Ryder System, Inc.
Q3 2010 Earnings Call Transcript

Published: 22 Oct 2010

[Operator:]

Good morning and welcome to Ryder System Incorporated third quarter 2010 earnings release conference call. All lines are in a listen-only mode until after the presentation. (Operator Instructions) Today’s call is being recorded, if you have any objections please disconnect at this time. I would like to introduce Mr. Bob Brunn, Vice President of Investor Relations and Public Affairs for Ryder. Mr. Brunn you may begin.

[Bob Brunn:]

Thanks very much. Good morning and welcome to Ryder’s third quarter 2010 earnings conference call. I like to begin with a reminder that in this presentation you will hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectation 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 Securities 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.

[Greg Swienton:]

Thanks, Bob, and good morning, everyone. Today we’ll recap our third quarter 2010 results, we’ll 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. Before we get into the results I would like to make a brief comment related to some recent management changes here at Ryder. Tony Tegnelia will be retiring from Ryder early next year after a 33 year career with out company. Tony’s contributions have been invaluable to the organization, having had key leadership roles in finance, supply chain and more 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 in personally for his outstanding service to our company and to our shareholder over the years. Most of you on the call already know Tony’s successor as president of Global 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 is 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 am 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 look forward to all of their contributions and there new roles. So now let me get into an overview of our third quarter result which begins on Page 4, 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 is $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 MFS fuel at 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 cost past through. FMS operating revenue which excludes yield 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 in fleet management were up 48%, fleet management earnings is 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 vehicle results and lower expenses in our retirement plans. These improvements were partially offset by higher maintenance cost on an older fleet as well as fewer revenue earning vehicles in the fleet. Turning to the supply chain solution segment on page 6 total revenue was up 10% due to higher sub contract of 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 movement. These increases were partially offset by the closure of some locations last year as we rationalized under performing contracts. SES net before tax earnings were down by 6%. Supply change net before tax earnings as a percent of operating revenue decreased by 70 basis points to 5.9% again unusually strong margin comparisons in the prior year. Reduced SES earnings were driven by higher self insurance cost partially offset by improved operating performance particularly in the high tech sector. In dedicated contract carriage total revenue was up by 1% and operating revenue was up by 2% reflecting higher fuel cost pass through. Net before tax earnings NDCC decreased by 12%. DCC net before tax earnings as a percent of operating revenue declined 110 basis points to 7.3%. The decline reflects lower operating performance including increased driver cost 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 EPS. EPS from continuing operations were $0.76 in the current quarter up by $0.25 for 49% from $0.51 in the prior year. Including this continued operations earnings per share for quarter was $0.74 up $0.31 or 72% from $0.43 last year. The average number of diluted shares outstanding for the quarter declined by $4 million to $51.5 million. In December 2009, we announced the $2 million share anti-dilutive repurchase program and in February 2010, we announced the separate $100 million repurchase program and these programs run simultaneously. Under the $100 million program we repurchased 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 2 million share anti-dilutive 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 remained authorized under this program and 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 U.K. and lower contingent tax accruals. These items 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 8 highlights key financial statistics for the year-to-date period. Operating revenue was up by 2%. Comparable EPS from continuing operations were $1.57, up 21% from a $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 the 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 9 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 we have added to the earnings press release table. In Fleet Management Solutions, full service lease revenue was down 2% a sequential improvement from the 4% decline in the second quarter The average leased 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 stabilization of the lease in 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 are 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 are 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 on 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 a 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 lease units to the 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 our servicing is smaller year-over-year fleet. We expect these trends to continue until our lease fleet resumes 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 winds were partially offset by certain under performing operating locations closed last year. SCS earnings are $15.2 million for the quarter, were down by a $1 million from 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 cost pass through. DCC's net before tax earnings fell by $1.2 million. We are 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 result in cost and productivity benefits in future years. The portion of Central Support cost allocated at 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 we'll 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 will turn the call over to our Chief Financial Officer, Art Garcia to cover several items beginning with capital expenditures.

[Art Garcia:]

Thanks Greg. Turning to page 11, 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 inline with our prior forecast of approximately 1.1 billion. Year-to-date spending on leased vehicles was up by $68 million from the prior year both UV sales and existing lease renewals have improved over the prior year and are ahead of plan. Capital spending on commercial rental vehicles was 358 million year-to-date, primarily due to refreshment of the rental fleet as well as some modest gross spending. This was an increase of $352 million over last year since in 2009; we spend virtually no capital on rental vehicles 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 increase 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 residual values and accelerated depreciation rates on certain vehicles. Including the impact of used vehicle sales, we generated over $1 billion of total cash year-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 vehicle received from OEMs. Including our cash capital spending, the company generated a $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 1% to equity at the end of the quarter were a 188% versus 183% at the end of 2009. Including share repurchase activity, we continue 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 repurchases 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.

