萊德系統 (R) 2010 Q3 法說會逐字稿

Good morning and welcome to Ryder System third quarter 2010 release conference call. (Operator Instructions) I would like to introduce Mr. Bob Brunn Vice President of Investor Relations and Public Affairs for Ryder. Mr. Brunn, you may begin.

Thanks very much. Good morning and welcome to Ryder's third quarter 2010 conference call. I'd like begin with a remind that in this participation 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 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 Security and Exchange Commission. Presenting on today's call are Greg Swienton Chairman and Chief Executive Officer, and Art Garcia Executive Vice President and Chief Financial Officer. Additionally, Robert Sanchez President of Global Fleet Management Solutions, and John Williford President of Global Supply Chain Solutions are on the call today and available for questions following the presentation. With that let me turn it over to Greg.

Thank you Bob and good morning, everyone. Today we'll recap our third quarter 2010 results, review the asset management area, and discuss our outlook and forecast for the year. After our initial remarks we'll open up the call for questions. But before we get into the results, I'd like to make a brief comment are related to some recent management changes here at Ryder. As we previously announced, Tony Tegnelia will be retiring from Ryder early next year after a 33-year career at our company. Tony's contributions have been invaluable to the organization, having had key leadership roles in finance, supply chain, and most recently leading FMS. While Tony will be with the Company for several more months, working on acquisitions and other strategic initiatives, I wanted to take this opportunity to publicly thank him personally for his outstanding service to our Company and to our shareholders over the years. Most of you on the call already know Tony's successor as president of globe Fleet Management Solutions Robert Sanchez who was formerly our Chief Financial Officer. The combination of Robert's prior experience in running fleet management's operations, and as our corporate CFO, will enable him to continue to lead the FMS business to new levels of performance in the future.

Replacing Robert as Chief Financial Officer is our former controller, Art Garcia. And some of you have met him already. And if you haven't met him, you will be seeing much more of him at investor events in the near future. And I'm particularly pleased that we have had such a strong internal members of our team in order to step up and fill these key leadership positions in the Company, and I look forward to all of their contributions in their new roles. So now, let me get into an over view our third quarter results. Which begins on page four for those of you following along on the PowerPoint presentation. Net earnings per diluted share from continuing operations were $0.76 for the third quarter 2010. Up 49% from $0.51 in the prior year period. Third quarter EPS, were also above our forecast range of $0.62 to $0.67. Total revenue for the Company was up by 5% from the prior year, reflecting a 4% increase in operating revenue. Operating revenue, which excludes FMS fuel, and all subcontracted transportation revenue, increased due to higher commercial rental and Supply Chain Solutions revenue. Partially offset by lower full service lease revenue.

Turning to page five. In fleet management total revenue increased 4% versus the prior year. Total FMS revenue includes a 7% increase in fuel services revenue reflecting higher fuel costs pass through. FMS operating revenue which excludes fuel, increased by 3%, due to higher commercial rental revenue. Contractual revenue which includes both full service lease and contract maintenance, was down 3% due to fewer contracted units in the fleet as compared to the prior year. Lease revenue was down 2%, a sequential improvement from the 4% decline we saw in the second quarter. Commercial rental revenue was up by 32%. Accelerating sequentially from the 20% growth we saw in the second quarter. Rental revenue benefited from improving global demand, higher pricing, and an increase in the fleet size. Net before tax earnings and fleet management were up by 48%. Fleet management earnings as a percent of operating revenue increased by 230 basis points to 7.5%. FMS earnings were positively impacted by improved commercial rental performance, better used vehicles results, and lower expenses in our retirement plans. These improvements were partially offset by higher maintenance costs on an older fleet as well as fewer revenue earning vehicles in the fleet.

Turning to the Supply Chain Solutions segment on page six. Total revenue was up 10% due to higher subcontracted transportation and increased operating revenue. Operating revenue grew by 5% due to higher automotive and high-tech volumes as well as favorable foreign exchange rate movements. These increases were partially offset by the closure of some locations last year, as we rational allied under performing contracts. SCS net before tax earnings were down by 6%. Supply chain's net before tax earnings as a percent of operating revenue decreased by 70-basis point to 5.9%, against unusually strong margin comparisons in the prior year. Reduced SCS earnings were driven by higher self insurance costs, partially offset by improved operating performance particularly in the high-tech sector. In Dedicated Contract Carriage total revenue was up by 1% and operating was up by 2% reflecting higher fuel cost pass-throughs. Net tax earnings in DCC decreased by 12%. DCC's net before tax earnings as a percent of operating revenue declined by 110 basis points to 7.3%. The decline reflects lower operating performance including increased driver costs, and investments in new technology initiatives.

