萊德系統 (R) 2004 Q3 法說會逐字稿

Good morning. Welcome to Ryder System's third-quarter 2004 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 Mr. Bob Brunn, group director of investor relations for Ryder, Mr. Brunn, you may begin.

Thank you, good morning and welcome to Ryder's third-quarter 2004 earnings conference call. We'd 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 and 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 release and in Ryder's filings with the Securities and Exchange Commission.

Presenting on the call today are 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 Tegnelia, 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. With that I will turn the call over to Greg.

Thank you, Bob, good morning and welcome everyone. This morning we will review our third-quarter results, we will update you on a number of other items including our outlook and forecast for the fourth quarter, and then as always we will open it up for questions. So let me begin with an overview of our third-quarter results and those of you following on the web we are now on page 4.

Earnings per diluted share were 83 cents for the third quarter as compared to 63 cents in the prior year period. This year's third-quarter earnings included a 1 cent EPS gain related to the previously announced sale of our company's headquarters complex, and the prior year's third-quarter included a 2 cent EPS net restructuring recovery.

The third-quarter EPS forecast we provided during our last earnings call was for a range of 75 to 78 cents. On our prior call we noted that the forecast included a 2 cent charge related to the insourcing of an information technology infrastructure contract. While that project is proceeding on track, we did not incur all these costs during the quarter. Additionally, the forecast did not include the 1 cent gain on our headquarters complex. So adjusting for these two items the equivalent forecast for the quarter would have been 78 to 81 cents, as compared to our actual results of 83 cents.

Fleet Management Solution posted revenue growth of 14 percent, or 9 percent excluding fuel versus the prior year. U.S. Lease revenue increased for the quarter primarily due to our acquisitions of General and Ruan. We have not yet had the organic growth appear that we would like which shows up in net U.S. lease revenue. We do continue to experience positive sales trends versus last year with increases in both replacement of expiring leases and growth in new lease business. We're optimistic that these positive sales trends will continue and expand given improved confidence among our customer base and anticipated increases in new vehicle production levels.

We continue to see very strong revenue trends in our commercial rental product line with 22 percent growth quarter-over-quarter. The increase in rental revenues for the quarter resulted from both improved pricing and higher levels of rental activity as well as from additional rental vehicles obtained through the acquisitions. Net before tax earnings in Fleet Management were up 57 percent; FMS earnings as a percent of dry revenue were up 360 basis points to almost 12 percent. That exceeds the 10 percent target we established sometime ago for this segment as well as the 11.5 percent margin we realized in the second quarter.

Continuing on page 5, from an earning standpoint Fleet Management's results benefited from our acquisitions, improved commercial rental performance, stronger vehicle gains, and lower pension expense in the quarter. We're pleased that this quarter's results for FMS continue to prove the strong earnings leverage that we believe exists in the overall business and think we are in the early stages of demonstrating the earnings leverage on profitable growth.

Turning to the Supply Chain Solution segment. While total SCS revenue was up about 2 percent, the operating revenue, that is revenue less freight under management, was down for the quarter. That SCS operating revenue declined as we anticipated due to certain customer contracts that were not renewed in prior periods. This revenue decline was partially offset by new contract startups. We expect pressure on SCS revenues to continue in the fourth quarter for the same reasons we've already discussed. We are focused on converting new business opportunities into operations as quickly as possible.

Third-quarter earnings in the Supply Chain Solutions group were down versus the prior year. As we identified last year, however, our prior year results included over $2 million of benefits from an operating tax refund in Canada, and we had the onetime favorable resolution of a contractual matter. If we exclude these benefits from last year's numbers, SCS earnings were flat with the prior year. Earnings in Dedicated Contract Carriage were also flat for the quarter; the small decline in revenue due to the termination of some accounts was offset by reduced overhead spending.

Page 6 on our chart on earnings per share, again, earnings per share increased by 20 cents to 83 cents, compared to 63 last year. As listed in the footnote, earnings per share included the 1 cent gain on the sale of a property ancillary to our main headquarters building this quarter. Third quarter of 2003 included a 2 cent restructuring credit. We have also highlighted in the footnote the impact on EPS a pension expense that totaled 15 cents per share for the third quarter in 2004 compared with 20 cents per share last year.

