萊德系統 (R) 2005 Q3 法說會逐字稿

Good morning and welcome to Ryder System Incorporated’s Third Quarter 2005 Earnings Conference Call. [Operator Instructions]

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 2005 Earnings Conference Call. We would like to begin with a reminder that in this presentation you’ll hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from these expectations due to changes in economic, business, competitive, market, political and regulatory factors. More detailed information about these factors is contained in this morning’s earnings release, and in Ryder’s filings with the Securities and Exchange Commission. Presenting on the call today are Greg Swienton, Chairman and Chief Executive Officer; and Tracy Leinbach, Executive Vice President and Chief Financial Officer. Additionally Tony Tegnelia, President of Fleet Management Solutions; and Vicki O’Meara, President of US Supply Chain Solutions are available to answer any questions you may have at the conclusion of our presentation.

With that, I’ll turn the call over to Greg.

Thank you, Bob and good morning everyone. I certainly want to welcome each of you to today’s call. In particular, we’re really pleased to be with you as you may have noticed on the national news a category 3 hurricane went over us two mornings ago and there’s not a lot of infrastructure in south Florida but we are here at our office operating. I’ll have a few more things to say about hurricanes later.

But this morning as usual we’ll cover our third quarter results; we’ll update you on a number of other items including our asset-management area. We’ll review our outlook for 2005 and then open up the call for questions.

So let me begin with an overview of our third quarter results, and it’s on page 4 for those of you on the PowerPoint presentation. Our comparable earnings per diluted share were $0.98 for the third quarter of 2005, which was a 20% increase compared to the $0.82 in the prior-year period. Comparable earnings in the third quarter last year exclude a $0.01 gain from the sale of a part of our former headquarters complex.

Fleet Management Solutions posted total revenue growth of 10%. Operating revenue which excludes fuel revenue was up 2% verses the prior year. Within SMS full-service lease revenue was up 1% due primarily to the impact of foreign exchange rates. Maintenance revenues were up 6% due to several growth-related initiatives in this area. In commercial rental we continued to see positive revenue trends with 4% growth over the prior year. The growth in rental revenues for the quarter resulted mainly from increased pricing.

Net before-tax earnings in Fleet Management were up 20%. Fleet Management earnings as a percent of operating revenue were up 210 basis points to 14.1%. From an earnings standpoint Fleet Management’s results benefited from improved commercial rental performance and strong performance in our used-vehicle sales area. FMS earnings also improved due to higher fuel margins as a result of hurricane-related price volatility as well as lower overhead expenses during the quarter. These earnings improvements were partially offset by hurricane-related charges that we experienced from hurricanes Katrina and Rita.

On page 5, turning to the Supply Chain Solutions segment, total revenue was up 28% for the quarter while operating revenue was up 9%, reflecting the impact of increased subcontracted transportation, new and expanded business, and higher fuel costs that were passed through to customers.

The third quarter earnings in Supply Chain Solutions improved due to new and expanded business contracts as well as lower overhead spending levels. These improvements were partially offset by lower volumes in certain automotive accounts and lower margins on our operations in Brazil.

In Dedicated Contract Carriage revenue was up by 10% for the quarter on both a total and an operating-revenue basis due to the impact of new contract sales and customer expansion as well as higher fuel costs passed through to customers. Earnings in DCC improved for the quarter due to these new and expanded customer contracts as well as due to improved cost performance in our safety and other operating areas.

If you turn to page 6 you’ll see our earnings per share for the third quarter. Reporting EPS increased by $0.15 to $0.98 as compared to $0.83 per share last year. And as I mentioned earlier, the third quarter results last year in 2004 included a $0.01 gain from the sale of a portion of our former headquarters complex. Excluding this one-time item in the prior year, comparable earnings per share were $0.98 this year verses $0.82 last year.

The average number of diluted shares outstanding decreased by almost 1 million shares verses the prior year due to the share repurchase program that was in effect during the third quarter. The 3.5 million share repurchase program that was announced in July 2004 was designed to mitigate the impact of employee stock purchase and option plans.

During the third quarter we repurchased approximately 216,000 shares at an average price of $36.91 per share. This brings the total number of shares repurchased under this program to 2.3 million shares at an average price of $44.28 per share.

As we announced several weeks ago, we’ve established a new $175 million dollar share repurchase program that is not limited to mitigating the dilutive effects of the employee stock purchase plan and option plans. The new $175 million program replaces the prior 3.5 million share repurchase program.

Our third quarter tax rate was 40% due to an increase in non-deductible items and a higher portion of earnings coming from higher tax-rate jurisdictions. For the fourth quarter we expect our tax rate to be approximately 39%.

And finally on a rolling 12-month basis, our return on capital improved from 7.5% last year to 7.8% this year.

If you turn to page 7 you’ll see our earnings per share for the year to date. Reported EPS increased by $0.27 to $2.60 as compared to $2.33 per share last year. Excluding the impact of the Ohio tax change in the second quarter of this year and our headquarters sale gain last year, comparable earnings per share increased by $0.39 to $2.48 this year verses $2.09 last year or an improvement of 19%. Our year-to-date tax rate is 36.1% but would have been 39% excluding the Ohio tax benefit this year.

So I’d like to turn now to page 8 to discuss our third quarter results for the business segments. Total revenues for the quarter were up 14% over the prior year. In Fleet Management Solutions revenue was up by 10% or up 2% excluding fuel. Fleet Management Solutions earnings were up $16.8 million or 20%. This increase was driven by the impact of strong performance in our commercial rental and used-vehicle sales areas as well as lower overhead spending. Additionally fuel margins improved in the quarter due to the unprecedented increase in market fuel costs which in turn increased the sales value of our in-ground fuel inventory in this business segment. During more normal market conditions with more slowly-changing fuel costs, our fuel margins are typically not materially impacted. However this quarter was very unusual given the rapid increase in fuel costs. The FMS earnings improvements were partially offset by the hurricane-related charges during the quarter for Katrina and Rita in the gulf coast.