Page seven highlights key financial statistics for the third quarter. I already highlighted our quarterly revenue results, so let me begin with EPS. EPS from continuing operations were $0.76 in the current quarter, up by $0.25 or 49% from $0.51 in the prior year. Including discontinued operations, earnings per share were to the quarter were $0.74. Up $0.31 or 72% from $0.43 last year. The average number of diluted shares out standing for the quarter declined by four million shares to 51.5 million. In December 2009, we announced a two million share anti-diluted re-purchase program, and in February 2010, we announced a separate $100 million re-purchase program. And these programs run simultaneously.

Under the $100 million program we re-purchased 720,000 shares at an average price of $41.17 per share during the third quarter. And at the end of the quarter, $25 million remains authorized under this program. Under the two million share anti-diluted program, we purchased 109,000 shares at an average price of $42.37 during the third quarter. At the end of the quarter 1.6 million shares remain authorized under this program. As of September 30, there were 51.7 million shares outstanding, of which 51.5 million are currently included in the diluted share calculation. The third quarter 2010 tax rate was 36%. The tax rate was lower than anticipated and below a normalized rate due to lower foreign operating losses, income tax reductions in the UK and lower contingent tax accruals. These item benefited EPS by $0.04 in the quarter. The third quarter 2009 tax rate was 35.7%. Excluding restructuring charges and other items the prior comparable tax rate was 40.3%.

Page eight highlights key financial statistics for the year-to-date period. Operating revenue is up by 2%. Comparable EPS from continuing operations were $1.57, up 21% from $1.30 in the prior year. Including discontinued operations, earnings per share were $1.53, up from $0.96 last year. The tax rate was 39.2% versus 40.7% last year. Adjusted return on capital was 4.5%, versus 5.1% in the prior year. Since ROC is calculated on a rolling 12-month basis, 4.5% for 2010 includes lower results from the fourth quarter 2009. We would expect ROC comparisons to turn positive by comparison next quarter, once full year 2010 results are included in the calculation.

I'll now turn to page nine to discuss some of the trends we saw during the third quarter in each of the business segments. And please note that some of the key statistics I'll discuss here are now included in a new key performance indicator page we've added to the earnings press release tables. In Fleet Management Solutions, full service lease revenue was down 2%. A sequential improvement from the 4% decline in the second quarter. The average lease fleet size was down 5% from the prior year's third quarter, but only slightly lower than the second quarter 2010. Contract maintenance revenue declined 5%, reflecting a reduction in the average fleet count of 3% versus the prior year, but flat with the second quarter. We saw improvements in both new sales and renewal levels in the third quarter. And as such, have now seen a stagnation of the lease and contract maintenance fleets, which is a very important next step for earnings recovery. Lease pricing on new units has been and remains firm as we're focused on realizing appropriate long-term returns for investments made in this asset based contractual product line.

Following declines in 2008 and 2009, miles driven per vehicle per-day on the US lease power units increased over the prior year now for the fourth consecutive quarter. Miles per-unit were up by 3%, versus the third quarter 2009. Commercial rental revenue was up strongly by 32% from the prior year on a 9% larger average fleet. We're seeing benefits from improved demand, lower freight capacity, and greater usage of rental trucks due to economic uncertainty and the higher cost of new trucks. Given these factors, we rented each vehicle for a greater number of days during the quarter, resulting in higher utilization. Global commercial rental utilization open power units was 79.2%. Up 840 basis points from 70.8% last year. This is a strong absolute utilization rate, and it was seen in all vehicle classes. Global pricing on power units was up 8%.

Accelerating from the 5% increase we saw in the second quarter. We have seen continued strong rental utilization and pricing into October. In Fleet Management, we also saw stronger used vehicle results during the quarter, reflecting an improved environment. I'll discuss those results separately in a few minutes. FMS also benefited from lower retirement plans expense due to improved investment performance in 2009. We saw higher maintenance cost in FMS due to the aging of our lease fleet. Since customers have been replacing leased units at a slower than normal rate, the fleet has become relatively older. We also saw a negative operating leverage on our facility networks since we kept our facility network intact. But are servicing a small year-over-year fleet. We expect these tends to continue until our lease fleet re-assumes growth.

In Supply Chain Solutions, operating revenue was up by 5% in the quarter. We saw higher volumes, particularly with some of our automotive and high-tech customers. Revenue increases from higher volumes and new business wins were partially offset by certain under-performing operating locations closed last year. SCS earnings of $15.2 million for the quarter were down by $1 million last year due to higher self insurance costs, partially offset by better operating performance, especially in the high-tech sector. SCS operating margin was solid at 5.9%, but was down against very strong comparisons in the prior year. In Dedicated Contract Carriage, operating revenue grew 2%, due to higher fuel costs pass-throughs. DCC's net before tax earnings fell by $1.2 million. We're seeing more driver job openings, and longer hiring lead times. Which resulted in more costly use of temporary outside drivers. Earnings were also impacted by investments related to new technology initiatives as we plan this year.