1.2 million share increase in the average number of diluted shares outstanding versus the prior year's quarter is due primarily to the number of employee stock options exercised. In July you'll recall we announced a two-year, 3.5 million share repurchase program designed to mitigate the impact of employee stock purchases and option plans. During the third quarter we repurchased approximately 900,000 shares at an average price of 44.04 per share under this program.

Page 7, on year-to-date earnings. Year-to-date EPS increased to $2.33 as compared to $1.51 per share before accounting changes in 2003, or as compared with $1.45 including those accounting changes last year. Again, we highlighted in the footnote that our year-to-date EPS includes a 23 cent gain on the sale of the Company's headquarters complex. We do not anticipate any additional gains related to the sale of our headquarters going forward.

Net restructuring charges through September totaled 3 cents per share, while 2003's results included 4 cents of restructuring credits. On a year-to-date EPS impact the pension expense was 45 cents in 2004 and 63 cents in 2003.

Turn to Page 3 for comments on the business segment results for the quarter. Total revenues for the quarter were up 9 percent while pretax earnings increased by $24 million or 38 percent. As previously mentioned in FMS revenue was up by 14 percent or 9 percent excluding fuel, and as also mentioned FMS earnings were up $31 million or 57 percent. That increase was driven by the impact of four things, acquisitions, strong commercial rental performance, improved vehicle gains, and reduced pension costs.

Commercial rental utilization in the quarter was a very strong 79.4 percent, up almost 6 percentage points from the third quarter of 2003. We are continuing to focus on driving higher commercial rental rates and utilization. Rental results are also benefiting from lease customers who are waiting delivery of new lease vehicles and are utilizing rental equipment on an interim basis. As mentioned, Supply Chain Solutions total revenue was up 2 percent while operating revenue excludes the freight under management was down about 1 percent. Net before tax earnings were down from 12.3 million last year to 10 million this quarter, and as I also mentioned earlier, 2003's results benefited by over $2 million due to tax refund in the contract resolution. Excluding these items, earnings in SCS would be flat.

On a percentage basis NBT as a percent of operating revenue was 4.3 percent, down from 5.2 percent in the third quarter last year but again would be flat year-over-year without the benefit of those onetime items in 2003. Dedicated Contract Carriage we saw 1 percent decline in both revenue and earnings primarily due to the nonrenewals of certain contracts offset by reduced overhead expenses. Unallocated Central Support Services costs were up largely due to Sarbanes-Oxley compliance costs that were not allocated to the business segments as well as some other miscellaneous items.

Earnings after all Central Support Service costs improved by 42 percent before restructuring and other recoveries or by 38 percent including all these items. Our quarterly net after-tax earnings were up 34 percent at 54.3 million for the quarter compared with 40.5 million the previous year.

In the year-to-date business segment results on page 9, Fleet Management solution revenue is up from the prior year by 10 percent or 8 percent excluding fuel, FMS earnings are up 83.4 million or 61 percent, the increases are from the same items that I mentioned in the third quarter. In Supply Chain year-to-date both total and operating revenues were down 2 percent, Supply Chain's year-to-date net before tax earnings were 26.6 million, down 400,000 from 27 million in the prior year. On a percentage basis net before tax as a percent of operating revenue was flat at 3.8 percent.

Dedicated Contract Carriage, we had a 2 percent decline in total revenue primarily due to nonrenewals of certain contracts and this impacted year-to-date earnings which are down 1.2 million or 5 percent. Year-to-date earnings after all Central Support Services costs improved by 53 percent before restructuring and other recoveries, or up 63 percent including all these items. Our year-to-date net after-tax earnings were up 59 percent at 153 million compared to 96.1 million in the previous year.

And at this point I will turn the call over to our Chief Financial Officer, Tracy Leinbach, who will cover a number of items beginning with capital.

Thank you, Greg. Turning to Page 10, year-to-date capital expenditures before acquisitions totaled $843 million up 47 percent from the prior year. Higher capital spending was driven primarily by increased activity in our lease business; our capital plan for the year did anticipate lower levels of term extensions as customers began to replace leased unit at a higher rate. We saw this trend towards higher replacement activity in the first half of the year along with some capital spending for additions of new leased vehicles and this trend has continued into the third quarter.

