clshTranscript20081022T

F I N A L T R A N S C R I P T

R - Q3 2008 Ryder System, Inc. Earnings Conference Call

Event Date/Time: Oct. 22. 2008 / 11:00AM ET

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C O R P O R A T E P A R T I C I P A N T S

Robert BrunnRyder System, Inc. - VP of IR

Gregory SwientonRyder System, Inc. - CEO, Chair

Robert SanchezRyder System, Inc. - CFO, EVP, Operations of US Fleet Mgmt, Solutions

Anthony TegneliaRyder System, Inc. - Pres, US Fleet Management Solutions

John WillifordRyder System, Inc. - Pres, Global Supply Chain Solutions

C O N F E R E N C E C A L L P A R T I C I P A N T S

John LarkinStifel Nicolaus - Analyst

Jon LangenfeldRobert W. Baird & Company, Inc. - Analyst

John BarnesBB&T Capital Markets - Analyst

Arthur HatfieldMorgan Keegan Co., Inc. - Analyst

Alexander BrandStephens, Inc. - Analyst

Ed WolfWolf Research - Analyst

Todd FowlerKeyBanc Capital Markets/McDonald Investments, Inc. - Analyst

Michael PackBank of America - Analyst

David CampbellThompson Davis & Company - Analyst

P R E S E N T A T I O N

Operator

Good morning and welcome to Ryder System Incorporated third quarter 2008 earnings release conference call. (OPERATORINSTRUCTIONS) Today's call is being recorded.

I would like to introduce, Bob Brunn, Vice President of Investor Relations and Public Affairs for Ryder. Mr. Brunn you may begin.

Robert Brunn - Ryder System, Inc. - VP of IR

Good morning, and welcome to Ryder's third quarter 2008 earnings conference call. I would like to begin with a reminder thatin this presentation you will hear some forward-looking statements within the meaning of the Private Securities Litigation

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Oct. 22. 2008 / 11:00AM, R - Q3 2008 Ryder System, Inc. Earnings Conference Call



Reform Act of 1995. These statements are based on management's current expectations, and are subject to uncertainty andchanges 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 morningsearnings 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 Robert Sanchez, Executive Vice Presidentand Chief Financial Officer. Additionally, Tony Tegnelia, President of Global Fleet Management Solutions, and John Williford,President of Global Supply Chain Solutions, are on the call and available for questions following the presentation. With that, letme turn it over to Greg.

Gregory Swienton - Ryder System, Inc. - CEO, Chair

Thanks, Bob, and good morning everyone. This morning, we will recap our third quarter 2008 results, review asset managementarea, and provide our current outlook for the business. After our initial remarks, we will open up the call for questions.

So, let me begin with a overview of our third quarter results, which is on page four for those following online for the slidepresentation. Net earnings per diluted share were $1.25 third quarter 2008, as compared to $1.11 in the prior year period. EPSin this year's quarter included a benefit of $0.03, due mainly to a change in Massachusetts tax laws. EPS in the prior year periodincluded a $0.03 net charge for restructuring costs, partially offset by a gain on property sale. So excluding these items in eachyear, comparable EPS was $1.22 in the third quarter of 2008, up from $1.14 in the prior year.

If you include the small positive tax effect in the third quarter this year, EPS grew by 10%. Excluding this effect, EPS grew by 7%.Including the tax effect, EPS was at the low end of the forecast range we provided on our last earnings call of $1.25 to $1.30. Ifyou exclude this effect, comparable earnings for the quarter were slightly below our forecasted range. The shortfall was due toweaker than expected demand in our Transactional Commercial Rental product line.

Total revenue for the company was down by 1% from the prior year. Total revenue reflects the impact of the previously announcedchange from gross to net revenue reporting, for sub-contracted transportation with one Supply Chain customer. Operatingrevenue, which excludes FMS Fuel and all sub-contracted transportation revenue, was up 3%, due to contractual revenue growthin Fleet Management and Supply Chain.

