萊德系統 (R) 2006 Q3 法說會逐字稿

Good morning and welcome to Ryder Systems third quarter 2006 earnings release conference call.

Today's call is being recorded. I would like to introduce Mr. Bob Brunn, Vice President of Investor Relations. Sir, you may begin.

Thanks very much, good morning, and welcome to Ryder's third quarter, 2006 earnings conference call. We'd 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 uncertainties and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive, market, political and regulatory factors. More detailed information about these factors is contained in this morning's 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 Mark Jamieson, Executive Vice President and Chief Financial Officer. Additionally, Bobby Griffin, President of International Operations, Vicki O'Meara, President of U.S. Supply Chain Solutions and Tony Tegnelia, President of U.S. Fleet Management Solutions, are available to answer any questions you might have at the conclusion of our presentation. With that, let me turn it over to Greg.

Thanks, Bob and good morning everyone.

This morning we'll review our third quarter 2006 results, update you on our asset management area, review our outlook for 2006 and as always, open it up for questions at the end. For those of you following on the PowerPoint we'll begin on page 4.

Reported net earnings per diluted share were $1.06 for the third quarter, up 8% as compared to $0.98 in the prior year period. Earnings in the third quarter this year, included a $0.06 cent charge related to a pension accounting matter that was identified during the quarter. On a comparable basis excluding this item, net earnings per diluted share were $1.12 in the third quarter, 2006, up by 14% from $0.98 in the third quarter last year.

Total revenue for the company was up 9% in the quarter, operating revenue which excludes fuel and subcontracted transportation was up 7%, with all business segments contributing to organic operating revenue growth in the quarter. Fleet Management Solutions posted total revenue growth of 5%, while operating revenue was up 3% versus the prior year. Within FMS, full service lease was up 4% with growth in all geographic markets. This quarter's 4% growth rate in lease continues the quarterly sequential improvement in lease revenue growth that we have seen over the past few quarters. Contract maintenance revenue is up 10%, reflecting our focus on growing this long term contractual business with customers. In commercial rental, revenue was down 1% from the prior year, changes in our fleet mix and modestly higher pricing helped offset lower utilization levels it during the quarter.

Net before tax earnings in fleet management were up 1%, fleet management earnings as a percent of operating revenue were down 30 basis points to 13.8%. From an earnings standpoint, fleet management's results benefited from growth and improved operating margins in both full service lease and contract maintenance. These earnings improvements were partially offset by higher marketing expenses, sales force and other compensation related costs in North America. Many of these costs will support the future growth of the contractual will support the future growth of the contractual leasing and maintenance businesses.

On page 5, turning to the supply chain solutions segment, total revenue is up 19% for the quarter, which includes the impact of higher managed subcontractor transportation. Operating revenue is up 18%, reflecting the impact of stronger volumes with existing accounts, as well as new and expanded business. Third quarter net before tax earnings and supply chain were up 54% versus the prior year. Net before tax earnings as a percent of operating revenue were up 130 basis points to 5.5% and were significantly above our full year planned margin improvement. These earnings improvements stemmed primarily from higher volume levels as well as new and expanded customer contracts.

In dedicated contract carriage, both total and operating revenues were up by 5% for the quarter, due to the impact of new contract sales and customer expansions as well as higher fuel costs passed through to customers. Net before tax earnings and DCC were up by 27%, and as a percent to operating revenue, were up by 150 basis points to 8.3%. Earnings improved in the quarter due to new and expanded customer contracts as well as lower safety related costs.

Page 6 highlights some key financial statistics for the third quarter. As I've already mentioned, operating revenue was up 7% as compared to last year with growth coming in all business segments. On that 7% operating revenue growth, comparable earnings per share, excluding the pension charge were up 14% to $1.12, reflecting good earnings leverage on operating revenue growth. During the third quarter, and subsequent to providing our last EPS forecast, we identified a one-time noncash charge related to prior service costs for retiree pension benefit improvements that were made in 1995 and 2000 that had not been amortized over the appropriate periods. The amounts involved were not material to any prior period financial statements. However, a cumulative EPS correction of $0.06 was booked for reduced earnings this quarter. Including the pension charge, EPS this quarter totalled 1.06. The average number of shares outstanding decreased by 2.8 million shares from the third quarter 2005 to 61.7 million shares this quarter, due to our share repurchase activity during the prior 12-month period. During the third quarter, we purchased 1.5 million shares under our current 2 million share repurchase program at an average price per share of $50.40. The number of actual shares outstanding before dilution at the end of the third quarter was 60.7 million shares. Our third quarter tax rate was 39.2%. And for the remainder of 2006, we expect the tax rate to remain unchanged.

On page 7, you'll see the key financial statistics for the year-to-date period. Operating revenue was up 6% year-to-date, with all business segments contributing to revenue growth. Reported earnings per share were $2.97 versus $2.60 in 2005. And excluding previously disclosed tax benefits in the first half of each year, and the pension charge this quarter, comparable year-to-date earnings per share were $2.91 cents. This represents an improvement of $0.43 or 17% from $2.48 last year. Our adjusted return on capital improved from 7.7% last year, to 8% this year.