Our current full-year capital forecast calls for approximately $1.1 billion in capital spending before acquisitions. Down from our initial plan of $1.2 billion dollar. The $100 million reduction in our capital forecast reflects a lower expected level of net Fleet growth in our lease product line for the year. Year-to-date, our lease capital expenditures of $578 million reflect spending on vehicles that have already been delivered from the manufacturers. In addition, our order bank for lease vehicles is up for sale that have been made but for which vehicles have not yet been received.

In commercial rental, year-to-date spending is up modestly as we are focused primarily on realizing higher pricing and utilization with minimal increases in our fleet size outside of the acquisition unit. Finally, the $149 million in year-to-date acquisition expenditures relate primarily to the purchase of Ruan Leasing Company which we completed in March of this year.

On page 11 you can see our debt levels have declined somewhat while equity has increased as compared to prior year end. Balance sheet debt is down $96 million for the first nine months and is down as a percent of equity at 119 percent. Ryder's total obligations at 1.9 billion are down $47 million as compared to the prior year end. Total obligations as a percent to equity at the end of the quarter were 133 percent down from 146 percent at the end of 2003. Total obligations include the impact of approximately $100 million of lease financing that was completed during the quarter and that is recorded as off-balance sheet debt.

Our equity balance at the end of the quarter was $1.4 billion up from $1.3 billion at the end of 2003. The Company's improvement and earnings were partially offset by share repurchases and dividends. As those of you who have followed us now from a funding standpoint the Company matches the average duration of our debt with the average life of our assets. While we utilize both fixed and floating-rate debt to achieve this match and generally the target, we target a mix of 25 to 45 percent variable rate debt. At the end of the quarter the Company's variable rate portion of debt was near the midpoint of this range at 34 percent of total obligations. Overall the Company has significant capacity to support what we continue to see as strong profitable growth opportunities going forward. And as we accelerate growth we would expect to increase financial leverage of the Company.

Turning to the next page, you'll see that based on our preliminary consolidation the Company generated $162 million in free cash flow on a year-to-date basis as compared to generating $259 million in the prior year. Deposit of $162 million in free cash flow this year includes $149 million in acquisition spending. The year-over-year reduction in free cash flow is driven by this acquisition spending, as well as by higher levels of capital spending on lease vehicles.

The improvement in our net earnings, higher proceeds from the sale of it used vehicles and the impact of the lease financing contribute positively to free cash flow results in the quarter. Cash flow also benefited by $44 million from the sale of our headquarters complex building. Our year-to-date free cash flow also benefited from the adoption of Fin 46 on July 1st of 2003 by approximately $40 million. Due primarily to increased depreciation expense. We believe the adoption of the Fin increased visibility into the cash flow of the Company as prior equipment rental expense is now reflected as depreciation expense and is added back to the free cash flow numbers.

Our full-year free cash flow forecast calls for the Company to generate $230 million of free cash flow including the acquisition spending, and the details regarding the cash flow forecast can be found in the appendix for the presentation.

Turning to Page 14, I would like to update you on our asset management area. Our performance in this area has a significant impact on our earnings as well as our capital efficiency and free cash flow. We continue to see used vehicle sale prices firm in the market particularly for tractors, and we anticipate this trend will continue in the near-term. We've taken a number of steps to enhance our used vehicles sales capabilities including expanding our retail used vehicle sales center network, and expanding the number of third party providers that offer used vehicle financing.

In the third quarter we sold 22 percent more vehicles than in the prior year, the higher number of units sold combined with the modestly firming prices contributed to higher proceeds and stronger vehicle gains performance in the quarter. We also continue to focus on the number of nonrevenue earning vehicles on our fleet, which were made up of two components, first, new vehicles that have not yet begun to earn revenue and second, those that are no longer earning revenue. The number of vehicles not yet earning revenue increased during the quarter reflecting higher level of sales activity in lease. We would expect this number to grow modestly as the volume of new vehicles coming into the Company increases.

The number of no longer earning revenue vehicles which we define as vehicles that have not earned revenue in the past 30 days was down significantly versus last year reflecting higher vehicle sales and improved rental utilizations. Our focus continues to be on keeping our equipment utilized as well as expanding our sales effort to effectively manage the number of no longer earning units. At this point I would like to turn the call back over to Greg to review our earnings outlook.