Fleet Management grew primarily from acquisitions and organic contract maintenance revenue growth, while Supply Chainrevenue grew due to new sales activity. Supply Chain and Dedicated revenue also benefited from higher fuel costs. On pagefive, Fleet Management total revenue was up 11%, while operating revenue was up 2% versus the prior year. Contractualrevenue, which includes both full service lease and contract maintenance, was up 4%. Lease revenue growth was up by 4%,driven by our recent acquisitions, while higher contract maintenance revenue of 6% growth reflects organic sales activity.

Total FMS revenue was positively impacted by a 33% increase in fuel revenue, reflecting higher fuel costs past due to customers.Global commercial rental revenue down 4%, reflecting a slow down in the global economy. Rental revenue was down in bothThe U.S. and the UK markets, while rental revenue was up in Canada. Gains from the sale of used vehicles were up by $2.3 million.We did sell fewer units during the quarter from a smaller used vehicle inventory. The decline in units sold was more than offsetby improved pricing as we increased our reliance on our own retail sales network, where we received better pricing.

Net before tax earnings in Fleet Management were up by 12%. Fleet Management earnings as a percent of operating revenueup by 120 basis points to 13.5%. FMS earnings benefited primarily from improved contractual business performance andaccretive acquisition results. To a lesser extent, FMS earnings also benefited from improved used vehicle results, and unusuallyvolatile fuel prices. These benefits were partially offset by lower commercial rental results.







Turning to the Supply Chain Solutions segment on page six, total revenue down by 22%, due to the change to net revenuereporting on a sub-contracted transportation business with one customer that was previously reported on a gross basis. Thisreporting change did not impact operating revenue or earnings. Operating revenue was up by 6%, reflecting both new andexpanded customer contracts, as well as higher fuel costs. Third quarter net before tax earnings in Supply Chain were down27%, versus the prior year. Net before tax earnings as a percent of operating revenue were down 160 basis points to 3.7%.Supply Chain's earnings were negatively impacted by lower operating results in our Latin American operations and the startupof a U.S. operation.

In Dedicated Contract Carriage, total revenue was down by 2%, and operating revenue was down by 1%. The revenue declinewas related to non-renewed contract, partially offset by higher fuel costs. Net before tax earnings and DCC were up by 7%.Earnings in the quarter benefited from improved operating performance, partially offset by higher safety and insurance costs.DCC's net before tax earnings as a percent of operating revenue were up by 80 basis points to 9.6%.

Page seven highlights key financial statistics for the third quarter. Operating revenue was up by 3%, reflecting growth inmulti-year contractual business. Earnings per share were up by 13%, reflecting higher net earnings and a lower number of sharesoutstanding due to share repurchases. Excluding the $0.03 tax benefit in 2008, and the $0.03 net charge for primarily forrestructuring costs in 2007, comparable earnings per share were up by 7%. The average number of diluted shares outstandingfor the quarter was down by 2.8 million shares to 56.2 million.

In December 2007, we announced both a $300 million discretionary share repurchase program and a 2 million share anti-dilutiverepurchase program. During the third quarter, we repurchased 850,000 shares, at a average price of $66.44 per share, underthe $300 million program. This brings that program to date purchases to 2.615 million shares, at a average price of $64.89 centsper share. During the quarter, we purchased an additional 103,000 shares, at a average price of $67.16 under the 2 million shareanti-dilutive program. This brings the program to-date purchases to 1.363 million shares at a average price of $63.41 per share.As of September 30th, there were 55.6 million shares outstanding.

As you know, the capital markets have experienced conditions that we haven't seen in the last 75 years. Ryder remains relativelywell positioned due to our strong credit ratings, our under-levered balance sheet, and experience in accessing diverse fundingsources. We are, however, being appropriately prudent in evaluating all sources and uses of capital. As such, toward the end ofthe third quarter, we temporarily paused our share repurchase programs. We are continuing to assess market conditions forappropriate continuation of the programs in the future.