[Greg Swienton:]

Okay, thanks Art. Page 15 summarizes key results for our asset management area globally. At the end of the quarter, our globally used vehicle inventory for sale was 4700 vehicles, down by 3100 units from the third quarter 2009 and down by 1200 units sequentially from the end of the second quarter 2010. We sold 4400 vehicles during the quarter, down 15% from the prior year due to our smaller inventory available for sale. We saw continued strength and 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 realize 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 41,100 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 that are extended 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 are 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 will 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 two and a half quarters. We are 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 cost renewed 2010 vehicles. We expect these factors to continue to benefit our business particularly in rental and used trucks. In rental these 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 cautious regarding the sustainability 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 have seen a stabilization of our lease fleet size. This 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 cost. This will continue to cause some pressure on lease until we start purchasing more new units and the fleet starts growing again. In dedicated expect some continued impact from higher driver cost, in 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 have taken to improve results in the segment. Looking specifically at our fourth quarter forecast, we expect increased interest expense of $0.02 related to the previously executed debt issuance. We are not forecasting the $0.04 tax benefit we received in the third quarter to reoccur in the fourth quarter. Given these factors were 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 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 26% to 29% improvement from a comparable $1.70 in this prior year. And that does conclude our prepared remarks this morning and we will move on to the Q&A and due to the number of usual callers in queue I'll ask that you limit your self to two or three questions each. If you have additional questions you are 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:]

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

[Kevin Sterling:]

Greg can you walk us through how the lease miles driven per vehicle progress throughout the quarter?

[Greg Swienton:]

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

[Robert Sanchez:]

Yes, Kevin by month it was up 5% in July, 1% in August and 3% in September. So, as we 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 to the month that was up each of the months.

[Kevin Sterling:]

Looking at lease prices today compared to last year. How much are they have today compared to last year?

[Greg Swienton:]

On a lease price for a customer?

[Kevin Sterling:]

Yes.

[Greg Swienton:]

Generally year-over-year which we are seeing is the impact of the new EPA technology and that is generally 10 to 15% increase.

[Kevin Sterling:]

Okay thank you and one last question. Do you plan to grow the commercial rental fleet with the streets you’re seeing in commercial rental this year? Do you have enough power units? We expect to end the year little bit higher than we had originally estimated. That is being done by some additional units that we bought early in the unit we talked about in the call last time. And the fact that we are going to hang on to some of the vehicles that we had originally expected to out service in the third quarter we hung on to some of those units over the season in order to be able to meet the demand we are seeing. Okay great thanks for your time I will get back in line and turn it over to someone else.

[Operator:]

And your next question is from Todd Fowler with Keybanc Capital Market your line is now open.

[Todd Fowler:]

Great thank you good morning everybody and I guess congratulations to Tony, Robert and R. Greg along the assumed line to Kevin's question can you talk about the commercial trends during the quarter. Basically kind of what you saw in a sequential basis and what you 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 cost of, the big cost jump up and you EPA mandated 2010 engine cost I think rental is probably not only been strong but we expected to stay strong. So that is something we will 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.

[Robert Sanchez:]

[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%.

[Todd Fowler:]

Robert what you are saying is that the utilization has been close to 80% every month since May.

[Robert Sanchez:]

That's correct.

[Todd Fowler:]

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

[Robert Sanchez:]

Right. We expect to be on a little bit but still relatively close to where we were.

[Todd Fowler:]

Okay perfect that's helpful. And then as a follow-up the stabilization that you are seeing within the size or the trends that are in the full service lease business is that being driven more by a slow down in the attrition that you are 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 this service or is it a little bit above it?

[Greg Swienton:]

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

[Todd Fowler:]

Okay, nice quarter good luck. I will get back in line.

[Operator:]

Our next question is from David Ross with Stifel Nicolaus

[David Ross:]

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.

[John Williford:]

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

[David Ross:]

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?

[John Williford:]

I am not aware of any regional difference we are seeing with our kind of drivers and dedicated fleets that the driver generally return home at night so we have pretty good jobs for drivers. Unlike, we said we are doing a lot to mitigate the impact to us but this is really a national issue right now.

[David Ross:]

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.

[Greg Swienton:]

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 and economic rebound, I think many that can utilize use trucks are in the market. In our case we have a lot fever 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 have 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 is also sensitive to the new EPA mandated engines and there in the shocking sticker prices that goes with it if they can utilize a used vehicle they will try to do it and I think there is a lot of factors that contribute.

[David Ross:]

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?

[Greg Swienton:]

So, Robert do you want to comment?

[Robert Sanchez:]

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

[Operator:]

Our next question is from Jon Langenfeld with Baird your line is now open.