US commercial rental utilization in the quarter was 78.1%, down from 79.4% in the third quarter last year. The difference between our utilization performance this year verses last year improved in the quarter as we continued to right-size our rental fleet and we continue to work towards more positive comparisons going forward in this area.

In Supply Chain Solutions total revenue was up 28% in the quarter and operating revenue which excludes subcontracted transportation was up 9% due to improved sales results. I’d like to note that to improve clarity we are now referring to what we used to call freight under management as subcontracted transportation which represents transportation purchased from third parties on behalf of our customers.

The SCS net before-tax earnings were up 9% from 9.8 million in the third quarter last year to 10.6 million this quarter due to higher operating revenues and lower overhead spending.

In Dedicated Contract Carriage revenue was up 10% reflecting the impact of new and expanded customer contracts as well as higher fuel costs passed through to customers. Please note that in the segment reporting included in the appendix we’ve noted the fuel costs for DCC as well as for Supply Chain. Fuel costs in these segments are generally a pass-through to our customers and are impacted by both pricing and volume changes. DCC’s net before-tax earnings improved by 22% from 7.5 million to $9.2 million, due to our new customer contracts and lower safety and other operating costs.

Unallocated central support services costs were essentially flat for the quarter while total central support costs on both an allocated and non-allocated basis were $3.7 million lower or 7% lower than last year. Earnings after all central support services costs improved by 22% before restructuring and other recoveries. Our reported quarterly net after-tax earnings were 63.3 million for the quarter, up $9 million from the prior year.

Turning to the year-to-date results on page 9; total revenues for the year are up 11%. Fleet Management Solutions revenue is up 10% or up 3% excluding fuel due primarily to growth in commercial rental and maintenance revenues. Fleet Management Solutions earnings were up $39.2 million or 18%. The increase was largely driven by the impact of improved commercial revenue performance and strong results in used-vehicle sales during the year.

In Supply Chain Solutions total revenue was up 17% year-to-date and operating revenue which excludes subcontracted transportation was up 7% due to improved sales activity. Net before-tax earnings were largely unchanged as improved margins on new business operations were offset by the impact of certain automotive accounts including plant shutdowns, launch costs associated with new business, and our Brazil operations. The single customer issue in Brazil has been largely resolved and we anticipate improved results on this operation starting in the fourth quarter.

In Dedicated Contract Carriage total revenue was up 6%, largely reflecting the impact of new and expanded customer contracts and higher fuel costs passed through to customers. Net before-tax earnings increased by $2.2 million or 10% due to new contract growth and improved cost performance. Earnings before restructuring and taxes improved by 17% to $262.6 million. Reported net earnings were 168.1 million, up 10% from the prior year. Excluding the impacts of the Ohio tax change this year and the headquarters complex sale last year, comparable earnings increased by approximately $23 million or 17% to $160.5 million for the current year-to-date.

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

Thanks, Greg. Turning to page 10, year-to-date gross capital expenditures before acquisitions totaled just over $1.1 billion, up approximately $300 million from the prior year. Higher capital spending was driven primarily by an increase in full-service lease spending on replacement vehicles. We are currently in a heavier-than-normal cycle of replacing vehicles for expiring lease contracts. Customer confidence remains high to commit to re-signing long-term lease contracts. This spending is good for our business as we are lengthening the average remaining life of the lease contracts in our portfolio.

Capital spending was also up modestly in commercial rental at $245 million for the year-to-date period. The bulk of our commercial rental spending was completed in the first half of the year and we expect full-year spending to come in at or slightly below our initial planned level of $258 million.

During the first 9 months we sold used revenue-earning equipment for a total of $250 million, an increase of $34 million over last year’s sales proceeds. Sales of operating profit declined by $44 million, largely due to the sale of our headquarters facility that took place last year. Deducting all the sales proceeds from our gross capital expenditures, we had net capital expenditures during the first nine months of $894 million, up by $314 million from last year. I would note that the $15 million in acquisition expenditures shown in the memo line relates to the 4G’s truck leasing acquisition we made in the first quarter of this year as well as to payments under holdback provisions for the acquisitions we made last year.

On page 11 you can see both total debt and equity levels have increased as compared to the prior year end. The increased debt level is due to higher capital spending as well as the impact of the previously announced settlement of our 1998 through 2000 tax matter that occurred during the first quarter.

Balance sheet debt is up $435 million for the year and that’s up as a percent of equity at 137%. Including our off-balance sheet debt, Ryder’s total obligations of approximately $2.4 billion, are up $419 million as compared to the prior year end. Total obligations as a percent to equity at the end of the quarter were 146%, up from 129% at the end of 2004.

Our equity balance at the end of the quarter was approximately $1.6 billion. That’s up $107 million verses the end of ’04. The increase represents our year-to-date earnings net of share repurchases and dividends.

For those of you following along on the PowerPoint presentation, we’ve added our long-term leverage target to the chart. That target as we’ve previously stated is 250 to 300% in terms of total obligations to equity. We believe that this leverage range is appropriate for our business due to the liquidity of our vehicle assets and because a substantial component of our assets are supported by long-term customer leases. As we’ve previously communicated, we look to achieve this target over time while maintaining a strong investment-grade credit rating.

As Greg mentioned earlier, we did announce a $175 million stock buyback program that will move our leverage modestly higher. However we will remain well within our target leverage range. We continue to believe it is appropriate to maintain significant debt capacity to fund our future growth in the business.