As shown in the appendix total central support costs were up by $4.1 million reflecting increased compensation expense, technology investments, and professional services. Technology investments include Mainframe, Shop Maintenance, and Data Warehouse Systems, which we expect to result in cost and productivity benefits in future years. A portion of central support costs allocated to the business segments and included in segment net earnings was up by $1.4 million. The unallocated share, which is shown separately on the P&L was up by $2.8 million, due primarily to higher compensation expense and professional fees.

Page 10 highlights our year-to-date results by business segment and in the interest of time, I won't review these results in full detail, but will just highlight bottom line results. Comparable year-to-date earnings from continuing operations were $83.1 million, up by 15%. From $72.4 million in the prior year. Net earnings including discontinued operations were $81 million, up by 51% from $53.7 million last year. And at this point, I'll turn the call over to our Chief Financial Officer Art Garcia to cover several items beginning with capital expenditures.

Thanks Greg. Turning to page 11. The year-to-date gross capital expenditures totaled $895 million. Up by $426 million from the prior year. We expect full-year gross capital spending to be in line with our prior forecast of approximately $1.1 billion. Year-to-date spending on lease vehicles was up by $68 million from the prior year. Both new lease sales and existing lease renewals have improved over the prior year, and are ahead of plan. Capital spending on commercial rental vehicle was $358 million year-to-date. Primarily due to refreshment of the rental fleet, as well as some modest growth spending. This was an increase of $352 million over last year.

Since in 2009, we spent virtually no capital on rental vehicle due to a weak economy. We realized proceeds primarily from sales of revenue earning equipment of $162 million year-to-date, up by $11 million from the prior year. The increased reflects higher used vehicle pricing, partially offset by fewer units sold. Including proceeds from sales, year-to-date net capital expenditures were $733 million, up by $415 million from the prior year. Turning to the next page, we generated cash from operating activities of $804 million year-to-date. Up by $35 million from the prior year. Depreciation decreased by $37 million, due to a smaller fleet and lower adjustments in the carrying values of used vehicles. These items more than offset higher depreciation resulting from higher average vehicle investments, lower -- lower residual values and accelerated de appreciate rates on certain vehicles.

Including the impact of used vehicle sales, we generated over $1 billion of total cashier to date. That's up by $43 million from the prior year. Cash payments for capital expenditures were $861 million, up by $352 million from the prior year. Reflecting higher vehicle purchases, and the timing of vehicles received from OEMs. Including our cash capital spending, the Company generated $153 million of positive free cash flow in the current year. As planned, free cash flow is down by $309 million from the prior year's record free cash flow, due primarily to higher capital spending on vehicles. We expect our full year free cash flow to be at or near our original forecast range of $225 million to $275 million. On page 13, total obligations of approximately $2.6 billion are up by $27 million as compared to year-end 2009. The increased debt level is largely due to higher vehicle capital spending.

Balance sheet debt to equity was 180%, as compared to 175% at the end of the prior year. Total obligations as a percent to equity at the end of the quarter were 188%, versus 183% at the end of the 2009. Including share re-purchase activity, we continued to expect our total obligations to equity ratio to be approximately 190% at the end of 2010. That's below our target range of 250 to 300%. Our equity balance at the end of the quarter was approximately $1.4 billion, that's down by $19 million versus year-end 2009. The equity decline was driven by net share re-purchases of $81 million, dividends of $41 million, partially offset by earnings of $81 million. At this point, I'll hand the call back over to Greg to provide an asset management update.

Okay. Thanks, Art. Page 15 summarizes key results for our asset management area globally. At the end of the quarter, our global used vehicle inventory for sale was 4,700 vehicles, down by 3,100 units from the third quarter 2009. And down by 1,200 units sequentially from the end of the second quarter 2010. We sold 4,400 vehicles during the quarter. Down 15% from the prior year due to our smaller inventory available for sale. We saw continued strength in used vehicle demand and pricing in the third quarter and this strength has continued into October.

Improved demand is a result of both relatively better market conditions, and the desire of some truck buyers to obtain pre-2010 engines. Stronger demand, combined with our lower inventory level, has allowed us to up price generally, and to increase the proportion of retail sales where we realized better prices. Compared to the third quarter 2009, proceeds per vehicle were up 24% on tractors, and up 50% on trucks. From a sequential standpoint, tractor pricing was up 7%, and truck pricing up 14% versus the second quarter this year. At the end of the quarter, approximately 6,900 vehicles were classified as no longer earning revenue. This was down by 4,100 units or 37% from the prior year, and down 14% from the second quarter 2010. And that decrease reflects fewer units held for sale and an improvement in rental utilization. We've continued to successfully implement our strategy to increase the number of lease contracts, on existing vehicles beyond their original lease term. The number of these lease extensions in the US year to date was up by 1,500 units, or 28% versus the prior year.