Thanks, Tracy. We will turn to Page 16 for the earnings outlook. Last December we presented our business plan as usual and provided a forecast for 2004 EPS of $2.35 to $2.45. We have increased our full-year EPS forecast 5 times since then. Our last update was made in conjunction with the strong results we recorded during our second-quarter earnings call, at which time we increased our forecast to a range of $3.00 to $3.06 per share. Based on our third-quarter results we are now increasing our forecast for a sixth time this year bringing our full year 2004 forecast to a range of $3.08 to $3.11 per share. We are maintaining our fourth-quarter forecast of 75 to 78 cents per share, that's the same as what we said last quarter.

Our full year forecast includes the 23 cent gain on the sale of our company's headquarters complex. Excluding this amount, our forecast would call for our core earnings of 285 to 288 per share. Our forecast for the year includes transition costs related to the information technology infrastructure contract termination that we previously announced during the second-quarter call. We now expect that these costs will be 3 cents in the fourth quarter for a total full-year impact of 8 cents. The full-year impact of that transition is down from our previously anticipated 10 cents per share, as we did not incur the expected 2 cents in the third quarter. And as usual, our forecast includes the impact of restructuring and other items I have previously reviewed.

Our outlook for the remainder of 2004 in Supply Chain Solutions is for continued softness in top-line revenue, which will limit our ability to deliver bottom-line earnings improvements. Longer-term however, we believe Supply Chain presents good growth opportunities and have taken a number of steps to reinvigorate profitable growth in this segment, as well as in the Dedicated Contract Carriage segment.

Our outlook for Fleet Management Solutions for the remainder of the year is more robust as we continue to see strong signs of growth in commercial rental, as well as positive trends in our lease business. In the near-term we are looking primarily to this segment to deliver the strong earnings leverage that we believe exists throughout the Company.

Finally, as a reminder, we will hold our usual conference call on December 20th at 11 AM Eastern time to review our 2005 business plan and will provide more specific financial forecast for the coming year at that time. That will conclude our remarks and our presentation. At this time I would like to turn it over to the operator who will open up the call and give you instructions for dialing in for questions.

(OPERATOR INSTRUCTIONS) Jon Langenfeld with Robert W. Baird.

Could you talks a little bit about the sales momentum within the full service side? I know you started the year very, very strong there, just wondering how that has progressed here in the third quarter. And then how these sales that you came through with in the first quarter, how those are layering into the reported revenue stream?

First, I think in general, we've obviously shown full-service lease growth from the acquisitions, I think that we have seen activity in replacements; we've not seen all of the organic growth that we would like yet in the full-service lease additions to Fleet. We also maybe wonder and this is a question that maybe isn't answered yet, we might wonder if some of the strength in commercial rental could still be due to some reluctance on the part of customers to make those conversions yet because of uncertainty about their businesses or uncertainty about the economy yet, or certainly issues with the price of fuel.

Whenever we do make full-service lease sales whether they are replacements or they are additions, it does take a certain amount of time for that revenue to flow through. We are in good shape in terms of slots, but the lead-time on tractors is increasing. If Tracy or Dick would like to add anything else to your question from what I have already said, I will turn it to them.

Jon, a comment on the second part of your question. As you recall when we actually at the end of last year we had expected to see replacement activity pickup with our customer base and we did not really see that happening in 2003. As a result we were under our capital plan for the year. We did see those decisions start to be made, particularly in the first quarter where we were getting an increase in signed contracts for replacement spending. With several of our customers we were starting to see when they made that replacement decision they were adding some incremental vehicles back to their fleets, and most of the fleets in the country have gone through a contraction over the last three or four years.

We were seeing and we continue to see some customers as they make that replacement spend, add back some customers or add back some trucks. We haven't seen that really take hold completely across the customer base. And that growth in fleet for some of those customers will be offset by some contracts that we don't renew which is just an ongoing part of our activity. So we did see that in the first quarter, we continue to see some of that activity, but certainly our plans are to see more of that activity not only with replacements but with fleet expansions around the existing customers as well as new customers.