I would now like to turn to the subject of interest rates and our management program. As those of you who follow us know, from a funding standpoint the Company matches the average duration of our debt to the average remaining life of our assets. We utilize both fixed and floating-rate debt to achieve this match and generally target a mix of 25 to 45% variable-rate debt. At the end of the quarter the Company’s variable-rate portion of debt represented 32% of total obligations. While our floating-rate debt has been impacted by the increases in the Fed fund rate over the last 15 months, our average interest rate on total debt has not increased significantly as we have refinanced maturing fixed-rate debt at lower rates. As a result, our higher interest expense that you see in the P&L this year is due primarily to an increase in debt levels, not in higher interest rates.

Given the current expectations regarding interest rates, we expect that our average interest rate for 2006 will not increase materially. And as a reminder, we do adjust the pricing on our new full-service lease contracts as rates move and we have CPI recapture opportunities in our existing contracts.

Turning now to the next page, you’ll see that we generated strong cash flow from earnings, depreciation add-back and proceeds on the sale of used equipment. On a free cash flow measure, the Company used $348 million of cash year-to-date as compared to generating $162 million in the prior year. The year-over-year reduction in free cash flow was driven by higher levels of capital spending on vehicles, lower sales of operating property due to the sale of the former headquarters facility last year, as well as the impact of the IRS settlement in the first quarter of this year. And as a reminder on that settlement, that was $176 million of cash for the ’98 to 2000 audit and approximately a $51 million cash payment that was made in the first quarter of ’05 relating to the 2004 tax year.

Turning now to page 14, I’d like to update you on our asset management area. We continue to be pleased with the results of our used-vehicle sales operation. We sold almost 5200 used vehicles during the quarter, that’s up 20% from last year. We did plan for higher vehicle through-put this year in connection with an anticipated increase in lease replacement activity. We expanded the number of used vehicle outlets and have enhanced many of our other sales tools. And our teams continue to execute very well in this area.

The higher number of units sold, combined with good pricing contributed to strong vehicle proceeds and gains performance in the quarter. Tractor gains per unit continue to improve over the prior year, while truck gains per unit were slightly down after record proceeds per unit last year. Going forward we expect some moderation in gains per unit but we expect overall total gains to remain good and above last year’s level.

Moving to some other asset management measures; the number of new vehicles that will be coming into service with customers in the near term and have not yet started to earn revenue was up by 600 units from last year. And that really reflects the higher level of lease sales activity.

The number of no longer earning vehicles which we define as vehicles that have not earned revenue in the past 30 days was up by almost 1800 units verses prior year third quarter due primarily to higher inventory levels of used vehicles for sale. While the number of no longer earning vehicles is up slightly over the prior year, it’s down 3% verses the second quarter. As we’ve stated in the past, we target used vehicle inventory levels at the equivalent of 3 months of vehicle sales, which is approximately where we were at quarter end and you should see us stay at this higher inventory level over the next several quarters and into 2006.

Before I turn the call back over to Greg, let me cover a few items on page 16 that relate to our earnings outlook. First, we’ve completed our review of the American Jobs Creation Act of 2004 and do not expect to repatriate any foreign earnings under this act.

Second, I want to identify several items that are not included in the earnings forecast that Greg will review in a minute. As I mentioned earlier, we announced the $175 million share repurchase program and any impact of that share repurchase program was not factored into our fourth quarter earnings per share projection or our full-year leverage forecast which is included in the appendix. We will not be providing any forward projection relative to the execution of this buyback program.

As we discussed in prior calls, we anticipate adopting FAS 123R relating to the expensing of stock options on January 1 of 2006. And therefore our fourth quarter forecast does not include any impact from the expensing of options. Historically the Company has used a combination of stock options and restricted stock as part of its incentive programs. In 2006 we will shift the mix of options and restricted stock. We will be using fewer stock options in the future and using more restricted shares in the future. We currently estimate that on a pro forma basis, in 2005 options expense would have resulted in a $0.12 per share impact to earnings. And in 2006 we project that impact to be in a range of $0.08 to $0.10 per share.

Now total stock-based compensation which would include the impact of restricted stock which is currently expensed is estimated to decline from $0.15 in 2005 to a range of $0.12 to $0.14 in 2006.

Finally, we anticipate adopting new financial interpretation FIN 47 which relates to the conditional asset retirements effective December 31st, 2005. We expect that the adoption of this FIN will result in a cumulative effect charge of approximately $0.04 to $0.06 per share in the fourth quarter. This cumulative effect charge relates primarily to the future costs associated with the retirement of underground fuel storage tanks.

At this point, let me turn the call back over to Greg, and he’ll review our earnings forecast.

Thank you, Tracy. If you’ll turn to page 17; first in December last year we presented our 2005 business plan and provided a 2005 earnings-per-share forecast range of $3.20 to $3.30 for the full year. During the first quarter call we increased this forecast by $0.10 to a range of $3.30 to $3.40 per share. Following the second quarter we retained our operational forecast but reflected a $0.12 state tax benefit to arrive at a forecast of $3.42 to $3.52 per share. And it this time we’re raising our full-year forecast to a range of $3.49 to $3.54 per share. We’re also establishing a fourth quarter forecast range of $0.89 to $0.94 per share. The fourth quarter forecast reflects some costs that we are now including and anticipating related to restructuring actions that will benefit future periods.

Our focus continues to be on profitable growth in all of our business segments. In commercial rental our plan called for continued growth but at a more modest rate of increase than in the prior two years and that’s what we continue to expect going forward.

In full-service lease and maintenance we’re executing our identified action plans in the areas of sales and marketing. We’re pleased with the continued confidence we’re seeing from our customers in replacing expiring lease contracts and we are starting to see modest improvements in organic new lease sales.