Increasing lease extensions is a beneficial strategy in the current market environment, as it retains the revenue stream with the customer, and lowers new capital expenditure requirements. We anticipate continued lease extension activity particularly due to the increased cost of the new 2010 engines. We also successfully redeployed approximately 900 more units than in the prior year to date. A 29% increase as we focus on driving return from vehicles already in the fleet. Early terminations of leased vehicles declined by approximately 1,900 units, and were at the lowest level in four years. These are all positive indicators and results from our asset management area. Our average global commercial rental fleet during the third quarter was up by 9% from the prior year period. Given the continuing favorable supply and demand conditions we're seeing in the commercial rental market, we now expect that our fleet will be up in the mid to high single digit percentage range at year-end, modestly above our last update. As always, we'll continue to monitor rental market conditions and adjust our fleet plans accordingly during the quarter.

Finally let me turn to page 17 to cover our outlook and forecast. We've seen continued strengthening in the early cycle recovery portions of our business for the past 2.5 quarters. We're clearly seeing improved supply and demand conditions benefit both commercial rental, and used vehicle sales. Some of this is due to a relatively better economic environment and improved transportation demand. Some of this is due to industry specific factors, including lower available freight capacity, increased use of rental resulting from an economic uncertainty, and the impact of the increased costs for new 2010 vehicles. We expect these factors to continue to benefit our business, particularly in rental and used trucks. In rental lease factors should result in higher year over year utilization rates and improving pricing in rental. While we expect continued rental strength, given overall economic uncertainty, we remain you cautious regarding the stainability of our very strong third quarter results.

In used vehicle sales we expect improved demand, lower inventories, and a desire among some buyers for pre-2010 vehicles to continue to benefit used vehicle pricing. In lease, we continue to see higher usage of existing lease trucks by customers, another good leading indicator of recovery in our business. More importantly, we've seen a stabilization of our lease fleet size, stabilization has resulted from both higher new sales and improved lease renewal levels. Although the lease fleet has stabilized, it's older, and that's resulted in higher maintenance costs. This will continue to cause some pressure on lease, until we start purchasing more new units and the fleet starts growing again. In Dedicated, we expect some continued impact from higher driver costs, and supply chain we expect continued solid volumes with some of our key sectors as well as growth from new contract wins. We anticipate supply chains earnings to remain strong, given the improved freight environment and the impact of the actions we've taken to improve results in this segment.

Looking specifically at our fourth quarter, we expect increased interest expense of $0.02 related to the previously executed debt issuance. We're also not forecasting the $0.04 tax benefit we received in the third quarter to reoccur in the fourth quarter. Given these factors we're providing a fourth quarter EPS forecast of $0.58 to $0.63, up from a comparable EPS of $0.41, in the prior year. This represents an increase in the fourth quarter earnings of $0.17 to $0.22, or 41% to 54%. We're therefore increasing our full year 2010 EPS forecast from our prior range of $2 to $2.10 to a new range of $2.15 to $2.20. Our new 2010 forecast represents an increase of $0.45 to $0.50, or a 26% to 29% improvement from a comparable $1.70 in the prior year.

And that does conclude our prepared remarks this morning and we'll move onto Q&A. And due to the number of usual callers in queue, I'll ask that you limit yourself to two or three questions each. If you have additional questions, you're always welcome to get back in the queue and we'll take as many calls as we can. At this time I'll turn it over to the operator to open up the line for questions.

(Operator Instructions). Our first question today is from Kevin Sterling with BB&T Capital Markets. Your line is now open.

Thank you, good morning, gentlemen.

Good morning.

Greg, could you walk us through how the lease miles driven per vehicle progressed throughout the quarter?

I know how it's kind of moved up from quarter to quarter, but I think Robert has the detail by month.

Yes. Kevin, by month, it was up 5% in July, 1% in August, and 3% in September. So as we've stated before, one month is a little bit tight in terms of comparing year over year. But generally, what you can see is that regardless of the month it was up each of the months.

Okay. Thank you. Looking at lease prices today compared to last year, how much are they up today compared to last year?

You're talking about lease, on a, a lease price for a customer?

Yes.

Yes, generally year-over-year, what you're seeing is the impact of the new EPA technology, and that is generally 10% to 15% increase.

Okay. Thank you. And one last question. Do you plan to grow the commercial rental fleet with the strength your seeing in commercial rental this year, or do you have enough power units?

Well, we expect to end the year a little bit higher than we had originally estimated. That's being done by some additional units that we bought early in the year that we talked about on the call last time, and the fact that we're going to hang on to some of the vehicles that we had originally expected to out-service in the third quarter. We've hung on to some of those units over the season in order to be able to meet the demand we're seeing.

Okay. Great. Thanks for your time. I'll get back in line, and turn it over to someone else.

Thank you.

Thank you. Our next question is from Todd Fowler with KeyBanc Capital Markets. Your line is now open.