Now if you look, the numbers that we have anyway, just kind of our estimates look like the full-service lease line is basically flat for the last several quarters here, slightly down on an organic basis. Given that you do have a lead-time and you do probably have pretty good visibility to what's coming online here over the next several months, should we expect to see that growth reaccelerate because it doesn't look like it has yet?

We would certainly expect to see it move to positive territory. It's hard to dial in exactly when that will happen because the retention piece is very important in terms of keeping the trucks we have at work working. And then obviously we want to make sure that we manage our slots appropriately so that we can show growth as quickly as possible, but we certainly have not lost confidence that it's going to move to positive territory. But dialing it in in terms of which month we will see that, we are not prepared to try to do that at this point.

What is the typical premium to a full-service lease versus a commercial rental if you looked at it over a year's period? Obviously you don't have the commitment on the commercial rental side, I think in the past you said 8 to 10 percent?

It's a growing premium. We are getting it upwards of 50 percent, between 40 and 50 percent depending on the class of vehicle premium for a rental truck over a lease. We continue to try to add to that because there is so much demand for rental equipment in true rental applications that we are trying to get, trying to maximize the returns we can get on a very active and highly utilized rental (inaudible).

I think that is why, if you see a number like that or hear a number like that it runs out over the course of the year. It's a premium of 40 to 50 percent; customers make good rational economic decisions. That's why I pose the one question, could that mean that there could be some hesitancy on the part of some customers to actually convert to lease. Which are paying that sort of premium. Hesitancy in terms of their own business or the economy or fuel prices or whatever. Obviously we try to convert as much as possible. We would prefer a longer-term contract. But in the meantime, obviously we are gaining some value both in revenue and margin from the amount of commercial rental.

Obviously you have the pricing is driven there to try to incent customers to move over to the lease side?

Absolutely.

Finally, could you give us some idea either probably more generically, when we look at the two acquisitions you did, what should we think about in terms of revenue retention on those businesses as we start to lap those acquisition dates?

I will let Dick cover that, he's been the closest to those.

Between the two we are seeing a little difference between one, more of an issue around retention than the other. One of them had rates in the marketplace that were a little bit lower than what we've seen and those contracts are more difficult to renew than the smaller acquisition but the rates were more in line with what we consider the market rates. They are not out of line with what we anticipated or forecast when we made the acquisitions internally. But there is an ongoing challenge to win those customers over to Ryder. They chose another company for a vendor and now they have had a new company selected for them so we are trying to build the relationships to make sure that we go forward and grow with those companies.

If I were to just throw out a ballpark number of historically not even on these two acquisitions but historically when you've looked at them, is three quarter's revenue retention, would that be considered good or bad or in the ballpark?

That would be good, that would be about where we had historically experienced but not too far.

Thank you very much.

Greg Burns with J.P. Morgan.

22 percent was the number I saw. What is driving that? Are the lease terms shortening up there? Anything other than just normal growth that's driving such a big increase?

Greg, I will ask you to repeat your statement or question because at the beginning you were cut off and we started to hear you from the word 22 percent on. We had a communications issue apparently, so if you could start from the beginning.

I'm just wondering what factors are driving what looks like a very strong increase in equipment sales? I understand the reason for the gains obviously prices are up, but 22 percent look like a very strong unit increase, I am wondering what are the factors driving that?

Greg, because we are starting to see a pick up in replacement activity we did anticipate selling more vehicles this year in terms of used vehicles, so that was by and large in our plan to do that. Obviously we had to plan and take actions for more throughput and we have expanded the network of used vehicle sales center and our sales team to be able to do that. And we've been pleased with the pricing that we've seen particularly the improvement around tractor pricing.

You guys have talked in the past about, depending on where the business cycle was giving people extensions on leases. Am I to assume now that you are essentially not doing that so they have to re-up up for full renewal?

We still are doing extensions, but the level of extensions really peaked last year. And we expected coming in really at the end of last year and coming into this year that what we would see that number go down, it has, and I think that is reflected in one of the schedules in our appendix. But that was anticipated because of the aging of the fleet.

And actually, as Tracy said, it is on appendix page 28 and those extensions, as planned, have declined and have actually declined 31 percent compared to last year.