Now turn to page 8 to discuss our third quarter results for the business segment. Total revenue for the quarter was up 9% for the prior year with operating revenue up 7%. In Fleet Management Solutions, operating revenue was up 3%, driven by full service lease and maintenance revenue growth. Higher fuel costs from fuel sold to customers also contributed to total FMS revenue growth of 5%. Fleet Management Solutions earnings were up by over $1 million or 1%. The increase was due primarily to improvements in our North American operating margins for the lease and contract maintenance product lines. These improvements were partially offset by higher sales force and marketing costs, and increased North American compensation related costs including options expensing. FMS margin improvement was also partially offset by higher interest costs due to planned higher debt levels, supporting growth of our lease fleet as well as higher debt levels due to our share repurchase activity.

U.S. commercial rental utilization in the quarter was 73.2%, down from 78.1% in the third quarter 2005. During the third quarter, we saw an expansion in the number of geographic markets, where volumes did not increase to their typical seasonal levels. Due to these market conditions, we accelerated the outservicing of some of the older rental vehicles during the second half of this quarter. As a result, our U.S. commercial fleet was held flat with the prior year's level and below our original business plan.

In supply chain solutions, total revenue was up 19% in the quarter, and operating revenue, which excludes subcontractor transportation was up 18% due to improved customer volume levels and new sales activity. This growth came in all reported U.S. customer industry segments and in our international supply chain business. SCS net before tax earnings were up $5.8 million dollars or 54% for the quarter due largely to these higher revenue levels.

In dedicated contract carriage, revenue was up 5% due to the impact of new and expanded customer contracts as well as higher fuel costs passed through to customers. Existing subcontracted transportation and fuel costs excluding the subcontracted transportation and fuel costs, the revenue growth was 5% in this segment reflecting stronger sales activity. Over the next few quarters, we expect some moderation in the growth rate of dedicated. However, as we continue to focus on improving dedicated sales results, this segment will continue to contribute to our overall performance. DCC's net before tax earnings improved by $2.5 million, or 27% to $11.7 million dollars due to our new customer contracts.

Total central support services costs were unchanged from the prior year. Unallocated central support service costs not charged to the business segments were up by 8% or $700,000 in the quarter. This increase reflects higher share based and incentive compensation.

Earnings before income taxes improved to $107.4 million from the quarter from $105.5 million last year, quarterly net after tax earnings were $65.3 million dollars as compared to $63.3 million in the prior year. Comparable net earnings excluding the pension charge were $68.8 million as compared to $63.3 million in the prior year up $5.5 million dollars or 9%.

Page 9 highlights our year-to-date results by business segment, and in the interest of time, I won't review all of these results in full detail. But comparable year-to-date net earnings, excluding the tax changes and pension charge were $179.9 million as compared to $160.5 million in the prior year, up $19.4 million or 12%.

I'll turn this call over to Mark at this point. He'll cover a number of financial items, bringing with capital expenditures.

Thanks, Greg. Turning to page 10, year-to-date gross capital expenditures before acquisitions totalled a bit under $1.3 billion, up by $116 million from the prior year. Increased capital expenditures were driven by higher spending on long term, contractual lease vehicles of $177 million. As we've discussed for some time now, 2006 is a heavier than normal year in terms of replacement spending on vehicles for expiring lease contracts. We continue to see strong levels of customer confidence in renewing these long-term lease contract that are expiring this year. We're also seeing fleet additions and new sales growth with both existing and new lease customers and continue to be on track with a significantly increased level of lease sales activity we identified last quarter. This higher spending and lease was partially offset by reduction and commercial rental vehicle spending at 55 million. On a full-year basis we expect rental spending to be below 2005 levels and modestly below our 2006 business plan. We realized proceeds from sales of mostly revenue earning equipment of $257 million, up by $5 million from last year. Deducting sales proceeds from gross capital spending, our net capital expenditures were just over $1 billion up by $111 million from last year.

Turning to the next page, you'll see that we generated cash from operating activities of 612 million on a year-to-date basis, primarily through our earnings and the deappreciation add-back. Cash from operations improved $141 million from the prior year to date. This improvement resulted from our increased earnings and the fact that last year's number included a $176 million payment to the IRS related to the resolution of the 1988 through 2000 tax audit. Including the impact of our used vehicle sales activity and other items, we generated $922 million of total cash year-to-date as compared to $773 million last year. This strong cash generation is important to the business as it supports our future expected growth of assets under management. Higher investment and revenue earning equipment under long-term contracts resulted in increased capital expenditures of $66 million. Including our capital spending, the company's $254 million of free cashflow as compared to using $348 million in the prior year-to-date period.

On page 12, you can see total debt has increased as compared to the prior year end. The increased debt level is largely due to spending on contractual vehicles as well as our share repurchase activity in prior quarters. Balance sheet debt is up $447 million over year-end 2005 and is up as a percent equity from 143% at year-end to 160% at the end of the third quarter. Ryder's total obligations of $2.7 billion are up by $422 million as compared to the prior year end. Total obligations as a percent-to-equity at the end of the quarter was 166%, up from 151% at the end of the 2005. Our equity balance at the end of the third quarter is $1.6 billion, up by $118 million versus the end of 2005, reflecting our net earnings offset by share repurchases.

At this point I'll hand the call back over to Greg to provide an asset management update and outline our 2006 forecast.

Thank you, again, Mark.

On page 14, I'll give you the update on the asset management area. We're pleased with the results of our used vehicle sales operation, where we sold almost 5,000 used vehicles during the quarter. The number of units sold through our retail used vehicle sales centers was down modestly by 2% from the prior year. Retail sales prices for both used tractors and trucks are generally at good levels. Retail tractor proceeds were up 7% from the prior year, reflecting solid Market demand for these units. Retail truck prices were down 4% reflecting a somewhat softer pricing environment and the fact that the trucks we sold this year were older than those sold last year. We expect these trends for both used tractor and truck prices to continue in the near term.