[Jon Langenfeld:]

Hi good morning gentlemen this (inaudible) for John, if I could just start on that lease thing comment but little bit more and you have talked about stability in that market. I mean certainly the least fleet continues to contract I think you have 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 looks like you will have incremental dollars being spend on the commercial rental side maybe at the expense of lease? But can you talk a little bit about timing of when we should start to see that, that lease fleet bottom.

[Greg Swienton:]

I think we are similar to where we were on the last call that that we expect to see stabilization meaning really bottoming out if will words the lease weight is no longer declining in the several quarters and you saw this quarter we were down on average I think 400 units and we expect of a pretty large base we expect that to really continue for the next quarter to and then begin to see some increases in the fleet in the second half of 2011. So mid next year we would expect to begin to some line of improvement. Now that could move depending on how quickly our customers decided they want to start leasing how the confidence in the economy starts to look. But right now we are estimating some point middle of next year.

[Jon Langenfeld:]

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 provision and entering into (inaudible) on the fact that those are all the existing contracts that were ahead exploration that are being re-negotiated can you talk a little bit about that mix.

[Greg Swienton:]

There is both in the extensions and you have some that are getting to the end of their term. They have got the near term and then get 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 are 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.

[Jon Langenfeld:]

Okay good and one last one on the pension side. I know what's there like when we think about 2011 and the potential impacts on puts and takes obviously you changed the pension plan asset prices are up but interest rates are down. So very early read in the 2011 but how should we think about the direction of impact or benefit next year for 2011 pension [loan] this year?

[Greg Swienton:]

I will let Art answer precisely, but I think if the market closed and where it is around today or yesterday and where December 31 and we are doing the calculation and interest rates where they were. It might benefit us on the P&L next year by about $1 million, there are plenty of shares. I think that's right but [Garcia is over there].

[Art Garcia:]

Right Greg I think 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 but there is a lot of items that still need to happen by the end of the year and that could clearly impact the number.

[Operator:]

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

[Alex Brand:]

First think about the cycle and getting back to peak earnings and kind of qualitatively how you think and 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 of 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?

[Greg Swienton:]

I would say at this point we are not surprised, I think if you would have asked this 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 a strong and some of the lease commitments to kick in. I think this is an issue beyond us, it is an issue of consumer confidence and business confidence and there willingness to signup for longer term deals I think is a total reflection on where the believe the economy is going and how there business maybe impacted by pending taxes, uncertainty in regulation. So they are 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 little erratic then I think they are going to ready to sign up for longer term 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 have recalled it 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 in your choice to sign a long term deal or work on something short term, the logic on the part of the customers and potential customers I’ll do a little more rental. Now for our business model that doesn’t necessarily harm what you describe is us getting back to our peak earnings because what we may find is even though what I have described maybe true we are 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.

[Alex Brand:]

And if it continues this way, which makes sense, where you have less commitment to long-term on the part of your customers, but you brought 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?

[Greg Swienton:]

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 are going to be doing more refreshment, more renewal and more additions. But over the long run that will shift and you will 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 in future cash flows. But we will play this the best we can given the hand that we are being dealt that I described little bit earlier.

[Operator:]

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

[Ed Wolfe:]

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 two sets of debt extinguishment are including it in that.

[Greg Swienton:]

It is all in there so we are seeing 58 to 63 and includes that.

[Ed Wolfe:]

Okay so on an ongoing basis really 60 to 65 though. I think the you call it debt extinguishment what we are trying to highlight is that the additional interest expense associated with empty and insurance we completed in September.

[Greg Swienton:]

And it is ongoing.

[Ed Wolfe:]

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

[Greg Swienton:]

I think you can probably expect to continue in that range it 66 in the second quarter just under seven and in the third. So I would 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 in terms of quarterly modeling and probably looking around that $6 million to $7 million range.

[Ed Wolfe:]

And why just, why does it replenish a few quarters from now. How do you think about that, well you got the rental fleet that we renewed we usually as I mentioned earlier we hold on the vehicle, we are holding on the vehicle in the third and fourth quarter? Those units will going to used truck centers towards the tail end of the year and will be sold in the first half. So you will have a few more to sell starting in the first and second half. And with just one kind figure picture cluster rag how quickly you can reduce the commercial rental unit its economy would have slow materially next year. How quickly can you get the trucks out that you’ve brought in and what would that process look like?

[Greg Swienton:]

Well you probably do it in several ways. Some you would move to the used trucks center, some you could move in to service and dedicated contract carriage, some you could move into shortened lease service, so you got a lot of options and choices that in the tough economy might be a good thing for us to do. And customers would respond well of that.