But Greg, where we can we would like to continue to not only run the fleet to the full term but extend it where it makes sense and where it makes sense for the customer as well.

Greg, what are your thoughts on dedicated, I mean, given what we are hearing in the marketplace of just real scarcity of drivers, starting to see it seems like some increase in demand for dedicated and certainly companies like J. B. Hunt (ph) that had not added to their regular fleet, should they be adding in dedicated. Should we assume that there is a little share erosion there and what is your take on why that's not growing faster?

I might let Tony Tegnelia comment on a couple of things regarding what's going on in the niche we serve and also your point on drivers.

We have had had some significant new hits in the DCC side most recently, and as we discussed in --.

Hits meaning sales?

Sales, yes, and as we have often referred to our DCC business in the past, there are really 2 segments. One is where there is specialized transportation required, typically specialized handling or specialized equipment, and the other which is a bit more commodity type. The revenue losses that you see reflected in this quarter relate to that segment which is more commodity type. However, where there is specialized requirements, we're doing very well and that's where we had the 2 significant opportunities within the last 4 or so weeks. So we do see a lot of growth opportunity for DCC in that specialized area, and we are working very quickly to modify our asset and business model on the more simplified DCC piece so that we can maintain our position and actually grow there at the same time as well. But we do still feel very good about DCC growth in the future.

With regard to the driver shortage issue, which is clearly on top of everyone's mind, a little bit of background about Ryder's driver community profile initially. Our drivers are home 95 -- about 95 percent of our drivers are home every night. So that really helps us from a recruiting point of view. Our compensation and pay packages are above the market. Typically the market is at about 30, 32,000 a year. We're in the 38 to 42,000 area, so we have a very, very attractive package. We also have a medical benefits and 401(k) package that appeals to them, and we also give them tenured vacations at the same time. As a matter-of-fact, our average tenure of our drivers is about 6 years. In some of our accounts they've been there 15 years or so. The turnover rate for Ryder is about 33 percent. The industry is really at about 100 percent, something along those natures.

Also we have very good communication programs with our drivers, very attractive safety program as well. As you know, we won the National Safety Council Green Cross Award in 2002, and in the DCC and supply chain side of the house, we lease all of our equipment from our sister division. The vehicles are new, clean, very attractive and also appealing to the drivers so that helps us on retention, and that helps us on recruiting. We have not lost any revenue from a driver shortage point of view in either DCC or in the supply chain side of the house. However, there are some extended periods of time for recruiting and as a result we have had to use driver lease companies for a bit longer. However, we've also increased our sign on bonuses and also some finder fee bonuses to help us recruit those drivers. We are beginning to recruit earlier for new business that we are seeing come on board. So overall, our driver profile community doesn't put us in the same position, the same severity of driver shortage issues you might see with some of the large LTL or truckload carrier operations.

That is helpful, and Greg, just on the supply chain side it sounds like you're pretty cautious about the revenue outlook, at least in the medium-term. Is that because of the competitive situation out there, are you seeing prices that are irrational, don't make sense, are you seeing more difficult bidding situations? What makes you somewhat cautious, if I'm reading that right?

The reason we remain cautious goes back several quarters and where consistent in our comments there, it is not general conditions or something irrational or something difficult moreso in the marketplace, in our case there are a couple of significant contracts that were not renewed at the end of 2003 going into 2004. And that meant we've had a lot of headwind that we are facing as we go through the course of this year, that is continuing and that will continue through the fourth quarter.

So we should look for a pickup in '05 as you anniversary those?

I will reserve that comment as generally positive until we have our 2005 business plan call on December 20th.

Great. Thanks a lot.

John Barnes, CSFB.

Good morning, guys. Can you talk a little bit -- I think you had talked a little bit about this before, the amount of supply chain business that has been won but doesn't come on until January, February of '05, can you give us an update as to what those figures might look like?

If anyone can speak to some of that broadly, I don't want to be too specific until we actually get to a business plan in December, a couple of months, but I will let Tony comment on that.

First of all as we also discussed in the past, we have dramatically increased the size of our sales force and also our sales and marketing efforts in the supply chain side of the house as well as DCC, as a matter-of-fact. Our sales year-to-date on supply chain are up very attractively over the sales this time last year for supply chain. And a number of them had started to layer on to our revenue, as you can see in the performance in the quarter we were able to almost offset the loss of two major accounts that termed out at the end of 2003. So we are seeing those new accounts come on and we will see them continue throughout 2004, 2005 for a full twelve months.