Great. Thank you. Good morning, everybody, and I guess congratulations to Tony, Robert and Art.

Thank you, Todd.

Greg, along the same lines to Kevin's question, can you talk about the commercial rental trends during the quarter? Basically kind of what you saw on a sequential basis, and what you've seen so far here in October?

I think we have had continued strength all through the third quarter, and it continues to the fourth quarter. And if Robert, you have anything specific by month, you can share that. But I would say that for all of the factors that we listed, supply demand situation, reluctance maybe to commit to longer term and use more rental, the big cost jump up in new EPA mandated 2010 engine costs. I think rental is probably not only been strong, but we expect it to stay strong, so that's something we'll continue to monitor. I think that unless you have a good economic forecast beyond two quarters, you don't know for sure, and we'll be monitoring that closely. But I think it has been strong, and will continue to be strong, which is a reflection of why we've let the fleet grow and expect it to grow by year-end, compared to our original forecast when we thought it would be flat.

Todd, it's been up close to 80% since May, so we've had good performance each month. Usually we see in the fourth quarter things slow down a little bit seasonally, but still we expect it to be relatively strong and up near that 80%.

Okay. So Robert, what you're saying is that the utilization has been close to 80% every month since May?

That's correct.

Okay. And then with the seasonality in the fourth quarter, you still think that you can achieve something close to where you were from a utilization standpoint in the third quarter on the rental fleet?

Right, we expect to be down a little bit, but still relatively close to what we were.

Okay. Perfect. That's helpful. And then as a follow-up, the stabilization that you're seeing within the size, or the trends within the full service lease business, is that being driven more by a slow down in the attrition that you're seeing from your current customers, or is it more of a function of seeing some lease writing activity come through and putting more vehicles in service? Or is it a little bit of both?

I'd say it's a little bit of both. Clearly the fleet reductions that have been going on during the economic downturn have diminished, slowed down and somewhat stabilized, and in addition therefore also the new sales and the new sales activity we've been doing actually then tends to show up more. So hopefully we've been at and close to the bottom, and some time in a future call soon, we hope to talk about an increasing fleet count.

Okay. Nice quarter, good luck. I'll get back in line.

Thank you.

Thank you. Our next question is from David Ross with Stifel Nicolaus, your line is now open.

Yes, good morning, everyone.

Good morning.

You mentioned the dedicated side that there was increased driver costs during the quarter, and that should be a headwind going forward. Can you talk a little bit about the reason for the driver cost increase, is it for recruiting, retention, higher wages, what kind of pay increase it might be.

Sure, I'll turn that over to John Williford who manages that.

This came on pretty sharply at the very end of the second quarter and has persisted. The impact, the financial impact comes from leasing drivers instead of hiring them, so that's about a $500,000 hit for the quarter. We kind of expect to see this continue, the overall driver shortage continue and maybe even get a little worse. We're doing a lot of things to mitigate the financial impact, including hiring more recruiters, and reaching out to potential drivers in new ways, but this driver shortage I think is with us for a while.

And are there different markets where it's harder to get drivers than others, is it kind across the board? I would think that a dedicated operation would actually be more attractive to most drivers than typical trucking companies?

Yes, I'm not aware of any regional differences we're seeing. With our kind of drivers and dedicated fleets, the drivers generally return home at night, so we have pretty good jobs for drivers, and like I said, we're doing a lot to mitigate the impact to us, but this is really a national issue right now.

And then on used vehicles sales, you mentioned used truck pricing is much stronger than used tractor pricing, or at least it's rebounded sharper over the past several months and quarters. Is there any type of reason for that, the difference in the two markets. Did truck get hit harder, and that's why it's bouncing back more.

You broke up a little bit on the call, but I think I got most of it. I think the demand is due to a number of factors. There is still, compared to last year and last periods, an economic rebound. I think many that can utilize used trucks are in the market.

In our case, we have a lot fewer in inventory because fewer have been coming off of service, so we've maintained the size of the rental fleet and up a little bit, so those units haven't been going to the used truck centers. Where we've extended leases, those units haven't gone to the used truck centers. So our availability is a little bit lower and the demand is up, and I think anyone who's also sensitive to the new EPA mandated engines and their, and the shocking sticker prices that goes with it, if they can utilize a used vehicle, they'll try to do it. And I think there's a lot of factors that contribute.

I guess, sorry if I broke up, the question was more for the truck pricing versus tractor pricing, and why truck is, the used vehicles sales on the truck side are better than on the tractor side.

Okay. Got that. So Robert, do you want to comment?

Yes, I think the key point there, truck versus tractors is that trucks actually declined, their decline started sooner and they were deeper. It was deeper than trucks, than tractors, so trucks I think just had more room to move up than, because they had come down more. And we are seeing, we have seen that pick up certainly over the last several quarters, and with strong demand and stronger pricing. Tractors seem to pick up a little bit, went down a little less and picked up a little bit later in the cycle.