The third quarter 2008 tax rate was 37.3%, in line with the prior year. The current period tax rate reflects the benefit of thechange in Massachusetts tax laws. The prior year tax rate reflects a benefit from audit closures, expiring statutes of limitationswithin several jurisdictions, and a tax law change in the UK. For the fourth quarter, we anticipate our tax rate to be somewhatabove our initial full year plan rate, which was 39.1%.

Page eight highlights key financial statistics for the year to date period. Operating revenue was up by 4%. Reported earningsper share were up by 10%. Comparable earnings per share $3.40, up by 12% from $3.04 in the prior year. The average numberof diluted shares outstanding were 57.2 million, down by 3.2 million shares.

The year to date tax rate was 40.3%, compared to the prior year tax rate of 38.1%. 2000 tax rate was impacted by non-deductiblelosses in Brazil we reported in the second quarter. Return on capital, which is calculated on a rolling 12 month basis, was 7.4%,and the same as last year.

I would like to turn now to page nine to discuss our third quarter results for the business segments. In Fleet ManagementSolutions, operating revenue was up by 2%, led by 4% contractual revenue growth. The smaller commercial rental product linehad a 4% revenue decrease. Total revenue increased by 11%, due both to this operating revenue growth, and higher fuel costs,[passed through to] customers. Fleet Management Solutions earnings up by $11.6 million or 12%.







In lease, we continued solid revenue growth, driven primarily by our four recently closed acquisitions. Miles driven per vehicleper workday on U.S. leased power units were down 4% versus the third quarter 2007. Contract maintenance revenue grew 6%,due to continued new sales to the private fleet market, which resulted in an increase in the number of units under contractmaintenance agreements. U.S. rental revenue was down, due to a 5% smaller fleet, and a 3% reduction in pricing on powerunits.

Despite softer market demand, U.S. commercial rental utilization on power units was 73.7%, up 70 basis points from 73%, inthe third quarter 2007. Utilization improved as we made the appropriate adjustment to our rental fleet size to meet marketdemand conditions during the quarter. This is the fourth consecutive quarter of improving U.S. rental utilization comparisons.In the UK, rental demand was softer, and this resulted in lower utilization of the UK rental fleet. Rental revenue increased inCanada in the quarter.

In Supply Chain Solutions, total revenue was down 22% in the quarter, due to the change from gross to net revenue reportingI discussed previously. SCS operating revenue excludes sub-contracted transportation, and therefore excludes the impact ofthis change. SCS operating revenue was up 6%, reflecting new and expanded customer contracts, as well as higher fuel costs.SCS net before tax earnings were down $4.7 million for the quarter. Earnings were negatively impacted by results in the LatinAmerican operations and start up of a U.S. based operation.

In Dedicated Contract Carriage, total revenue down 2% and operating revenue was down 1%, due to non-renewed contracts,partially offset by higher fuel costs. DCC's net before tax earnings were up by 7%, due to improved operating performance,partially offset by higher safety and insurance costs.

Our total Central Support Service costs were up by $1.7 million, due primarily to professional fees associated with strategicinitiatives and legal services. The portion of Central Support costs allocated to the business segments and included in segmentnet earnings was up by 1.4 million. The unallocated share, which is shown separately on the P&L, increased by $300,000. Netearnings were $70.2 million, up 7%. Comparable net earnings were $68.6 million, up by 2% from the $67.2 million in the prioryear.

Page ten highlights our year to date results by business segment. In the interest of time, I won't review these results in full detail,but will just highlight the bottom line results. Comparable year to date net earnings were $194.5 million, as compared to $183.6million in the prior year. This represents a increase of $10.9 million, or 6%. At this point, I will turn the call over to our ChiefFinancial Officer, Robert Sanchez to cover several items beginning with capital expenditures. Thanks Greg.