In Dedicated Contract Carriage we’re pleased to continue the stronger growth rate in earnings improvement that we started to see in our second quarter results. Our efforts in refocusing this segment on the right kinds of customer relationships and in pursuing cost-management opportunities should continue to help us deliver stronger performance in this business segment going forward.

And finally in Supply Chain Solutions we’ve continued to address some challenging individual accounts and are pleased that our actions are reflected in stronger third quarter results after experiencing some softness earlier this year. We’re also pleased to continue to show solid and accelerating operating revenue growth coming from new contract sales and expansions with existing customers in this segment.

That will conclude our remarks regarding the quarter. But before I turn the call over for live questions, I’d like to address one additional matter that some of you have asked about and I know that maybe on your mind, and that is the recent hurricanes.

First of all, this has been an unprecedented year in terms of number of named storms. We’re already through the alphabet and we’re on Greek letters. The meteorologists tell us that this just happens to be the phase we’re going through. We had a number of years when things were calm, and things are just a lot more active now.

So to begin with, I’d like to recognize really the extraordinary response that Ryder employees have shown in hurricanes Katrina and Rita and now as we’re beginning to take care of the aftermath of hurricane Wilma which just came over us in south Florida as a category 3. Our employees have really gone above and beyond the call of duty in ensuring that our customers were well taken care of, both before, during and after the storms.

We’ve also done some innovations that I know a number of you have seen. For example we have provided some new customer-oriented services on the website. When fuel was very volatile and due to the gulf storm impacts and it was tough to always know if fuel was available and where it was available; we have a very capable and experienced team that had a good access to fuel. We tried to provide it to all the customers in our fueling locations that we could. But on that website we also indicated before drivers ever went to the locations, which ones had fuel and which ones didn’t. We also had a map on that website that showed them where to go to for the nearest fueling location from Ryder. I think that’s the kind of innovation and technology that are helpful in serving customers and I know a number of you have followed that along in just seeing what the situation was during that difficult period in the gulf.

Our employees have also provided a lot of significant assistance to their fellow employees and to the communities in which they work following these disasters. As I like to say, I think Ryder appropriately during times of emergency has a heart; but even more valuable we also have trucks. And we like to put those into service in supporting relief efforts, charitable organizations and just getting things moving after the aftermath of significant impacts like hurricanes.

I’m really proud – we’re all proud to work with such a fine and dedicated group of people. And now we have Wilma from two days ago which has really impacted a large area of Florida, south Florida including Miami where we’re headquartered. And our team continues to work to serve customers and perform for our shareholders. And while today, even as we speak, much of south Florida is without power and infrastructure, our Miami headquarters is currently fully operational. And we thought it important to hold this call today as scheduled.

So like our field locations, we try not to have acts of nature deter us in taking care of our customers and our shareholders. And that’s why we’re here and we’re on the call and now we’ll open it up to your questions.

Thank you, sir. [Operator Instructions] Our first question today comes from Jon Langenfeld. Sir, please state your company name.

Robert Baird; thank you and good morning.

Good morning, Jon.

Good morning, Jon.

I guess first on the Supply Chain side, you continue to show some nice top line growth there. We’ve seen a few of the contracts come out there. I assume you’re feeling pretty good about that platform?

That sounds like a question and a statement.

Yes, it does.

I think we feel very good about that platform. We’ve been at this for several years and I think as you followed our plans and our progress when we said we really tried to solidify that segment, make if profitable a couple of years ago; get the sales back on track again, and I think you are seeing that. If you’d like a little more flavor on that I can ask Tony Tegnelia who in his prior role as head of Supply Chain, now that he’s gone to Fleet Management but for last quarter he ran Supply Chain. If you’d like to add anything else Tony, feel free.

As you know John we do feel good about the growth that we’re seeing this year and also more particularly the new sales that we are signing this year that will be launched in the fourth quarter very late, but will be there also during 2006 as well. So as you know we are reliant on the acceptance of certain models from certain OEMs on the automotive side, but we see very good growth on the ACI side our consumer electronics business piece. And we think that will hold us in good stead going into 2006.

Okay, so the new growth – new contracts being signed; is that generally outside of the automotive area?

There is some in automotive but it’s also a large part of it’s in the ACI consumer electronics business as well.

Okay, good. On the FMS side Greg, can you talk about sales trends, both new sales as well as retention rates and where those are tracking relative to your plan and kind of – any momentum you may or may not have in terms of the pipeline?

Yes. And let me caution these comments first of all that we probably don’t share everything that you would probably like in the way of sales activity and retention because as you know we’re the only public reporting company in this segment. So I’ll give you some broad information. First of all I think now we’re probably pretty close to plan. I think we’ve had a little bit more run up in the latter part of this year. So I think retention has been better. That’s been a focus of ours to make sure that we get renewals on the lease contracts, both for lease and for maintenance activities. And I would say over the last several periods we have had more closed organic lease sales than we’ve had in the last several years. So I think that’s a general trend. We also have Todd Renehan in Fleet Management Solutions group who is here and he could add a few other comments generally if you’d like to also add to Jon’s question.

Yes Greg, thank you. We have had several months in a row of positive net sales throughout FMS in both leasing and in contract maintenance revenue and we’ve had some very good success on large deals that we’ve been working on for quite some time, so it is improving.

When was the last time, Greg, where you actually had positive net—a consecutive month of positive net sales?

It’s been several years because I think when we had an economic decline first of all due to the truck markets and then the general economy, that you tend to have a slow runoff of business because that’s contractual business; in the same way you tend to have a slower ramp up as leases are re-contracted and new net sales are signed up. So I think it has been several years since we’ve seen this kind of positive activity.

And is it – I mean do you feel better about the sales initiatives today than you did three months ago?