Excellent, thank you.

Sure.

Thank you, our next question is from Jon Langenfeld with Baird. Your line is now open.

Good morning, gentlemen, this is Ben Hartford in for Jon.

Morning.

If I can just start on that leasing comment a little bit more, you talked about stability in that market. I mean, there's certainly the lease fleet continues to contract, I think you've been targeting year-end before you saw some stabilization at least in that lease side. Is that still the expectation kind of taking into account the CapEx is unchanged, but it looks like you will have incremental dollars being spent on the commercial rental side, maybe at the expense of lease. So can you talk a little bit about timing of when we should start to see that lease fleet bottom?

Yes, I think we're similar to where we were on the last call, that we expect to see stabilization, meaning, really bottoming out, if you will, where the lease fleet is no longer declining, in the next several quarters. And you saw this quarter we were down on average I think 400 units. And we expect, off of a pretty large base, so we expect that to really continue for the next quarter or two, and then begin to see some increases in the fleet in the second half of 2011. So, mid next year is when we would expect to see some of that improvement.

Now that could move depending on how quickly our customers decide that they want to start leasing, and how the confidence in the economy starts to look. But right now we're estimating some point in the middle of next year.

Okay. Good. On the extension side, obviously, the early terminations numbers have come in, the extensions are up. Is that simply the expiration of contracts coming to fruition and entering into extensions on the back of those, or are there existing contracts that were ahead of expiration that are being re-negotiated? Can you talk a little bit about that mix?

Yes, there's both in the extensions, and you have some that have, that are getting to the end of their term. They got to the end of their term and they've been extended, and some that are being done several months prior to that extension. But as you can see overall, we are seeing customers that are really interested in extending the units that they have because with that, they're able to avoid the investment in the newer technology. We expect that trend to continue, certainly going into the balance of the year, and probably going into next year.

Okay. Good. And one last one on the pension side, I know it's early, but when we think about 2011, and the potential impacts, and puts and takes, obviously, you changed the pension plan, asset prices are up, but interest rates are down. So, a very early read into 2011. But how should we think about the direction of impact or benefit next year for 2011 pension relative for this year.

I'll let Art answer precisely, but I think if the market closed at where it is around today or yesterday, and it was December 31, and we're doing the calculation and interest rates where they were. It might benefit us on the P&L next year by about $1 million or $0.01 a share. I think that's right but -- .

Right, Greg. I think as you, based on current asset levels, and trying to factor in the impact of lower discount rates, we think we may be slightly better year-over-year. But to Greg's point, this is a year-end calculation, so there's a lot of items that still need to happen by the end of the year, and that could clearly impact the number.

Okay. Great. Appreciate your time.

You're welcome.

Thank you, our next question is from Alex Brand with Stephens Inc. Your line is now open.

-- think about the cycle, and getting back to peak earnings, and kind of qualitatively how you think -- this cycle feels a little different to me, and I'm just wondering if you're thinking -- are you surprised that you're not getting more fleet renewal activity to take place at this point in the cycle? And what do you need to see in order to get back on your peak earnings run rate, in the next couple of years?

I would say at this point, we're not surprised. I think if you had asked us a couple of years ago about a predictive model from the way things used to be, we would have expected rental to be strong, as it is, and maybe not even as strong, and some of the lease commitments to kick in. I think this is an issue beyond us. It is an issue of confidence, consumer confidence and business confidence. And their willingness to sign up for longer term deals, I think is a total reflection on where they believe the economy is going, and how their business may be impacted by pending taxes, uncertainty and regulation. So they're going to be cautious.

I think as soon as things clear up, and they understand how things look, and they see certain economic recovery, even if it is multi-year, bumpy and a little erratic. Then I think they're going to be ready to sign up for longer terms deals.

If you throw in the other factor into the soup, which is a big price increase in 2010 EPA mandated engines, and you think that many customers -- or recall that many customers bought before 2007, they are now facing a 2007 and a 2010 EPA mandated engine cost. And that gets to be rather staggering. So given uncertainty in big price increases, and your choice to sign a long-term deal or work on something short-term, the logic on the part of customers and potential customers, I'll do a little more rental.

Now for our business model, that doesn't necessarily harm what you've described as us getting back to our peak earnings. Because what we may find is, even though what I've described may be true, we're probably going to have a bigger and longer horse to ride on rental before lease kicks in. It eventually will, but the timing compared to past periods would be different.

All right. That's very helpful. And if it continues this way, which makes sense, where you have less commitment to long-term on the part of your customers, but rental is unusually good for a cycle. Is that a slight positive for the cash flow outlook, or does it not matter, because you end up having to invest in a similar number of trucks either way?