At the same time our pipeline is up about two-thirds year-over-year as a result of that increase in the sales force. Our major effort right now is converting those proposals out in the hands of customers which is up in two signed contracts between now and year end so that they will be implemented and start operating during 2005. But our return from the increase in our sales force and our improvement in our pipeline we think will hold us in good stead.

And John, before we leave that, Bobby Griffin who is responsible for international operations is also here and I will let him speak to the international portion of that.

We are also seeing a nice uptick also in international sales in the supply chain category. In fact even though the lead-time for securities contracts have taken us a little longer than we had hoped, we definitely out to see a positive impact beginning sometime in the latter part of this quarter and also into next year. Some of the same things that Tony talked about, the retention program over and above the contract losses that Greg alluded to early on is in much better shape for the balance of the year and at the same time we think that some of the new deals that we have gotten verbals on, as well as some contracts that have yet to be concluded, we expect to get those all done between now and I am going to say the first quarter next year, so the revenue stream should improve.

Okay. On both pieces of the business, you both mentioned conversion. Can you give us an idea what the conversion level looks like right now versus maybe a year ago?

It's difficult to compare conversion rates year-over-year. The deals are larger this year and they're more complex, and the contract team takes a more extended time. But I would say generally speaking the rate of conversion is about the same. However, the size of the pipeline is larger. That is speaking for U.S.

Greg, in looking at the cost you incurred this year for Sarbanes, do you expect this is the level of recurring costs going forward or do you expect to get some moderation of those costs next year?

I hope it's not ongoing. We've estimated for the year 2004 that we are somewhere in the range of about $3.3 million, $3.4 million of which some of that is internal cost and some of that is external. And I think we probably booked about 2.7 million of that or so about 3.3 already through three quarters. That is a lot of money, that's a lot of tax to pay for, equivalently, for behavior that caused Sarbanes-Oxley.

The questions you ask are the same questions that I and probably other CEOs are asking our auditors. Asking what is the expectations that the government is going to require because as you go on from week to week you keep hearing about other conditions, other terms. I would hope in the long-term it will drop off. I just can't guarantee it's going to drop off in 2005.

But you do expect to be compliant by year and?

Yes, we do.

Even with the acquired properties?

Yes, we do.

Lastly, free cash flow generation. Solid free cash flow especially given the acquisitions, here beginning besides the fact that your debt is steadily coming down, not where I think it should be quite yet, but as a matter of opinion, but I guess what I'm getting at is you are developing the same kind of problem a lot of people in our space are developing and that is the cash flow is starting to pour in. What do you look to do besides just continuing to clean up the balance sheet, I know you have got share repurchase but are there other things that you're looking at? I mean, how, given that you've had some success with the acquisitions you've just completed, is that appetite still there, does it kind of run the gamut or are you ready to be a little bit more specific as to where you want to allocate the cash flow?

You got a lot of things in that question. I would say first that the issue of debt because a large portion of our business is in leasing that we actually could have considerably more debt and greater leverage and that would make sense from that portion of the business model.

In terms of the cash, and what we might do with it, first on the share repurchase, the only share repurchase we have talked about was not a large repurchase program but only to offset the dilutive effects of our employee share purchase plan as well as options. Now the larger issue, what you do with the cash, right at this point if there are acquisition opportunities, we are open to them. At the same time I guess our comment on cash would be we will utilize it however we think it will best serve our growth and shareholders' interests.

Okay. I'm sorry that was sort of rambling. I am trying to get it all encompassing. That about does it for me. Nice quarter and look forward to hearing your comments in December.

John Larkin.

Legg Mason. Good morning everyone. I seem to remember sometime in the last six to twelve months that there was some talk that some of the smaller leasing companies had also stretched out the lease terms to 5, 6, 7, 8 years. And the speculation was that as they began to try to hold on to that business that Ryder might be able to take some share from those smaller companies, which as I recall, have something like 70 percent of the market. Is any of that going on?