I feel better today than I did two years ago. I feel better today than I did three months ago; and I expect to feel better in the future than I do today.

Well, great; keep it going. Thanks.

Okay, our next question comes from John Barnes. Please state your company name.

BB&T Capital Markets; good morning guys.

Good morning.

Good morning.

Greg, just going along that path that Jon was just going down on the Supply Chain side; I mean could you give us an idea of just the bid pipeline there—what it looks like verse say a year ago?

Again I’ll have the same caution but I will let Tony Tegnelia speak to that in generalities without real specifics.

Yes John; our signed new business that has not been launched yet is up dramatically in the 40 almost to 50% range relative to where we were last year at this point in time. So we feel very good about the pipeline. We feel very good about the wins that we’ve had this year and also some wins that are executed and that will be launched early in the year of ’06 and also later on into ’06 as well when the volumes start to hit. As you know there is a very long lead time on some of these sales. They were worked on during ’04; negotiated during ’05, signed in ’05 and we’ll see the benefit of those in ’06.

We also have a major launch in our automotive operation as well which we worked through this year and we’ll see the benefit of that next year as well. So we’re pleased with the pipeline, pleased with the signed business that will begin next year.

Okay on that last point in terms of auto; I get a lot of calls as you can imagine when Adelpha [ph] filed about Ryder’s auto exposure and that has been a core group for you. Can you talk – this bid pipeline and these contract awards that you’ve won; are you steadily reducing your exposure to auto in terms of percentage of the total business or is it still kind of in that kind of 40% range?

It’s still in a large range and it will take awhile to diversify that portfolio just because of its size. So you can expect that there is still a lot of activity in both domestic and international non-US domestic automotive activity, but there is growth both in automotive and non-automotive.

Alright, so you’re not fearful of the auto industry. You’re still willing to do that business and there are no plans to rapidly scale that back?

We think it’s appropriate to do what is prudent. So we monitor the situation with our customers. We try to have the right relationships, contracts and agreements; and we think we try to be prudent in the business that we take on.

Okay. Greg, when you guys did your ’05 earnings outlook call last December I think there was an over-reaction to the CapEx level for this year and there was concern about when those contracts were going to come on. You guys gave some parameters in terms of how much revenue that new business would generate in ’05 and into ’06. Can you remind us of what levels are and how much of that business has now come on?

We’ll let Tracy comment on that.

Yes, at the time of the plan call I think we indicated we’d have about 200 million of capital spent on net growth opportunity for the year. Now that on a full annualized basis would generate about $75 million of annual lease revenue. But because of timing we only anticipated about a $25-26 million impact on lease revenue for 2005. Obviously it would have a full-year impact for ’06. I think as you followed us through the year we didn’t get as fast a start as we would have liked on our lease sales activity. Now you’ve heard from Greg and Todd that we’re very pleased and have seen positive net sales here in the last four months. So we may miss slightly those numbers but I think what’s really critical for ’06 and ’07 and the future years is that we build that momentum going into ’06. So a slower start to the year in terms of getting those sales on board; but those were the numbers that we had shared on the plan call.

Okay, and then do you anticipate doing the same type of call in December this year.

Well we actually announced this earlier in the year. We will be providing our ’06 business plan in conjunction with our fourth quarter call which I believe is scheduled for February 3rd. So we will not be having a separate meeting this year, but we will cover it on the fourth quarter call.

Very good. And lastly, Tracy you made the comment that the repurchase activity is going to take your debt and leverage up slightly but it will still be in your comfort range. As I’ve given this company several looks from different angles and even with the Supply Chain business you’re still largely a leasing company. And if I compare you to other leasing companies in the industry who do a lot of different asset types, the debt to cap—the debt levels seem to be approaching 300, maybe 400%. I mean so in that regard you could make the case that you guys are grossly under-capitalized for a leasing company. Is there anything out there on the horizon that makes you more comfortable with taking on additional debt? Are there growth opportunities that if you were more comfortable with taking up the debt levels that you could pursue? Or is all the growth opportunity out there easily served by your comfort range on the debt level?

Well, we agree that we are under-levered for the mix of business. We are driven largely by our leasing business but we do look at our other businesses when we determine that target. So the target that we’ve laid out 250-300% we think is appropriate for the business and gives us the right comfort around having that strong investment-grade credit rating which is of course critical to our business.

Now we’ve always said, how we get there is important; not just the target itself. And as we’ve been working on improving our margins, growing our business and now one additional element this share buyback; and I think we want to continue to make sure we have good opportunities for the organic growth opportunities that are on the horizon in all of our segments, as well as any acquisition opportunities that are out there, just as we’ve done in the last couple of years with some lease acquisitions. So we feel pretty good that we have the capacity to handle growth across our segments.

Okay, very good. Great quarter; thanks for your time.

Thank you, John.

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

Legg Mason; good morning everyone.

Good morning.

Good morning, David.

I have a question as to what you’re seeing out there in the leasing marketplace overall in terms of what the pricing environment is like with you all and the other large competitor, but mainly with the regionals; what are you seeing in terms of capacity out there, are any of the smaller regional competitors having financial problems? Can you give us some color there?

I can’t say that we’ve seen any real change in the environment. I think those who have been strong enough to survive the last number of years are in business. They tend to be capable. They probably have adequate access to capital and I wouldn’t say there has been any real shift in the environment that we’re competing in.

Okay, so there is no real need to lower your cost of capital to compete with these guys?

Not due to that; I think we have a constant effort to reduce our cost of capital because we want to have a greater differential between our return on capital and the cost of the capital; but not due to what you’re indicating in the marketplace.

Okay, great. And then last year in the fourth quarter there was kind of a real tight supply-to-demand relationship in the trucking space and that obviously helped out with people needing some surge capacities, especially going to Ryder for that. Are you seeing signs of that happening again this year?