Yes. It probably doesn't matter too much on capital expenditures and cash flow, because if lease is a little softer and rental stronger, then we're going to be doing more refreshment, more renewal and more additions. But over the long run, that will shift, and you'll be spending more on lease. Now it's not a bad sign for us when we see an increase in demand in CapEx for lease, because you know that that's long-term certain revenue earnings and future cash flows. But we'll play this the best we can given the hand that we're being dealt, as I described a little bit earlier.

Understood. Thanks for the time.

Sure.

Thank you. Our next question is from Ed Wolfe with Wolfe Trahan, your line is now open.

Thanks, and I want to repeat my congrats to Tony, Robert, and to Art, as well.

Thank you.

I just want to be clear, on the EPS guidance you gave, the 58% to 63%, or is it 60% to 65%? Are you excluding the $0.02 of the debt extinguishment or including it in that.

It's all in there. So we're saying 58% to 63%, and it includes that.

Okay. So on an ongoing basis, really 60% to 65%, though?

Well, I think Ed, you called it debt extinguishment. What we're trying to highlight is that's the additional interest expense associated with the MTN issuance we completed in September.

So, it's ongoing then, I'm sorry.

Ongoing, yes.

Okay. Can you talk a little bit about gains on sales going forward? It seems like it's going to be a trend of fewer units and rising prices. How do we think about $7 million versus -- this quarter going forward directionally?

Ed, I think you can probably expect to continue in that range. It was $6.6 million in the second quarter, just under $7 million in the third, so I'd expect that to continue. The only offset would be that we obviously have fewer units to sell, maybe for the next few quarters. But I think from, in terms of quarterly modeling, you're probably looking around that $6 million to $7 million range.

Why does it replenish a few quarters from now? How do you think about that?

Well, you have the rental fleet that we renew, we usually, as I mentioned earlier, we hold -- been holding onto vehicles in the third and fourth quarter. Those units will be going to the used truck centers towards the tail-end of the year. And will be sold in the first half, so you'll have a few more to sell starting in the first and second half. Second quarter, I'm sorry.

Okay. And then, just one kind of bigger picture question, Greg. How quickly can you reduce the commercial rental unit. If the economy were to slow materially next year, how quickly can you get the trucks out that you've brought in, and what would that process look like?

Well, you'd probably do it in several ways. Some you would move to the used truck center. Some you could move into service and Dedicated Contract Carriage. Some you could move into shortened lease service. So we have a lot of options and choices that in a tough economy might be a good thing for us to do. And customers would respond well to that.

Okay. Thank you. I appreciate the time.

You're welcome.

Thank you. Our next question is from Art Hatfield with Morgan Keegan, your line is now open.

Morning, everyone.

Morning.

I kind of jumped on the call late, so if I'm asking to repeat something, I apologize up front. But when, I heard some of your comments on the extensions. And I haven't had a chance to go back and look at prior quarters, but did that rate of number of customers wanting to do extensions, or that number of total extensions, did it slow at all in Q3?

No, it hasn't. And in fact, when you get a moment and you look at the appendix in the PowerPoint on page 29, you will see on a year-to-date basis that compared to four years ago, those quantities have doubled. And they have stepped up each of the last three difficult periods, and I think they've been strong during all of the months of the most recent quarter, as well.

Okay. Yes. I was looking at that, but I wasn't sure how it had played out in Q3 specifically, so that's helpful. The other thing is on the commercial rental fleet, I was a little bit surprised by the fact that, I know that you were investing in that fleet this year. But the average fleet count of 31.1 in the quarter had dropped down to 39 at the end of the quarter. Can you explain what was going on there? And then as part, kind of a part-B to that, and I'll be done. Is 79.2 utilization, is that theoretically, can you get that -- is it even possible to get any better than that?

Let me answer the last part first, and then Robert can talk to you about the fleet. Since I think, as you know, but just for the benefit of everyone on the call, when we calculate that percent, that's based on a seven-day week. Even though commercial customers often use it Monday through Friday. And we also count the units that are out for service. So it's a pretty rigorous denominator. When you get to where we are, you are eventually renting those right through the weekend to a great degree. And to a greater degree than in the past, and I think that shows a little bit of strength of recovery, but it's also supply and demand.

A customer that might normally use it Monday through Friday may keep it over the weekend to ensure that they have it on Monday instead of returning it on Friday, because at these levels you do find a lot of lots begin to empty, especially if you want a particular kind of vehicle. So that's sort of a theoretical max, and you really can't get much higher than that, without turning away customers at certain locations. This is a national average, so that means some are even higher. So I -- that's kind of peak.

Okay. Thank you.

Hi, Art, your question around the fleet.

Right.

It is down. The ending fleet was down a couple hundred units from the average. But that's mainly due to just normal ebbs and flows within the fleet.

As an example, one of the things that we are doing is leasing some units out of the rental fleet for customers that are interested in those. So at any given month, you might have a few more going out than what came in that month, but you can see quarter-over-quarter we were up 100 units from quarter-end to quarter-end. And from the beginning, or from March, it was 28.8, so we're up just over 2,000 units from the end of the first quarter.