The number of vehicle months no longer earning revenue is down by over 1500 units or 21% versus the prior year's quarter due mainly to a significant reduction in our used vehicle inventory. Our used vehicle inventories are currently in very good shape and close to our targeted levels. Over the next few quarters we expect an increase in our used vehicle inventories as we move a sizable number of units that are coming offlease and out of the rental fleet into the used vehicle sales centers. Our U.S. commercial rental fleet size in the third quarter was flat with the prior year. As I mentioned earlier, the number of geographies that did not experience typical seasonal business volume increases expanded this quarter. As a result, we brought our rental fleet level down by approximately 3% below our initial business plan. At the present time, we expect to keep our rental fleet size flat during the fourth quarter and we're continuing to monitor market conditions closely and also implementing a number of initiatives to drive higher levels of activity in the rental fleet.

And page 16 for our outlook. Our prior year 2006 EPS forecast excluding the impact of the tax changes and pension charge was a range of $3.89 to $3.99 per share. We're now increasing our full-year forecast by $0.02 cents to $0.07 cents per share to a range of $3.96 to $4.01 per share, once again excluding these items. Our increased forecast represents comparable EPS growth of 16-18% versus earnings from continuing operations in 2005 of $3.41 per share. On a GAAP basis, including the $11 cent tax benefits, and the $0.06 pension charge, our 2006 forecast now calls for $4.01 to $4.06 per share. We are also reaffirming our fourth quarter forecast of $1.05 to $1.10 per share.

Overall, we're pleased with the results we realized in many areas of the business during the third quarter. Most importantly, we're improving our customer retention rates, contract expansions and new business wins with high quality customers in all of our contractual businesses. This long term contractual revenue growth is the key to driving the long-term profitability improvements that we are targeting for the company. We'll continue to work on addressing some of the near term costs associated with this contractual growth, and in the rental area, will continue to make the appropriate tactical decisions based on developing market conditions, including continuing to reduce the size of the rental fleet and implementing a number of initiatives to drive higher levels of customer activity in this product.

That concludes our prepared remarks for this morning. So at this time, I'd like to turn it over to the operator, who will open up the call for any questions.

Alex Brand you may ask your question.

Hi., this is George Pickle for Alex Brand.

Greg, in the FMS segment we know when you sign the lease, the customer is basically locked in for the term. But if there happens to be a slowdown in the economy, is there anywhere within the FMS that will kind of feel the weakness?

The call broke up a little bit at the end.

But I think your last question was, is there anywhere in FMS in spite of those contract where is we see some weakness? You're talking about FMS overall?

FMS overall.

I guess potentially, if you really had a significant downturn, then one potential place would be in rental activity. You have to consider that would the slack that's usually taken up by rental be an issue? I mean, that's a possibility.

We've also, I think, established in those circumstances, in our renewed business model over the last number of years, significant more ability and capability to utilize equipment in other ways and to move equipment and do other applications so that you minimize or mitigate such an impact. I think if you really had a severe downturn, then you also measure, you know, how many miles are actually being driven. Because even in the leases, you do get build, customers get billed by us for their actual miles in addition to the fixed rate lease.

So, you know, there's not total immunity. We think we have some cushions compared to those organizations that engage in full tactical activity and daily activity that requires decisions to be made. But for the most part, in FMS and other parts of the business, it is largely contractual, so you do have a good deal of protection compared to the norm.

Great.

I'm kind of sticking with the same and going to gain on used vehicle sales. Can you give us an idea of the vehicles for sale or of the vehicles that will be for sale next year, how many are class 8 trucks?

I'll ask Tony Tegnelia who heads up that segment, who's got that level of detail. I'm not sure if he has it, but he'd be closer to it, and I'll turn it over to him and maybe give you some idea.

As Greg had mentioned earlier in the call, we do have a large number of leases terming out this year, and our retention rate has been very very high, but those units terming out, the tractors particularly, class 8 vehicles, will be going into our used vehicle network.

Our capital expenditures for full service lease in the fourth quarter because of replacements and also because of the significant new sales that we've had this year for growth, will be double in the fourth quarter of '06 that it is in '05, and so the vehicles coming offterm will be going into our used vehicle network of about 51 locations. Well see an increase in the class 8's of probably about 1,000 or so, 1,200 or so more coming into the used vehicle network as a result of that. And we're very pleased with that, because we find that the proceeds on the tractors going into the '07 technology is held very firm, it's actually up, we feel that those proceeds will continue to remain very firm and up, so we're pleased that those vehicles will be going into the used vehicle network going into next year.

Great. Thank you.

Moving on to supply chain, I know you provided segment breakdown which is very nice, is there anyway you could give us historical data, at least for Q1 and Q2 on segment breakdowns? Specifically, I guess the auto and industrial.

We do provide in the appendix of the presentation, a breakdown of the operating revenue, by those different segments in the U.S., and separately by international. We don't carry earnings to the sub segment level, just to the whole segment level. If you need the historical on the second or first quarter of previous quarters, we could get that.

Great. Thank you. Let's see. That was it.

Thank you so much for your time.

You're welcome.

John Langenfeld, you may ask your question and please state your company name.