Usually when you think about surge capacity it’s happening between now and the Christmas season and I think those firms in transportation that are more associated with the Christmas peak season, container loads coming off the coasts, the west coast inland, tend to see more of that correlation. We don’t do that drayage and we don’t have as much of a direct correlation to that kind of pre-Christmas activity. Ours tends to be a little more steady and more contractual. At the same time, if other providers are finding a big demand for deliveries and shipments including packages before Christmas that may positively impact our commercial rental. But it’s not so much that you get that dramatic impact as you would in others in the transportation segment.

Okay, and then speaking of commercial rental, on past calls you indicated that commercial rental recently has tracked up in I guess the high 80 percentile utilization. I want to know where that currently stands.

Yes, I think I reported earlier that it’s I think 78.1 if my memory is correct-

Yes.

-and that was compared to 79.4 last year.

And that’s for our US fleet, which is the largest fleet globally.

Okay, great. Well thank you very much.

You’re welcome.

Thank you.

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

Bear Stearns; good morning, guys.

Hello Ed.

Good morning, Ed.

I think the biggest question I have is the net contribution margin for leasing and rental really expanded from 11.9 to over 14% this quarter. I came in late; I was on the CSX call so if you said this I’m sorry for re-asking it. But is there anything in that that’s one-time—why all of a sudden are we seeing this spike up particularly when commercial rental volumes decelerating a bit and the leasing hasn’t picked up that much? Is there something different that’s going on?

Well there are a lot of things that contribute the bottom line and one of the things that we said is we have had a number of cost initiatives that are important. We’ve had some lower overhead. And due to some of the hurricane-caused volatility in cost in pricing for fuel, there probably was a quicker pick up in that contribution to the bottom line just because of the speed of the rise in the value of the fuel in the ground. So that may be a little bit unusual and that’s not tending to be repeatable. But those things that are repeatable are the cost initiatives and lower overheads and the leverage that we get from increased revenue across that large Fleet Management network that falls to the bottom line.

But you had those in – we’ve been seeing that gradually improve and it feels like we had a step function. Is there any way to quantify the fuel impact in the quarter on an EBIT basis?

No.

Okay, and is that in both rental and leasing or I’m guessing it’s a rental event?

It would be in both.

Okay. In terms of the used truck markets and the gains on sales, can you give your sense of what you’re seeing in terms of number of trucks you expect to sell over the next couple of quarters? And also there have been some indications that maybe the truck market is not as – it’s still strong but not as strong as it was; your thoughts on that?

Well I think first on the market we continue to be pleased with what we see in the marketplace. We’re selling I think year-to-date 20 to 22% more vehicles than last year. We expected that. We’ve been pleased with the proceeds. We have seen a little bit of an adjustment on the straight truck proceeds but we anticipated that. I think we mentioned that on a previous call. So we’re pleased with our ability to sell the volume and the proceeds. We expect our volumes to remain at these levels into and really through 2006. And that really correlates with the replacement cycle that we expect to remain strong through ’06. We’d like to sell more vehicles. Our teams are continuing to open up new outlets, to look at additional export opportunities, and obviously just to raise the productivity of our sales team. So the more trucks we can sell at good prices; that would be good for us. But we would expect to stay at these levels or higher through ’06.

So I just want to make sure I understood you; it sound like the class 8 trucks market is just as good as it’s been?

Yes; and continues to show improvement.

Okay and am I right? My memory is that as you get into ’06 you get done with selling the pre-October ’02 engines. Are you starting to sell some post-October engines and what are you seeing in that market if you’re doing that yet?

I don’t think we’ve seen a lot of volume there Ed. We tend to hold our vehicles for a long period of time, so we’re selling particularly on the class 8; we’re selling 6-year-old vehicles. So we really haven’t seen too much-

Am I wrong? I don’t know why I thought I had spoke with you or somebody earlier and that during ’06 we’re going to get to the point where we’re in some of those ’02 models that—I guess it’s ‘02’s and ‘03’s that were built before October ’02?

Yes, I don’t think we have large numbers of those at all.

Okay, and then one last shot on this net contribution margin; Greg, when I look forward is this a sustainable margin then to most of it? It feels like you feel like it is.

Well, we’ve had an improving net contribution margin in this segment of the Company over the last several years. And it’s moved up many hundred basis points from where it was, probably 600 basis points from a couple of years ago. So we think that being able to continue to ratchet up and not move back is really the target and that’s why we talk about continuing cost initiatives to continue to utilize technology, to utilize a lot of areas that really improve the returns in this business segment. And the fact is that this is a large infrastructure network that had been reducing over a number of years. And we said that when we got the incremental revenue to go on that fixed network it was going to show up in the bottom line. And I think that’s what we said our plan was, and that’s what’s happening.

But when I look at your guidance for fourth quarter I mean the implication is kind of a flat margin which had a big up-tick in leasing and rental last year. I mean $0.92 gets you a flat margin which is the mid-range. So should I think of that – you might be being conservative there or how should I look at that?

Well there are two areas of impact that literally could add about an extra $0.04 per share. We’re going to have in this quarter about another $0.015 to $0.02 EPS impact from hurricanes, including this most current one. And we also said we’re going do some other restructuring to take some other costs down in the business so we get some future period benefits. So in total that’s about $0.04 per share.

Okay, that’s very helpful. Thanks guys for the time.

You’re welcome.

Our next question comes from Brannon Cook. Please state your company name.

JP Morgan. Good morning.

Good morning.

Good morning.

I had a question on the leasing demand environment. It looks like the revenue has accelerated. As you look through the third quarter did things accelerate taking out seasonality as we moved into September and maybe October?