We win some from smaller leasing companies. And they win some from us, I mean, it's a constant battle trying to prepare your competitive offering for that many competitors because they all have a unique spot, some of them very unique, in small marketplaces. We haven't experienced an upswell in winning more deals than we have historically. There are some smaller companies that I think have pulled in their competitive horns a little bit and in those markets were that has happened, where they had a tough time getting access to capital, we have gained a competitive advantage and we have gained share. But the healthy small leasing companies that are well-run and well-managed, we are out there everyday trying to win business from them and they from us.

I think generally probably their issue is and you can't generalize, but for those companies who have access to capital they will continue to be competitive; if for some reason they don't then they are more vulnerable.

Follow on question with respect to the replacement deals that you are getting. I know Greg, when you arrived on the scene a lot of the leases were, as you used to call it, negative EVA leases and I suspect there are very few of those left. Can you give us some feel for the kind of pricing improvement you are getting on the full-service lease business when you do go into a replacement on the customer's fleet?

I do know that we have, we calculate EVA per deal, we don't disclose that for a lot for competitive reasons, but I can tell you that the average EVA per transaction is higher now than it was last year and higher than it was several years ago. I don't like to be too much more explicit because a lot of this is competitively sensitive, we are the only public company in this sector and sharing too much doesn't help us.

Just one final question. I know Tracy was talking a little bit about production slots for Class A tractors and with the EPA tightening down the admission standards again in '07 there is a lot of scrambling to I think add slots because the manufacturers may not want to upsize their production capability just for a year or two. How far out are you buying, are you at all worried that you may not have enough slots out in the future, if in fact some of this incremental business does materialize?

We have slots through 06, 2005 level of slots are 25 percent higher than '04's. We can still get a truck built in January, we are arranging our production so that the growth -- anything that has to do with growth comes does, any replacement goes in the Q a little later, and any rental truck goes in the Q behind that. We are hopeful that with more slots available and with the ability to manage it centrally how we use the slots, that we will get some growth as you might suspect just from having the ability to quickly deliver a vehicle to the marketplace.

Did I hear you say you have slots all the way through the end of '06?

We do.

That is terrific. Thanks for your help.

Matthew Brooklier with Bear Stearns.

Bear Stearns. Good morning. I just wanted to get a better feel for the month-to-month progression during third quarter for commercial rental and leasing revenue growth. Have you started to see the acceleration within the core leasing product at this point as you convert more the rental contracts to longer-term leasing?

I don't think the progress month-to-month in that three-month period would be particularly discernible or material.

Are you willing to share the utilization rates within your core pool of leasing trucks within your leasing pool?

In the rental pool, that's where it would be relevant. 79.6.

Are you guys providing 2005 CapEx guidance at this point?

Not yet, we will do that in December.

Last question, it looked like the tax rate was up a little bit in the quarter, what is fair to assume going forward?

I assume you can expect it to stay up. You realize all of the significant profit growth has come from the fleet management sector, and that tends to be where you have more taxable income and state income.

So that 37 9 is a good number to use going forward?

Yes, and we will update that as we finalize our plan for 2005.

David Campbell.

Thompson Davis & Company. I just wanted to ask about, Tracy, your comment about free cash flow this year. We have $60 million in our forecast, I think you said $238 million of free cash flow this year. Is that excluding acquisitions? If that's the right number, how did it get to be so big?

David, the $230 million forecast does include the $49 million acquisition, it is benefited from $100 million of lease financing we closed in the third quarter. That's treated as off-balance sheet debt, was executed in the form of a sale leaseback. That is contributing to about $100 million to the free cash flow that would not have been in our original plan. I think there is a breakout of the forecast in the appendix that might give you a little bit more detail that is on page 32 of the presentation Greg.

Numbers of shares outstanding, you mentioned about 900,000 shares in the third quarter, what were the number of shares then on September 30th? Or what will the shares be in the fourth quarter?

At the end of the quarter, 64.3 million shares outstanding, that's less than the diluted figure. And given that we have a repurchase program in place, I would not expect that number to move significantly between now and the end of the year.

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

It appears that every question has been asked and answered. Since there are no further calls we are aware of in queue, operator, we will call the meeting adjourned. Thank you all for your attendance and take care, be safe, bye now.