Robert Sanchez - Ryder System, Inc. - CFO, EVP, Operations of US Fleet Mgmt, Solutions

Turning to page 11, year to date gross capital expenditures totaled $949 million, down $33 million from the prior year. Fullservice leased vehicle spending was down $37 million. The reduction in lease spending reflects increased term extensions onsome existing vehicles, in lieu of purchasing new vehicles for customers. Additionally, lease spending was elevated in the prioryear due to the pre-buy of 2006 model year engines, which continued to be purchased for customer leases in early 2007.Commercial rental vehicle spending was down by $28 million from the prior year reflecting our more conservative plan forrental capital spending this year.

[Re-realized] proceeds primarily from sales of revenue earning equipment of $212 million, down by $85 million from the prioryear. This decrease reflects a planned reduction in units sold as a result of having a smaller used vehicle inventory. In 2007, weexecuted $150 million sale lease back, but did not have a sale leaseback in the current year to date period. Including proceedsfrom sales and the 2007 sale leaseback, net capital expenditures were $737 million, up by $202 million from the prior year. Wealso spent $232 million, on three Fleet Management acquisitions closed this year, Lily in the northeast, Gator in Florida andGordon in Philadelphia.







Turning to the next page, you will see we generated cash from operating activity of $882 million year to day, up by $45 millionfrom the prior year. This increase was due to improved earnings before depreciation expense. Increased depreciation was largelydue to spending on contractual leased vehicles primarily from acquisitions. Including the impact of our used vehicle salesactivity, we generated over $1.1 billion in total cash, down by $191 million from the prior year. The decline was primarily dueto the $150 million sale leaseback from the prior year.

Cash payments for capital expenditures were $891 million, down by $202 million versus the prior year. Including our capitalspending, the Company generated $250 million in positive free cash flow in the current year to date, up from $239 million inthe prior year.

On page 13, total obligations of approximately $3.1 billion are up by $135 million, as compared to the year end 2007. Theincreased debt level is largely due to spending on acquisitions and net stock repurchases. Balance sheet debt to equity was165%, as compared to 147% at the end of the prior year. Total obligations as percent of equity at the end of the quarter were174%, versus 157% at the end of 2007. Our recently closed acquisitions, as well as share repurchases, are starting to move ourbalance sheet leverage higher in accordance with our previously stated objective.

We continue to have significant balance sheet capacity to fund future growth, acquisition, and other objectives. Our equitybalance at the end of the quarter was $1.77 billion, down by $115 million, versus the year end 2007. Our ending equity balancereflects net share repurchases, currency translation losses and dividends, which more than offset our net earnings. At this pointI will hand the call back over the Greg to provide a asset management update. Thanks, Robert.


On page 15 we summarize key results in our U.S. asset management area. Quarter end, our used vehicle inventory for sale was4,600 vehicles, unchanged from the end of the second quarter. Used inventories down 39%, or almost 3,000 units from the endof the third quarter 2007. The lower used fleet balance reflects the actions we took last year, to reduce inventories and bringthem in line with our targeted levels. We sold 4,300 used vehicles during the quarter, down 36% from the prior year, and in linewith our expectations.

Because our inventories are in line with our targets, we return this year to our normal process of selling the large majority ofour vehicles at retail prices through our own used vehicle sales centers, where we realize the best pricing. Proceeds per vehiclesold were up by 17% on tractors, and up by 8% on trucks, as compared to the third quarter 2007. Tractor and truck proceedsper unit were also up by 3% to 4% from the second quarter this year. Because our inventories are so much lower than last year,we are able to be much more selective and can focus on maximizing the price per unit sold. At the end of the quarter,approximately 5,600 units were classified as no longer earning revenue. This number is down by 3,200 units from the prior year,primarily due to a decrease in the number of units available for sale.