Actually, this is Mike King filling in for John Langenfeld, we're with Robert W. Baird.

Just a quick question on the sales and the dragging that was on the FMS side. Could you talk a little bit about the commissions there? And then as far as how long you feel that's going to be a potential drag and when that would anniversary?

I didn't get all of that question, I know that Tony was probably squinting to hear that as well. Maybe the phone connection wasn't real good. Could you repeat that question for me, please.

Absolutely. Can you hear me better now?

So far.

Just a question on the -- what you mentioned as far as the head wind on the FMS side, from the increased sales activity and the commissions there? I just wanted to know, get a little more color there as well. How long do you feel that would be a drag on the earnings side of things there?

I'll ask Tony to cover that as head of FMS in the U.S.

Okay. Our net sales we're projecting this year will be several fold what the sales were last year. So we're very pleased with our new sales, the growth in the new sales has not been at the expense of margin or at the EDA. Our EDA is up year over year with those net sales as well. We do expense 100% of the commission expense paid to the sales force at the time of the vehicle does go into service. So all of our commission expense is very front-end loaded relative to the 5, 5.5, 6 year life of the lease that we are writing.

Now, in '06 in contrast to '05, where the rate of growth was dramatically up, you know, then the impact on the leverage for the FMS P&L is somewhat dampened by that, and you saw that in the third quarter, Now as you get into more normal used growth rates in '07 compared to '06 and '08 compared to '07, we think that the minimizing factor relative to the leverage on the FMS P&L will be neutralized. You good see the impact of the interest expense eroding a bit of the leverage that does exist on the FMS P&L. That will relatively not go that path as we go on out into the future with more normalized relative growth rates.

Okay. [ Static on the line ]

We didn't get any of that last communication. So if you're on a cell phone, I'll have to ask you to probably redial but we'll have to cut that and go to the next call, because all we got was static on that last communication. Sorry.

David Rush, you may ask your question and state your company name.

Good morning, Stifel Nicolaus.

Good morning.

First could you just remind us, Greg, the average contract length in FMS, SCS and DCC. They're all contractual businesses for the most part. I know FMS is around 5 years, but what are the other ones?

We have a range in each of them. So I'll ask Tony to cover his range in FMS and Vicki O'Meara in U.S. Supply Chain to cover her range of contracts in DCC and supply chain.

In our FMS business, it's typically 5 to 6 years with a full service lease.

In supply chain and dedicated both the range is roughly 3 to 5 years on average.

Okay. And Greg, can you talk about the asset management a little bit.

On page 28 of the slide presentation, you go over redeployments, extensions, early terminations, early replacements, and just trying to get a sense for how you think we should be viewing these core trends, are there any that are more important to look at than others. Any that the management team is more focussed on than others. Seems as the redeployments go down, if they go down as early terminations go down, extensions could be good, it could be bad. Just trying to get a sense for how you view it. How you think we should be looking at it?

For people that don't have the page right in front of them. It's on the appendix on page 28.

Early, we're measuring year-to-date 2001 through year-to-date 2006. In the category of early terminations where the client doesn't need the equipment any longer, and, therefore, are turning it in. They usually have a payment to make when that happens, but nevertheless, that equipment is no longer needed, in 2001, that number was at a high of 5400 units. And on an equivalent year-to-date basis it's now down to 2800. I think that's a good sign in terms of many things, including health of the economy, and obviously, the utilization of that equipment. So where you see that decline, that's a good indicator of health, generally. Both for our business, and for the economy.

In redeployments and extensions, they were higher. Redeployments were in a range of 2001, 2002 of 3900 to 4400. Now they're down to about 2800. And extensions were at a high of 3,950 in 2001 and now they're down to about 3,000. We think that you do get more redeployments and extensions when we had a period of a difficult economic times and that was more the case in 2001 and 2002. We both encouraged it, and it was good for customers because they were going through tough economic recessionary periods, and they got better value with used equipment and we got the value of not having that equipment sit along the fence being unused. So you've seen that decline over the years as the economy strengthened.

We do think that there are valid reasons to redeploy into other uses and for extensions because sometimes for a period of time that makes economic sense for a customer. So that number shouldn't constantly decline or go flat, but I think, you know, where you have a moderate level now is just fine. And Tony, if you wanted to add anything to that.

Just a few points to that. All of these activities inter-relate to the total P&L for SMS. For example, the -- as extensions go up, and we did have the very focussed effort on extensions this year. There are fewer opportunities, for units to be redeployed because they were extended. Also, you'll notice that as early terminations, actually went down. Which is a very good thing, because we're working very hard and very focussed on retaining business, that actually impacted our gains in the third quarter, because typically when somebody early terms on us as Greg had mentioned, they'll buy out the fleet and then will generate a gain on the buyout of that fleet. So we're very pleased with our effort to retain business at a much higher rate and reduce those early terms, but oddly enough, it had a negative impact on gains in the third quarter year-over-year, but we always try to are redeploy our logistics operations is a great avenue for redeployment for us. We do try to extend because the revenue stream continues without any capital expenditures.

This may be a question for Mark on the new pension legislation, regarding pension plans that's going to take effect at the end of the year regarding status being placed on balance sheets. Looking back at the K, it looks like you may have roughly a $250 million charge to equity at the end of the year. Could you just comment on what's going on there?

Yes, that will be the key thing for us will be no impact on cash or operations or EPS. It will be a charge to equity.

So that will help you guys get toward your leverage targets pretty easily?

