, on the pension plan, I noticed the amortization of the gain or loss, you guys have gone up, I believe last year was at 6.5 years this, year it's gone up to 8.5 years. Is that driving a major change in the pension expense going forward?

Well, it has a -- the change occurred, you know, based on an actuarial update which we do periodically and what's really driving that is our employment turnover rate, actually, declined. From our previous actuarial study.

Now, that has several impact on your pension expense. It impacts your PBO, it impacts your amortization period, and, you know, what I would reference you to probably in terms of going through all those different dynamics is our white paper, which is still on the website. We've reviewed that, and I think the sensitivities are still indicative of how our mention expense would move.

Okay. Great. Thanks.

Next question comes from Anthony Lorenzo. Please state your company name.

John Levit & Company. Hey, guys. Quick question.

Looks like you're spending a lot more money in the commercial business. And I'm just trying to get a sense for, in the commercial rental, what are you spending it on this year and any particular vehicles you're buying?

You're referring to the CAPEX?

Yeah.

I'll let Dick answer that.

Yeah, that was really a refreshment of fleet. We've grown the fleet a little bit. Mostly a timing thing.

The fleet at the end of the year will be down slightly. We've skipped a year of CAPEX, and we only had a small CAPEX in the year before that. So this was really catching up the fleet to...

What trucks are those? Are those five to seven? Eight? Who are you buying them?

About half and half ,between five's and eight's.

And who are they from? Who are the manufacturers?

No, we don't disclose that.

You don't?

No. Sorry.

Okay. Thanks.

Your next question comes from David Ross. Please state your company name.

Asked and answered. Thank you

Thank you. Next comes from Gavin Curry. Please state your company name.

Brookside Capital. Good Morning.

Good morning.

Quick question, or actually two of them. One, this is sort of like the third good quarter for Supply Chain Solutions, and how confident are you guys, really, that this will be maintained going forward, and do you see room for improvement? And the second question is could you guys go into a bit more detail on what really caused the margin decline for fleet management and DCC and how readily you think the margins will bounce back?

All right. I'll cover that a little bit then turn it over to the segment people.

On supply chain, this obviously was a third quarter of success, but probably a bit stronger than you'd normally expect. What we have said publicly on previous calls, in answer to the question, is that we were going to try to get to the high 2's, around 3%, of operating margin for that segment this year. And I think averaged over the three quarters we're probably a little bit over 3 right now. But each quarter is a challenging one, but that's what we said we would try to do.

Going forward, over the next couple of years, we're going to try to have continuing improvement. We still think there's opportunity there. I will let Tony comment on that further.

On fleet management, I think the big impact on the bottom line would have come from the pension impact, so it covered in mass, covered over some of the progress in that area.

And in dedicated contract carriage the big difference was the impact for the insurance.

I'll let Tony go back to the supply chain profitability question.

We have made, as you know, progress on the cost side to the tune of several hundred basis points year-to-date. That comes from very hard-earned MIP activity which we continue to work on, and which we do believe will continue.

At the same time, on our overhead cost structure, an additional several hundred basis points, about 50/50 split, which we believe will continue on into the future as well. We're maintaining those costs, we're keeping the overhead down, not only to earn improved profitability now, but most importantly, to ensure that we are much more highly competitive as we go out into the future.

This was a particularly good quarter. Our operators did an exceptional job for the shareholders this quarter and we believe that their performance will continue as well.

Now, this is also been an environment of declining revenues. How much of those costs are sort of going to bounce back once revenues start increasing again?

Our operating costs are contract-specific, and our new processes and procedures that we put into place are also contract-specific, so we feel that the margin improvement initiatives and those opportunities will remain, regardless of revenue growth.

Our overhead cost, we believe there is still leverage clearly in our overhead cost structure. We do not see them coming back relative to revenue growth going into 2004. We're going to hold the overhead costs regardless of the revenue growth that we're struggling and working for into 2004.

So when you envision improvements, are you talking like 25, 50 basis points improvement as a goal or are you thinking much bigger than that?

We are thinking much bigger than that.

Okay.

Thank you very much.

You're welcome.

I would now like to turn the call back over to Mr. Greg Swienton.

All right. I think that indicates that that's the last call in queue, and it's noon, we started a few minutes late but we got all the questions in.

Thank you for your participation, questions and attendance.

Have a good day.