Our total U.S. commercial rental fleet in the third quarter was down on average by 5% from the prior year. In addition to lastyear's fleet reductions, due the the softer than expected rental market in the third quarter, we have reduced the size of the U.S.rental fleet to below our previously planned level. We made the necessary changes during the third quarter, to align our rentalfleet with the softer demand, and we continue to closely monitor and respond to market conditions on an ongoing basis. Therental fleet reductions we have made accomplished their objective for the third quarter, by improving rental utilization levelsby 70 basis points versus the prior year. It's also important to highlight that even with the additional rental fleet reductions inthe third quarter, our used truck inventories were stable and remain below our target level, while pricing on used vehicle saleshas improved.

Turning to page 17, we are revising our full year 2008 EPS forecast, primarily due to softer commercial rental demand. Our priorforecast was a range of $4.60 to $4.70, while our new range is $4.43 to $4.53. This now represents an increase of 5% to 8% over







the prior year comparable EPS of $4.21. We're also establishing a fourth quarter EPS forecast of $1.03 to $1.13, versus $1.18 inthe prior year.

As some of you may recall, our original business plan for the year assumed a continued soft, but stable economic andtransportation environment. Specifically, our commercial rental revenue was forecast to be in a range of flat to up 2% for theyear. While this forecast was accurate for the first half of this year, due to the further weakened economic environment, we nowexpect commercial rental to be softer the near term, and have factored this into our fourth quarter outlook. Additionally, wehave assumed $0.02 of additional EPS expense in the fourth quarter, related to higher short-term borrowing costs, given therecent unusual conditions in the credit markets.

While our EPS outlook is now somewhat lower due to the changed economic environment, our business model does remainstrong because of the many process changes we have made in the business in recent years. In particular, our Centralized AssetManagement team, and our improved processes in this area, have been critical in properly executing our asset strategy throughthis downturn. As a result, we remain in very good shape in terms of managing the Company's vehicle fleet assets.

Fleet Management's operating margins were actually up significantly in both third quarter and the year to date period reflectingthese actions. Commercial rental utilization rates were also up in both periods. Our used vehicle inventories have been andremain below our targeted level. And the pricing we realized in the third quarter on used trucks and tractors was solidly up.The proper management of our fleet puts the Company in a significantly stronger position to weather the current economicdownturn, as compared to the prior downturn we experienced in the early period in 2000 and 2001.

Looking ahead to next year, while we haven't finalized our 2009 business plan yet, we expect to continue to grow our contractualbusiness through both acquisitions and organic growth. We have intensified our focus on productivity initiatives and costcontrol opportunities in light of the softer market conditions. We are also making progress on addressing some of the operationalheadwinds we have had this year in the Supply Chain segment. EPS will also benefit next year from the share repurchases wehave already completed to date, and from any additional repurchases if and when we restart the programs. While we expectthe external economic environment to remain challenging for some time, we are going to the focus on our own initiatives togrow our contractual businesses to improve our productivity and reduce costs to drive earnings improvement next year.

That does conclude our prepared remarks for this morning. Before I open up the call for live questions, I would like to addressone question that we have received in advance of the call. That question is related to whether we anticipate vehicle write downs,or increases in depreciation expense, due to used vehicle market and pricing conditions. The short answer to that question isno, we don't anticipate vehicle write downs or increases in depreciation expense due to used vehicle market and pricingconditions.

Our depreciation policy is based on long-term trend of used vehicle pricing over an economic cycle, not just on recent pricinghistory. We also review our depreciation rates periodically and make any changes necessary to depreciation rates for existingvehicles on a going forward basis. Due to the significance of our volumes, this review is based primarily on Ryder's sales pricingexperience, not on general market rates. The review is also not based just on recent used vehicle prices, but is typically basedon a five year history of sales proceeds.