Yeah, that will be -- we've already had -- we'll have a charge of $50 million to equity in the fourth quarter. Some of that's been accounted for already.

Okay.

You -- is that okay?

That's fine. Thank you very much.

Great.

Adam Thalhimer you may ask your question and state your company name.

Thank you. It is BB & T Capital Markets.

First question here, Greg, I think I heard you say you expect some moderation in DCC top line growth? But I didn't hear an explanation for that. What's the thinking there.

Oh, in DCC, yes, we expected some moderation in DCC growth in the coming quarters. Just from what we know of activity in the pipeline and activity of customers in general, and what contracts we have. We have a little good look into the couple of quarters ahead.

Vicki, if you want to add anything further to that, I'll turn it over to you.

Just a couple points.

The news recently about the softness in the truckload capacity market could also impact our near term dedicated top line growth in that some of the truckload carriers are also DCC service providers, and they may take some extreme actions to utilize their assets and put them into dedicated. So we haven't seen this yet, but it's possible if that freight volume continues to decline, we could see an impact coming externally in the sales. We're protected, of course, from the freight volume changes in our long-term contracts in dedicated and actually in our transportation management business, we see some upside when there's a softness in truckload capacity. But that's another possible factor.

Okay. And then also, you talk about the rental fleet, and you talked about some initiatives that you have in place to improve the top line results at commercial rental. Could you also elaborate on those, please?

Yeah, I know a number of areas because I usually stay pretty close to the segment and I'll let Tony comment as well. But, you know, one thing that we're not trying to do is do a lot of discounted pricing. So we want to make sure we do a better job of marketing, we're doing a better job of incentives, we're doing a better job of market coverage. We're doing a better job of redeployment of equipment into areas that are hotter than are colder. So, I think in general, we're trying to take every appropriate approach that we can to get the improved utilization without harming the revenue per unit or the revenue per day. And I'll turn it over to Tony if there's anything else you want to add.

Yes. Just a couple of points.

First what we do, we redeploy vehicles optimally to the stronger markets, because we do not want to participate in anything relative to weakening price. We also have a much more focussed effort on new national accounts that we've been working on very hard during the year. And in the fourth quarter, our objective is to stay very focussed also on the seasonal parcel business which really spikes up in the fourth quarter. So those initiatives are very important.

And we also have a focussed effort as well working with our lease customers as you know, over 50% of our rental business does relate to our lease business, and so we're very focussed on gaining more rentals from our lease customers, national accounts, and also redeploys to the strong market areas, but the fourth quarter parcel business is very strong area for us in the 4 th quarter.

Thanks for the extra color on that.

On the full service lease, the growth rate continues to accelerate there, you had great results there in the quarter, particularly versus what we were looking for. I mean, what's driven that, is it the sales force improvements and the investments you've made there, better result in the UK?

I would say that there have been positive results in the UK, Canada and the U.S., all geographies have shown better performance. The biggest bulk of the activities, the biggest bulk of the revenues in the U.S., and what I would attribute there is that this has been an issue for us of improving relentless tactical execution over the last several years. We have worked very hard in improving sales management, sales focus, sales accountability, performance which leads to we think better customer retention, better new customer selling -- I think all of those are just the fundamentals blocking and tackling that support a solid operation. So we work on our operation to make sure that we're meeting customer expectations, that they're getting the things done with the equipment that we put into service and then to leverage that strong capability with a good sales and marketing effort.

So there's no one big bang silver bullet -- I think there's a lot of items that just speak to the fundamentals of relentless effort at improving execution, and Tony, if you want to add any more.

One other point I think we have invested in reinvigorating our marketing area, and we'll continue to see a lot of benefits from that enhanced marketing function within FMS particularly. Also, we have gotten a bit of wind in our sails for the '07 engine technology, but because of our very focussed selling that we now have and our enhanced marketing program, we're confident that we've received more than our share of this wave of the new business coming from the '07 engine. Also as we discussed earlier in the call, we have very very strong focus on retention and that's why the early terms were down and that's really important to us.

Okay. Thanks, just this line of question here -- this one might be for Vicki. Previously in Q2 you reported a very strong SCS quarter in terms of EBIT growth, you told us not to necessarily expect that going-forward, and then we saw a little bit of a decline from EBIT from the segment to this quarter. Is that the kind of fluctuation that we can expect going forward? How do you expect that to trend maybe in the fourth quarter?

Well, Adam, I'm glad you remembered the cautionary comments from last quarter, I would remind us that while first half of the year we showed a net before tax increase of 95%, this quarter we showed a 54% net before tax increase year-over-year, which we would still say is a healthy growth rate in earnings.

Some of the event that are driving and affecting the year-over-year comparisons we've mentioned before, and it's important to bring them up again, in the first half of 2005, we had some profitability issues with an important contract in Brazil that were fixed by the second half of 2005. Those will affect year-over-year comparisons, in the first half of 2006, also we mentioned on the last call, we had a one-time $2,.5 million benefit from a contract termination fee that again affects the year over year. There are also -- we had the benefits at the end of 2005 of many good launches in our high-tech business that were up and running by fourth quarter 2005. So you're beginning to catch now the tail of those, or the beginning of those, and they're affecting the year-over-year comparisons as well.

In this business, we should expect to always see quarter-to-quarter variability based on start-up activity and other such customer specific events. But overall, over the long term, we see a healthy trend of growth in the base business, which gives us a very sustainable long-term growth opportunity in the supply chain business.