Are you going to be taking net deliveries in the quarter, so at the end of the Q4 that number will be higher again?

No, normally what happens in Q4 is we bring it down a little bit, because you have to get the fleet down to the right size going into the first quarter, you're not too over-fleeted, so we'll probably be moving some units toward the tail-end of the year into the used truck center. So the ending fleet is probably going to be down from what you're seeing today.

So you manage it, you manage it down just through the natural attrition process.

Correct.

That's all I have today. Thanks for your time.

Sure.

Thank you. Our next question is from Matt Brooklier with Piper Jaffray. Your line is now open.

Thanks, good morning, guys.

Good morning.

When I look at your guidance for the fourth quarter, let's take the mid-point here, it's suggesting you guys are going to be roughly, let's say $0.10 or $0.11 down from the continuing number you reported in 3Q. Yet historically, third and fourth quarter pretty much look similar from an earnings perspective, especially into recovery and off of a bottom. I guess my question here is, as we move from third quarter to fourth quarter, are there some incremental cost headwinds or some utilization issues that would drive earnings down from the third quarter number?

If you look back over time, and you compare enough 4Qs to 3Qs, you'll notice that there tends to be a dip more than a flatness. And last year, the change of fourth quarter from third quarter was also down $0.10. And that's sort of the range that we're looking at this year. Now, a couple of items are very specific. The $0.04 from tax, we don't expect to reoccur. And the $0.02 from interest costs from the medium term note, that is more expensive in interest than commercial paper.

Apart from that, you just don't know how strong seasonality the fourth quarter will be. If it is a strong holiday season, and things are going well, and rentals are hot, then you may not see as much of a decline. But it's hard to know exactly in advance yet. So a couple of things we know specifically, and a couple we have to guess at. And if it's not quite as robust as it was in the third quarter, that will be slightly lower, and that kind of gets you to that $0.10 or so difference from third quarter.

Okay. Fair enough. Central support costs ticked up in the quarter, what was driving that?

Just some higher compensation costs and professional services. I think on a go-forward, we're putting probably more in line with prior quarters at $9 million to $10 million, probably.

Okay. Thank you.

Yes.

Thank you. And our next question is from David Campbell with Thompson, Davis and Company. Your line is now open.

Hi, good morning. It's almost afternoon. Good morning, everybody.

Good morning.

Good morning.

Greg, in answer to a previous question about the fact that this cycle may include a more commercial rental growth than normally, and less full service lease growth, does that potentially, in the long-run, increase the volatility of the earnings or make them less predictable, given the fact that the commercial rental list can go down pretty fast?

Well, I think this is more of a short-term phenomenon. That is, talking about the difference between the recovery from our products, versus historical. I think that over time, and even as we get through this particular period of uncertainty, the norm will return and we will have, I think the same predictability that comes from predominantly a contractual revenue and earnings base. And that served us well in a downturn, and it will serve us well as things ramp-up again. We just think in this case, the commercial rental will be stronger longer before you see a big up-turn in lease.

Okay. Which would be theoretically put into 2012 estimates?

Yes. By early 2012, is when we'd really expect, from what we know today, is when you'd really see the significance of lease, and rental would be expected to be quite strong through then. And that's based on the fact that we normally have a couple of quarters of visibility. We're nearing the end of this year. If things began to pick up, and you sold business into the end of the first half of 2011, it will start showing up by the end of 2011 and into 2012, and that's kind of the expectation.

Okay. Thank you very much for your help.

You're welcome

Thank you. Our final question today is from David Ross with Stifel Nicolaus, your line is now open.

Yes. Just on the supply chain solution side, you sighted higher self insurance costs as a cost increase in the quarter. Can you talk a little bit more about that? That's typically not something that a non-asset based carrier is involved in, or has a material impact.

The self insurance costs?

Correct.

Yes, I'll let John Williford cover that.

Yes, you're breaking up a little bit, but in SCS, self insurance costs were up a little bit. About half of that is from rebates in the prior year that didn't reoccur. Okay? And a big part of the rest of that is from ongoing claims that go into prior years. So I'd say -- maybe half of that should disappear in future quarters, and would reflect a normal run rate. And the, you said it normally wouldn't be an SCS, we have a fair amount of drivers in SCS, mainly in our automotive vertical.

Excellent. Very helpful.

Okay.

Thanks.

Thank you. This does conclude our question and answer session. I would now like to turn the call back over to Mr. Greg Swienton for closing remarks.

Well, thank you. I believe we've answered all questions for everyone in queue. And thank you for holding the questions, and for those of you who then were willing to get back in. So, we're just at noon-time. Thanks for your participation, have a good, safe day. Bye now.

Thank you, this does conclude today's conference, thank you for participating. You may disconnect at this time.