Each year when we have communicated our business plan for the coming year, we have identified any changes in our depreciationrates resulting from this analysis. In years where we have made an adjustment, the changes have been modest in size, neverrepresenting more than a $0.13 impact to EPS in any of the last five years. Based on our sales experience to date, and given oursales price trends, we don't anticipate a significant change in depreciation policy rates next year. In fact, as a result of our assetmanagement programs, we are operating some vehicle types for longer time periods with customers. This actually may resultin a modest benefit to earnings next year, because our depreciation policy will reflect that it's appropriate to depreciate vehiclesover longer periods, which represent their actual usage periods with customers.







We will be happy to discuss this and other topics further, so at this time I will turn the call over the operator to open up the linefor questions.

Q U E S T I O N S A N D A N S W E R S

Operator

(OPERATOR INSTRUCTIONS) Our first question today is from John Larkin. You may ask your question, and please state yourcompany name.

John Larkin - Stifel Nicolaus - Analyst

Yes I'm with Stifel Nicolaus, good morning everyone.


Good morning, John.


Given the suspension of the share repurchase program, yet reiteration of the objective longer term of moving the leverage ratioup to 275%, total obligations to equity, is it safe to say that, at this particular time given the credit markets as they are, that itwould be difficult to lever up to that level?


It would be a little tougher to lever up at the rate that we would have anticipated prior to this sort of meltdown in the financialmarkets. That doesn't change our intended direction to get to that right level of 250% to 300%. And we are going to keep acareful watch on this. Obviously, we have been experiencing, as I said in my remarks, something this country and the worldhasn't seen for 75 years, and we just think it's prudent that we look at every source and use of cash, so we are temporarilysuspending that. That doesn't change our long-term direction, between share repurchases and acquisitions, we still expect tomove to that longer term objective. It may just not happen as quickly as it would have if we didn't have this blip that occurredover the last several months.


So to put it in easier to understand words, if a great acquisition came along in the next couple of months, you would have theavailability under current lending arrangements to move on that acquisition and roll that company into your operation?


Yes, we currently absolutely do. Robert Sanchez, is there anything you want to add about our access these days?








Yes, the only thing I want to add is clearly our access to capital has, despite all of the issues that have occurred in the creditmarkets, has been strong during this period. And one of the reasons why we temporarily paused the share repurchase to makesure that as these acquisition opportunities come up that we do have all the capital that we need, even if some things went thewrong way in the capital markets that we would still have the capital we need to execute on them. Because in this environmentone thing we are looking at is that it could possibly mean more opportunities for acquisitions, which would be helpful for us.


Do you think that generally acquisitions are more accretive to earnings than the share repurchase program, even at this shareprice level?


In the short run, no, in the long run as these acquisitions really are tuck-ins and we get the synergies that we look for in them,we believe that we are better positioned with the acquisitions.


Is there any refinancing of any pieces of commercial paper or other instruments coming up in the near term we need to beworried about?


No, there's not. Let me address that little bit. In August we issued the $300 million, seven year medium term note at about7.25%. That did position us well coming into September to be able to manage through some of the activity that's gone on.Commercial paper level is at a low level right now, we are between our AR backed CP and our normal CP, we are at about 250million. As you know, we have a $870 million global revolver, plus the $250 million AR backed CP programs. We have got a lotof capacity on that end for continued capital access.


Could you tell us who your lead bank is, and then who the other key members of the bank group are?


They are all global banks. The three top ones in the revolver are Banc of America, Royal Bank of Scotland, and Bank of Tokyo.


That's very helpful. One other sort of broader question, the Company has done such a tremendous job over the last few yearsof moving away from what I would call businesses that are tied to economic cyclicality, yet even with commercial rental beingonly, I want to say 10% of the total overall business, it has had a bit more of a impact than some of us might have thought inthe last quarter or two. Is there any thought to perhaps dramatically downsizing that, or perhaps exiting that business, or is ittoo critical in terms of being maybe the first service that potentially much larger customers would want to partake of?