I think Vicki said it exactly right.

And I would reemphasize a bit of that last point that you really just can't look quarter-over-quarter or a real fixed period of time, because a lot goes on in these activities and these contracts. Sometimes as you're getting significant future cashflow beginning and revenue beginning, you do have start-up costs, so it would be dangerous to make too much of and have too much emphasis on specific quarter over quarter, because you're going to have variability for a lot of reasons as Vicki said. Over the long return, what you want to kind of watch, and which we watch is over a period of several years, and even a year at a time a period of several years, and even a year at a time in total, taking out the quarterly variations, how is the operating revenue, how is the operating earnings as a percent of operating revenue, how is that performing over time. We've said we have a commitment to improve that, three years ago we've taken it to profitability. And then we said we want to be best in class in this segment. When you look at the basis point improvement that we've had, again this year in total. That's what you want to look at. But it can be dangerous in some quarters, because you can get some difficult or easy comparisons based on particular situations, so I think if you take the longer view, then you'll know as we take a look at, we're on the right track.

Great.

Thanks for the time. And congratulations on another solid quarter.

Thank you.

Ed Wolfe, you may ask your question and state your company name.

Ed Wolfe, Bear Stearns.

A couple different things, you talked about the margins at logistics, I guess, Vicki, what I would take from your comment is the momentum you have in the business, your comment is the momentum you have in the business, the ability to grow it and continue to get the margin is sustainable. But the magnitude of that margin expansion will probably level off a bit. Is that a fair summary?

We're seeing growth in the base business, which will drive overall NBT growth as well. We also see an opportunity for continued improvement and quality of earnings, I would add that as a factor. We are seeing long term sustainable trends in both revenue and NBT in this business.

When you think about NBT margin, that is tracking 5% plus this year, is that where we should think about this margin going-forward to start with?

Yes, yes.

And how big can that margin get over time.

We've said in the past, I think he Greg said on the last call, that's the range that you can see best in class providers, I think it was a 6 to 8 range. We're continuing to see quarter over quarter improvements in that and we're continuing to strive for those. We think this is a good range, but are continuing to press for improvements in the quality of earnings.

Is there a goal that gets to 6 to 8 by some time frame?

No, we don't have a time frame on that target.

And seasonally in that business, are there certain quarters where a margin should be stronger or weaker for certain reasons?

No, there's no seasonality in that. It's not a function season.

Okay, and then just on the top line growth, you went from 30% to a little less than 20%, how should we think about that in terms of contracts grand fathering and that kind of thing.

Again, we had the benefit, I think of the events we talked about before, we had a lot of start-ups coming on, the sales activity and supply chain has been very strong, and our focus is on operating revenue which we're seeing continued healthy increases year over year.

Yeah, and Ed, I think a part of that is the subcontracted transportation?

Yep.

You see the big change in the top line gross revenue, you're actually seeing a closer coming together of that total revenue and the operating revenue so you're getting less impacted from that subcontracted transportation.

Do you think that's a better way to drive it in the future is to look at the net, not the gross?

Yes, we do. We measure ourselves and are incented on the operating revenue, because the subcontracted transportation, while there's revenue there, it carries a lot of costs with it for the same reasons we don't use fuel and FMS as primary revenue measurement because you can have fluctuations in that price. Operating revenue for us is the best measure for our performance.

Thanks.

Mark, this is probably my own shortcoming, but the interest expense came in a little bit lighter than I thought, and I'm just trying to understand maybe I timed the capital spending a little bit different. The $36.4 million this quarter, do you have some rough guidance, what that should look like on quarter on average next quarter quarter?

We're going to spend another $500 million dollars, so it should be up about $10 million over prior year. 10 to 12.

And -- so 10 to 12 up over the 24 over the 31.3 over the fourth quarter 6 '05.

No, I think it will be up over the 31.3 -- $12 million.

So around 44 or so?

Yes.

OK 43.

Yes.

On the used truck market, Tony before talked about more trucks to sell in the fourth quarter, 1,000 or 1,200 were those class 8s, or is that everything?

That's class -- not particularly the fourth quarter, that will be carrying over into the first as the Cap Ex for the fourth quarter comes in to replace our high replacement retention factor this year. Those units will carry into next year. That's pretty much the total of class 8 piece, we'll have some rental trucks going in there as well.

The 4952 that was listed in the slide of total trucks sold. How many of those are class 8s?

Those are probably, maybe about 50/50 or about 50, 55% possibly is the class 8s.

I'm just trying to understand -- are there fewer or great number of class 8 trucks being sold in fourth quarter versus third quarter.

There will probably be a bit more in the fourth than the third. The gains will be up in the fourth compared to the third. Well have more units sold in the fourth compared to the third. So the class 8s will be up as well in the fourth.

One of the big public truckload guys talked about at the end of the quarter, the used truck weakening a little bit, and they you pulled some trucks off the market because they thought people were taking, pre-buying trucks and then trying to sell trucks too quickly and it was hurting the market. Did you see any of that? If so, was it certain kinds of trucks or markets?

No, we really see our class 8 vehicles which are in demand because of our maintenance programs doing very well in the used truck market. As Greg had mentioned earlier, our proceeds were up really 7% relative to those vehicles, and we see the tractor sales staying strong and firming going into next year, actually, in demand. If people purchase those units, to actually avoid, possibly the '07s. The truck rates are basically because of the vintage that we're selling and the mileage. Our tractor sales are strong in great demand and the prices are up.