I don’t think that the actual revenue booked has accelerated that much in leasing. I think the sales have been strong, which we mentioned earlier. We’ve had a benefit of exchange rate from the UK and Canada which helps that top line. We’ve also had an increase in maintenance in contract-related maintenance and growth about 6%. So when you look at those two categories you tend to see more growth rate, but I wouldn’t categorize it yet as really evidencing a much faster lease sales rate or revenue rate, but that’s what we anticipate if we continue to close the sales at the rate we’re closing them.

Okay, and then a question on automotive; it sounds like you’re generally comfortable where you are and you’re talking about being prudent with that business. Could you give a little more color on what that entails to the extent are you perhaps changing some receivable terms or pruning some business that you might be concerned about or is it just being conservative about the new business that you bring on?

I think it’s terms; it’s terms and conditions, it’s making sure that we know that what we agreed to and what we bill to will be collected, and that’s a very important part. The receivables – getting the money in the cash drawer after the service is rendered still has to be the objective. And that’s kind of the way we look at it. I’ll let Tony Tegnelia from that segment make another comment if necessary.

Yes, I would just add that from a strategic point of view on directing the sales and marketing for us, we are balancing out amongst the different OEMs. So it isn’t just necessarily the industry particularly, it’s how you balance your exposure to the different automotive assemblers and also the different tier 1 and 2 suppliers as well. And even within specific OEMs it depends upon which facilities and which plant you have and what the models are coming out there. But a large part of our balancing of the risk posture in automotive really is directed toward balancing the revenue from different OEMs.

And the other thing that I’d add there is that as we balance all of what we’ve already mentioned, we also want to make sure that we get the right returns and the right profit margin on the business we take on.

Alright, that’s helpful; thank you.

You’re welcome.

Our next question comes from David Campbell. Please state your company name.

Thompson Davis & Company. Good afternoon everyone.

Hello.

Hi David.

I just wanted to ask a few questions. First of all on the full—the FMS business the Fleet Management Solutions business you mentioned partially offset by hurricane-related charges which you just said would approximate $0.02 in the fourth quarter. I guess that’s an after-tax cost. What would your estimate be for the third quarter that had an impact on the profits there?

It’s about the same. It was about a million and a half; so $0.015 to $0.02 per share in the third quarter, and actually we had about a half a penny last year from last year’s hurricane. So there was probably a net difference of $0.01 to $.015 impacting us in this third quarter.

And that’s after tax?

Yes after-tax EPS.

Right. And was that in lost revenues or in increased expenses or both?

Both; we have a number of facilities in the gulf coast impacted by Katrina and Rita. I think right now we’ve got about seven facilities that we don’t expect to be up and running for the near term. As you might imagine in New Orleans, a lot of customers were impacted and those were customers that we had lease and maintenance business which served that local market, and there’s nothing going on right now in that effort. So I would say there is a revenue impact, there’s also obviously a cost impact when you have that many vehicles that are damaged and facilities that are impacted. So the net impact is what I gave you from all of that; but we’ve absorbed it.

Right; somewhat offset obviously by the fuel gains from the fuel prices. What is the anticipation in the fourth quarter with regard to full-service lease revenues? Will that rate of increase that was better in the third quarter than it was in the second quarter; will that again do better in the fourth than in the third?

David, the trend for organic lease revenue has improved. It’s been modest improvement but it’s important improvement and it’s correlated to the four months of positive net sales and lease. So we would hope that that would continue to show improvement as those sales come on board and obviously the goal is to just keep having those positive months of sales activity so that as we get into ’06 that you see a consistent ramp up in lease revenue. But we would certainly hope and expect to see continued, albeit modest improvement in that lease revenue line in the fourth quarter.

Thank you and switching to Supply Chain Solutions you mentioned the Brazil problem being resolved. Could you elaborate a little bit on that? What was the problem and how was it resolved? I assume it’s a matter of a customer that lost money for you.

Yes, it was a contractual issue and normally we’ve got some adjusters for foreign exchange and fuel. This one perhaps wasn’t as locked down as we would have liked in getting those adjustments as quickly as we would like. But that has been resolved and that’s why we think going forward that’s been taken care of.

So you still have the customer? At least you didn’t—

Oh, yes.

He’s just paying more.

He’s paying us the fair amount for the increases. As you know in Brazil you get foreign exchange impact and you get some significant fuel price impacts, and we need to be reimbursed for that.

And I would say in addition to some of those pricing issues, we have been working jointly with the customer around initiatives to just take cost out of the design in the system. So that has been part of the turn around as well. It’s not just been price increases.

Okay, thanks.

You’re welcome.

The retirement of the storage tanks cost in the fourth quarter; is there going to be operating expenses or-?

Well, there will be—that’s a one-time cumulative effect charge for all of our tanks that are in the ground. We have over probably 750 tanks in the ground. And that’s the present value of the future costs. Now there will be an ongoing operating cost but that will be less than a million dollars a year, so that’s something that we’ll just absorb.

But this one-time charge; is that going to be in operating expenses?

No, it’s separated out whenever there’s an accounting change like this; it’s separated out as a separate line item as a cumulative effect of accounting principle change.

A separate line item; that’s what I wanted to know. And so that cost—did you say how much that cost was? I can’t remember.

It’s a range—we’re finalizing that $0.04 to $0.06. And again that represents the present value of these costs which we expect to incur 10-20-30-40 years from now.

And that’s after tax per share?

The share numbers are all after tax.

Okay. Sorry, I thought I had one more question, and I’ll come back if I do. Thank you very much.

You’re welcome.

Thank you, David.

Our next question comes from Lee Markowitz [ph]; please state your company name.

Pilot Advisors.

Hello.

Hi Lee.