Yeah, I would say that the way that commercial rental is a piece of the Fleet Management and leasing and maintenance business,that we would not be looking to do something Draconian or dramatic or move away from it. It is a logical service piece that isa key part of leasing, and much of the volume that comes from rental does come from existing lease customers. Clearly whathappens when you take a sudden rapid decline, which is sort of what we have been experiencing now in the third quarter andwe think will happen in the fourth, is a rapid decline from where we thought things might have been.

So, you might say it's sort of a double dip this year that nobody forecasted, not even us. So in the short-term, you not only havethe rental revenue decline, you also have the cost of then outsourcing the vehicles, and that has a little bit of extra expense toget to the right levels. But the overall business model, and the being tied together of the value for our customers, I think in thelong-term really does play out well, and that's why I answered the way I did. I don't think it would be appropriate to do somethingDraconian because that would harm the long-term model, although it's a little bit of pain in the short-term.


Maybe to shed a little more light on that point, any idea what percentage of the new full service lease customers first startedout with Ryder as commercial rental customers?


I don't know that I know the exact percent, but we can tell you that many customers had their very first experience with us asrenters, and that's when they become exposed to the Company, to the people to the operations, to the maintenance, and thepotential for leasing. So that is also a feeding point. In addition as I also said earlier, just to repeat, the majority of the businessthat comes from rental is not just occasional rentals, but also from our longer term leased customers.

So your point that, again, is this an indication that you've got tougher issues in the economy generally, I would say, yes, that'sthe case, because that is supplemental capacity that they don't need. And you will also note the other thing we reported forthis quarter, is that for the first time in quite a while, the lease miles that were run on existing fleets were also down for the firsttime in a long time. So I think that is saying something about the level of freight to be moved in this environment.


That's very helpful, thank you very much.

Operator

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

Jon Langenfeld - Robert W. Baird & Company, Inc. - Analyst

Robert W. Baird. Good morning. Can you reflect on the pipeline on the full service lease side?


Tony, I will let Tony who heads up FMS comment on that. Good morning Jon.







Anthony Tegnelia - Ryder System, Inc. - Pres, US Fleet Management Solutions

Our pipeline actually looks very good year-over-year. It's up from the third third quarter of last year. A significant portion of thatpipeline continues to be for large deals, which is strategically our segmentation direction. It's up from the beginning of the yearand also mid-year as well. So, we have discussed in the past, we are staying very steady state and firm with our sales force inthe field, and we are going to continue that strategy.

We continue to build the pipeline; we like it very much. We are making improvements in our closing ratios, and our extensionsare up very handsomely as well. And our reduction in lost business is very attractive too. So we are seeing our retentions up,extensions up very high and a very strong pipeline. And we are continuing firmly with our strategy, with our strong sales forceto continue gaining market share in this environment. We like where the pipeline is in level and also in quality of it, and as wediscussed earlier in previous calls, we have really cleansed the pipeline process very well, and the probability of hit rates on thispipeline is higher than the hit rates have been in the past, with it's level being higher as well.


If you look at that pipeline today, relative to six month ago, is there anything in it that convinces you that things have gottenworse? I know there is other data points in your business that show that, but I'm wondering if the pipeline specifically, if thereare issues or items, I don't know if the duration to close is getting longer, or how you might measure that, but (inaudible)?


The only tempering aspect is exactly the point that you raise. We are seeing some delays in decisions. They still need theequipment, they are still seeing their business going pretty steady state. We have a good credit worthy and good strong customerbase, but it is taking them long tore decide, and you can see that that in the extensions.

During this rather turbulent period, the extensions are higher, as they wait to make longer term commitments, but they aresticking with us, they are very pleased with the service, and we like the extensions because we get very extraordinary returnson the extensions, so we're keeping them in the fold. It also helps us preserve capital. But they are taking a little longer to makethe decisions, and we are okay with that, because we really do like the extensions.