Okay. On the dedicated side, somebody had said that one thing you're keeping your good eye open for is if the truck market continues getting a little bit sloppy, the truckload market that does that spill into your potential sales for dedicated. Wouldn't impact your existing business, but future business personally in terms of what the marketplace looks like. Have you seen any signs of that yet, or is it just something you're keeping your eye on?

No, we have not seen any signs of that. It's something we're looking out into the future about.

We're in a good position, though, in our transportation management business in that when truckload capacity gets soft, we're actually able then to deliverer more competitive pricing to our TM customers, kind of an inverse reaction in our business line to freight volume. So we have -- we're in a nice position in that our long term contracts and dedicated are insulated from freight volume change, and then our TM business can actually benefit from a softening of truckload capacity.

In terms of new sales, though, we are looking out because those truckload carriers do have dedicated businesses as well. We have not seen any signs of it, it's something we mention only as a caution in the short term.

The TM business is simpler to a brokerage type of business, like a CH Robinson type of business, is that what you're talking about.

It's a nonasset arrange for transportation type of business.

It's a piece of the bigger supply chain puzzle if you will.

That's right.

What percentage roughly of the total logistics revenue is that?

Percentage I don't have. It's -- I can give you the total number, it's over 100 million in revenue, at present it's growing very rapidly.

5%.

5%.

So it's 100 million annually?

Correct.

And then Greg, the one thing I still don't understand is, you've talked a lot the last couple quarters about a very fast growing pipeline and sales turning over or closing deals and that kind of stuff, I'm just not seeing it in the revenue as reported. Based on what you sold already or the order book, what would you expect FMS's growth to look like, or even full service lease even more specifically growth rate to look like at this point next year?

Well, we usually don't disclose that until we talk about our 2007 plan, so it's premature to say.

On your point of when does the revenue show up, actually sequentially every quarter for the last 4 quarters, the actual contracted revenue report has gone up by 1% so full service lease contractual revenue is 4% this quarter, last quarter was 3%, two quarters ago was 2%, 3 quarters ago was 1%. So it's moving up, which I think is an indicator of the reality of the performance that's being done up front to get that. And then there is a time lag between when sales are made, when equipment is ordered, and actually then getting into service. So that's been the trend thus far, we're not prepared yet to answer your question for 2007 because we do that when we actually do the business plan and share that with everyone.

Sure.

I mean, that's fair that the revenue's gone up one, but when I look at the contribution margin for the business, it's not doing the same thing. Should we take it that some of that business that's coming on takes a little while to mature? How do you think about that?

One of the things we explained this quarter and talked about earlier in the answer, is the impact of sales and marketing costs and part of that is commission. And it is the standard in the industry that when that equipment comes due, you're paying the commission right up front and immediately, and that's when it gets booked. So when you have heavy periods of selling, you're going to see more expense that is above the norm that diminishes the expected leverage from the FMS business segment. So over time as you get a more normal or more even kind of selling activity as opposed to a big flurry which again has been exacerbated by the '07 push, you don't see that kind of difference and then you see the more typical leverage falling to the bottom line from the top line revenue.

And what's roughly that commission look like? Should we think of that as a percentage of the pie?

I'm looking at Tony, I'm not sure that we want to level -- release that level of detail. There's just too many competitive and compensation issues related there, and I think considering we're again the only public company reporting in that sector, I'm going to avoid giving that level of detail.

Fair enough, thanks a lot for the time. I appreciate it.

John Langenfeld you may ask your question.

This is Mike Halloran again with Baird. [ Static on the line ]

We got the static again, so I don't know if you're on a cell or -- we're going to ask you to redial on a regular land line.

Todd Fowler, you may ask your question and state your company name.

Good morning, Todd Fowler with KeyBanc Capital Markets. I was wondering if you guys could provide a little more color -- you talked about softness in some geographic areas of the rental market. Specifically where you're seeing softness and if you have any more color about what that's related to.

I'll let Tony Tegnalia cover that.

We see it pretty much in the central area. We also see it pretty much in the Great Lakes and northeast area as well. And the Carolinas is a bit softer than usually in this time of year for this season as well. Southwest is strong. The west is strong. We're pleased with it, but there are those several pocket that is never came quite up to the seasonal levels that we'd anticipated.

And then this is more related to the cyclical businesses that would have more needs during this time frame?

I think to some extent in the central area, it may be a bit cyclical. Somewhat related to automotive, but not totally.

Okay, great. Next there was a little bit of commentary in the release about lower safety costs within the dedicated business. I was just wondering if you could provide a little more color on what those costs were related to, and will we see that benefit on a go forward or is this a one time in the quarter issue?

I wouldn't say it's one time. I think that we have had a long term trend first of all to real commitment to safety and security through the whole organization and it's not something that we do for the money, we do it because it's the right thing for our people, our customers, and the traveling public. At the same time, you know, sometimes you do have accidents in the dedicated business, because have you a lot of rolling stock on the road. And some quarters you do have some better performance show up than others, but we look at a long term trends.

And is it something well see --

We don't do it for the money, but the improvements and the safety record do have monetary implications on the up side. We've been seeing the benefit of that over the past couple years. We anticipate the continued focus on safety for the reasons that Greg has mentioned are pressing forward for improved safety records. We'll continue. We cannot really predict and anticipate what the financial future is connected to those safety costs.