[Operator:]

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

[Art Hatfield:]

I kind of jump on the call late. So if I am asking you to repeat something I apologize upfront 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 wanted to do extensions or that number of total extensions, did it slow it all in Q3?

[John Williford:]

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 have been strong during all of the months of the most recent quarter as well.

[Art Hatfield:]

I was looking at that but I wasn’t sure how well it played out in Q3 specifically. So that’s helpful. The other thing is on the commercial rental fleet and I was a little bit surprised by the fact that I know that you are investing in that fleet this year but the average fleet kind 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 kind of a part B to that I will be done, is 79.2 utilization, is that theoretically, can you get that -- is it even possible to get any better than that?

[Greg Swienton:]

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 7 day week, even though commercial customers off and use it Monday to 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 virtually renting those right through the weekend to a great degree and to a greater degree in the past and I think that, that shows a little bit of strength of recovery but its also supply and demand. A customer that might normally it Monday to 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 sort of a theoretical max and you really cant 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 that’s kind peak

[Robert Sanchez:]

Your question around the fleet, it is down the ending fleet was down a couple of hundred units from the average but that’s mainly due to just normal adds and flows within the fleet. As an example, one of the things that we are doing is leasing some units out of the (inaudible) fleet for customer that are interested in those. So at any given month you might have a few more going out and what came in that month but you can see quarter-over-quarter we roll up 100 units from quarter end to quarter end and from the beginning from March it was [2088] so we are up just over 2000 units from end of the first quarter.

[Art Hatfield:]

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

[Robert Sanchez:]

Normally what happens in Q4 is we bring it down a little bit because you have got to get the fleet down at a right size going into the first quarter, you are not too over fleet and so we will probably be moving some units towards the tale end of the year into the used truck center so the ending fleet is probably going to be down from what you are seeing today.

[Art Hatfield:]

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

[Robert Sanchez:]

Correct.

[Operator:]

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

[Matt Brooklier:]

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?

[Greg Swienton:]

If you look back overtime and you compare enough 4Q to 3Q, you will 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 are looking at this year. Now some couple of items are very specific. The $0.4 from tax we don’t expect to recur and $0.2 from interest cost from the medium term note that is more expensive than interest than commercial paper. Apart from that you just don’t know how strong seasonally the fourth quarter will be. If it is a strong holiday season things are going well and rentals are hot then you may not see as much of a decline. But it is hard to know exactly in advance yet. So couple of things we know specifically in a couple we have to guess at. And if it is not quite as robust as it was in the third quarter that will be slightly lower and that kind of get you to that 10 centers difference from the third quarter.

[Matt Brooklier:]

Central support cost takes up in the quarter what was driving that.

[Greg Swienton:]

Just higher compensation cost and professional services I think on a go forward we are putting probably more in line with prior quarter at $9 million to $10 million probably.

[Operator:]

Thank you and our next question is from David Campbell – Thompson, Davis & Company your line now open.

[David Campbell:]

Greg and answer to your previous question about the fact that this cycle may include more commercial rental growth then normally and less full service lease growth. Does that potentially in the long run increase our utility the earnings or make them less predictable given the fact that the commercial renters couldn’t go down pretty fast.

[Greg Swienton:]

Well I think this is more of a short-term phenomenon that is talking about the difference between the recoveries 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 contractual revenue in earnings base and that service well in the downturn and it will service 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.

[David Campbell:]

Which would be theoretically put in to 2012 estimates?

[Greg Swienton:]

Yeah, 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 are nearing the end of this year. If things began to pick up and you sold business in to the end of the first-half of 2011 it will start showing up by the end of `11 and into `12 and that’s kind of the expectation.

[Operator:]

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

[David Ross:]

Yes just on the supply chain solution side you said its higher self insurance cost I guess the cost increase in the quarter, can you talk a little bit more about that that’s typically not something that are not asset base carrier I guess is involved in or has material impact?

[John Williford:]

The self insurance costs?

[David Ross:]

Correct.

[Greg Swienton:]

Yeah, I will let John Williford cover that.

[John Williford:]

I think you are breaking up a little bit but in SES yes, self insurance cost were up a little bit about half of that is from rebates in the prior year that didn’t reoccur and a big part, rest of that is from ongoing claims that go into prior years so I would say maybe half of that disappear in future quarters and that would reflect in normal run rate. And you said it normally wouldn’t be an SES, we have a fair amount of drivers in SES, mainly in our automotive vertical.

[Operator:]

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.

[Greg Swienton:]

I believe we have answered all questions that were for everyone in queue and thank you for holding the questions and for those of you were then willing to get back in so we are just at noon time. Thanks for your participation, have a good safe day. Bye now.

[Operator:]

Thank you. This concludes today’s conference. Thank you for participating. You may disconnect at this time.