Hi, how are you? As shareholders we would think it was a great move by you and the board to initiate the share repurchase program and we just wanted to thank you for that. And I just have one question. You have a higher level of inventory of trucks and you said that sales are picking up. Do you anticipate that the higher level of sales will lead to lower levels of inventory or where do you sort of see your inventory of trucks going?

We- I think we try to keep about a 3-month inventory and I think that’s about where we are now and Tracy, do you want to put it further-?

It is and as we add outlets obviously it’s important to have inventory available. Having said that though, inventory has a cost; in terms of our near-term outlook, the rest of this year and I think going through ’06 we would expect inventories to stay at these levels. We’re going to have a lot of through-put going through. To the extent we can exceed our expectations currently in terms of used-vehicle sales; you might see some decline in inventory. But I would expect to stay around this range through ’06.

Okay as you start to sell through and sign more contracts and you start to move those levels of inventory off, then you’ll probably just buy more trucks to keep that 3-month level of inventory?

No. There are times in a cycle; we’re in a very heavy lease replacement cycle so as we bring new trucks on we obviously have the used trucks to either re-deploy elsewhere or move to the used-trucks centers. There are times when we actually scramble for more inventory to make sure we have the full-product spectrum for our used-truck people to have. But we don’t expect to be in that position through the end of the ’06; but it can move in cycles.

Okay. Thanks again for that share repurchase program.

You’re welcome.

Sure.

Our next question comes from Connor McLaughlin. Please state your company name.

Hi, from JLF Asset Management; how are you?

Fine, thanks.

Fine, thanks.

Great. I’m actually just in need of a story. This is the first time I’ve really taken a close look and just a little housekeeping; on the balance sheet you’re saying that on the current liabilities you said the current portion of long-term that’s included there—can you just give me how much is the current portion of long-term debt in that number?

The current portion of long-term debt in our current liabilities is about $330 million.

$330 million? Great, thanks very much guys.

Our next question comes from Jon Langenfeld. Please state your company name.

Robert W. Baird. A couple of follow ups; what was the pension expense in the quarter?

I think we’re going to have to try to look it up because we have our controller here to look up the pension expense—if we can find it quickly, we’ll answer it now otherwise we’ll have to get back to you – I think we found it.

For the quarter Jon, our pension expense globally was $15 million.

Okay and then assume, what 11 of that is FMS?

Probably the majority of it is FMS, probably 12 million.

Okay and then on the fuel side, is the benefit of that done now or does that carry into the fourth quarter? I’m just trying to understand how the P&L part of that works.

Sure; it’s important that – we didn’t change our pricing mechanisms to our customers. And what the up tick we saw from a fuel standpoint really related to really what was in the ground in our inventories and we saw as Greg said, unprecedented single-day moves in fuel pricing in terms of when we went out to buy new fuel compared to the cost of the fuel in the ground. We’ve always had that timing issue; but it’s some days it goes up and some days it goes down and it tends to offset each other. We don’t expect—we certainly don’t see a spike in fuel like that in the horizon and in fact fuel prices have been coming down. We think it’s a good thing that fuel prices are coming down because that’s good for our customers. So you kind of give some of that back when fuel pricing goes down. It really is a timing issue and this is the first time certainly in my 20 years that I can recall that it’s ever even been an issue in the quarter.

Do you recognize expense based on the transaction and the cost you bought the fuel at or how does the expense-?

Well we obviously expense it based on our cost of the fuel and we have to go through the inventory I guess FIFO methodology on fuel cost. But for our pricing mechanisms they did not change to customers. And that’s based on kind of daily market costs in their local markets. And it was just – we’ve just never seen the markets and the pricing react in certain markets as they did in the month of September and we hope we never do again.

Right, as do I; and I know it’s a tough one to estimate but kind of put some numbers together here—it looks like it was about a $0.02 or $0.03 benefit in the quarter. Would that be a ballpark estimate?

You know Jon we’re not breaking that out.

Okay and then over on the sales side Greg; we talked about in the past just in terms of longer-term, not necessarily an ’06 number but just in a good environment where you’d be happy with the growth rate on that side of the business. And does it still seem to you like this business should be able to support 5 percent or better organic revenue growth?

I think that the Fleet Management Solution business segment should be able to sustain a growth rate greater than GDP growth. That is because I think that the outsourced services that we can provide to the marketplace are of such value in a period of uncertainty and difficulty as you go through changes in technology and engines and everything else; that as long as we got the right value package for customers we have the right cost model, we continue to improve our efficiency, productivity and initiatives, that we ought to be able to sustain a growth that is better than you would normally expect in a mature environment and above GDP growth. And as I said before I think that that’s incumbent on us to get the model right, our costs right and our sales and marketing right; and that’s what we’re doing.

And lastly, maybe along those same lines; as you look at the new sales growth that you have can you qualitatively just talk to us about how much of that is new outsourcing a customer that hasn’t outsourced the Fleet operation before verses someone who has done it and are either expanding or switching from another provider?

That’s coming from all parts. I will ask Todd Renehan who runs sales and marketing Fleet Management at a high level to give you a sense of that.

We typically have about 50% or more of our business come from the ownership market, people who have not outsourced in the past and are getting their maintenance some other way. And then some of the growth is from existing customers who add vehicles and then some we take from our competitors. But it’s about 50% brand new, never outsourced before.

And would that be relative to a year ago, where would that 50% have been?

It is better than it has been a year ago through some concerted efforts on our part to try to penetrate that ownership market.

Okay, great thanks for the color.

Alright, we’re about 10 minutes over our time. We’ve had a long list of questions from many participants which we thank you for. If there are any questions left over now that we’re about 10 minutes over our time, you can get those calls to Investor Relations at Bob Brunn. And for now we’ll sign off officially and thank you for your participation. And we’ll talk to you all soon. Thank you and be safe.