Okay. Thank.

And then Mark, maybe you can touch on and just kind of refresh my memory, with regard to cashflow going into the 2007 in the replacement cycle, what will we see from the 2007? Does it ease up as we get into 2007?

We've indicated 25 to 30% reduction in the replacement cycle in '07 and that. You know, that number alone would be worth $200 to $300 million of cashflow. The not needing to replace all those vehicles. Terms of predicted cashflow, that will be offset by our growth expectations and we're signed up to continuous growth.

That puts us almost at free cashflow neutral in 2007?

No, that number isn't out there yet, but -- yeah, we better not talk about that yet until we do the op plan.

The number's not out there yet and it's not going to be out there, I guess. Okay. Well, thanks a lot. I appreciate the time.

David Campbell you may ask your question and state your company now.

Thompson Davis and Company.

All my questions have been answered except one, and that is, where is the pension account adjustment in the expenses? What segment is it in and what was the pretax number?

Yeah, well, start from the back to the pretax number, it was $5.9 million. In the backup data, we sent with the press release, it's included in salaries comp and ben the presentation with the earnings call, it's been lifted out of the segment reported and it's in restructuring because we just -- we don't want to measure the businesses on that particular item. It's in restructuring, it's not a segment item.

Okay. Thank you, I'm not in my office, so I didn't have access to all that information.

If you look at salaries comp and ben in the sheets we sent out. You'll see comp and ben up about 1% to op revenue, and that's both the pension number and the mix the shift of Vicki's number. Vicki's large sales, she's a heavy comp and ben user so you'll see the salaries up.

That's okay. She's worth it.

Absolutely.

Thank you. [ Laughter ]

Thanks very much.

You're welcome.

Okay.

Brandon Cook, you may ask your question and state your company name.

Brandon Cook, JPMorgan.

Yeah, just had a question, you talked about -- people talked about the weakening trucking market in third quarter, and it sounds like you saw a little bit of that in your rental business and had some concerns on dedicated.

When we look at your full service lease business, and you look at the pipeline going out, it sounds like you're pretty confident, given the acceleration in trends and looking toward those 7, does the weakness in the trucking market impact your outlook of growing your business looking to next year?

Tony? Do you want to comment?

The pipeline we see in our leasing business is very strong year-over-year, as Greg had mentioned earlier and I followed up on, we have a very very focussed sales force structure right now, enhanced marketing investment in our market research and market development area, and as a result, we're seeing much much stronger building of the pipeline on the part of the sales force, you also see as we had mentioned in the press release and as well in our discussions today. That we have higher sales force related costs, that's not exclusively commissioned, there's also more head count as well in the sales force, and so we are building the pipeline, it's stronger than it's ever been. We also have very attractive large deals in the pipeline, a greater proportion of larger deals than we've had in the past. And we see it carrying strong into next year. We are a class 8 organization. But we still see a lot of the growth we generated in '06 which is impacting our commission expense this year, really carrying us into growth for next year.

You've gotten plenty of questions on the 2007 engines and what not. As we get closer to that time period, have you -- have your customers gotten more or less comfortable with taking on the '07 engines? Has there been more of a willingness to do that as you work through the pipeline and customers are looking toward next year?

We think the OEM's have done a good job on the '07 technology, they've had experience in the past going through some EPA changes and we think they've dramatically enhanced their testing, dramatically enhanced their research in this area. We believe generally speaking that there will be good acceptance of the '07 engines. We have a number of vehicles in our pipeline for '06 engines that will still be leasing as well as the same time, so we have those to carry through some growth for us as we go into '07. We think overall the '07 engines will be accepted. The OEM's have worked very hard to do that.

Final question on fuel surcharge, I know, the way your mechanisms are set up, you talk about a pretty clean passthrough to your customers. As fuels come down here, should we think about that impacting your margins or business looking toward fourth quarter at all?

We really don't project fuel costs out, we work through the markets on fuel, generally, fuel is an accommodation in the FMS organization to our customers. It's very convenient for them, it's very convenient for their drivers, we like it very much as well. It brings the unit into our maintenance operation for us to do some PM activity when the vehicle is in. Check tire pressure and things of that nature. It's basically an accommodation for us. In high rising prices that rise quickly, and when prices fall quickly, timing of recapture becomes a bit complex, but overall the profitability of the operation is not really reliant on fuel, it's generally an accommodation to our customers.

Okay. Thanks for the time.

We have one last question that we'll take. Richard Armstrong, you may ask your question and please state your company now.

This is Dick Armstrong from Armstrong & Associates. I've been concentrating on page 22. The supply chain solutions results. And the -- first of all, congratulations on the continued improvement. I think there's a good long-term trend here. It's important to note that the high-tech and consumer and transportation management areas are growing faster than automotive and industrial. And I think that's a good long term trend.

One question, we haven't talked about here, hasn't been covered is international operating revenue. Is most of that operating revenue involved in operations in the Americas?

I'll let Bobby Griffin comment on that but there is a lot in Canada, Mexico and South America. I think generally, but Bobby, can you --

The stronger operating revenues that Greg just mentioned, tremendous uptick in Canada and Mexico very strong, and of course in the southern part of South America which would be Brazil, Argentina and Chile.

Very good. Thank you.

You're welcome.

I am showing no further questions, sir.

All right. Since we're a little over our time. I thank everybody for their participation, have a good, safe day and thank you for joining us.

This concludes today's conference, thank you very much.