Okay, good. Greg on the Central Support Services, I saw that was up a couple of million dollars relative to your run rate. Canyou talk about some of the strategic initiatives and elevated legal services that cause that?


There were dollars that we had to expense in the third quarter, that when we go through various acquisition activities, if in factthose don't occur, and that has happened, then you end up expensing all of that money right at the time that that decision ismade and concluded that you don't complete the acquisition. So under today's accounting rules, all of that then gets expensedat that time. That's what helped move that up, both in the general acquisition, strategic, and legal costs.


Assuming you don't have more of those, that's not a run rate, the 48 plus million there?








That's correct.


And then finally, if you think about your comments about growing earnings next year and having the contractual businessesgrow and trying to improve the earnings, can you talk qualitatively, how you think you get there from, looks like leaving theyear here in the fourth quarter, if I look at the mid point of your range, your earnings will be down, kind of in the mid to uppersingle digits. What are the incremental points? If you could run through those again, you did it on the prepared remarks, butmaybe run through those that give you the confidence sitting here today that you might be able to improve earnings.


I will try to think of a little bit of a litany or a hit list for you. We have again, at the end of this year, managed our vehicle assetsdown, and I think that puts us in a better position again at the start of next year, even in the lower general economic environment,that we are better positioned to face some of that head wind. We are going to face that from a softer rental market, but webelieve that we can continue to grow our contractual business, both through acquisitions and through organic growth.

Our continued challenge, and it's still showing up, is that even as an existing base of business with customers tends to be slowingdown, we continue to work on offsetting that with both organic sales, by going after new customers, and proposing the valuepropositions that I think you're familiar with, as well as from acquisitions. We are also going to, I think, be able to over comesome of the things we faced this past year in Supply Chain, both in the U.S. and internationally, particularly in Latin America, sowe will have that behind us. We may, as I indicated in that first proposed question, we may have some benefit from depreciation,because we are holding vehicles for longer periods, because customers are holding them and utilizing them for longer periods.We are going to have some positive impact from earnings per share from share repurchases that we have already completedto date, and that assuming that the conditions are right, we would resume again. So I think those are some of the potentialreasons behind feeling that we can still make progress.

I would say that the one other area that is going to be a headwind and we may have commented on it briefly, but it will comeup when we do our year end analysis, and we do 2009 and we talk about 2009 for next year, is that pension costs to our P&Lare going to be determined by market values of securities held by a plan on December 31 2008, just as anybody who has gotto define benefit plan. So based on current asset values, we are going to expect that we are going to have a pension expensethat's going to significantly increase in 2009, yet at the same time we are going to be doing a number of other things withproductivity and cost management and other growth areas to offset.

So, net of all of that, we believe that even in a tougher environment, we are going be able to still grow revenue operatingrevenue and earnings, maybe not as robustly as we would have hoped six to 18 months ago, but we still expect to grow earningsand revenue.


Thanks for the color.

Operator

Our next question is from John Barnes, you may ask your question and please state your company name.







John Barnes - BB&T Capital Markets - Analyst

BB&T Capital Markets. Can you talk about, two questions, one on managing the used vehicles, you said they're below targetlevels, can you talk about, given your outlook, how much more aggressively will you manage the number of vehicles in theused vehicle network on a go forward basis? How many more would you be willing to take out at this point?


I will let Tony speak to that, I don't know that we would predict a specific number. I think we're going to try to balance that tothe anticipated demand that you see for the next three to six months.


John, we have targets for the fleet level, and targets for assets that are generating revenue. Right now we are about 10% belowthat target, and we're very very comfortable there. We developed that program last year, we're keeping it into effect and weplan to keep it that way. We are probably not going to go dramatically lower, and I'll tell you why. We like the price level thatwe are getting right now on the used truck and used tractor sales. And we like that price and those gains are very attractive forus.

So our mix has changed as Greg had mentioned to a much more favorable retail channel, and we want to keep it that way. Sowe still have about a three month inventory supply on hand. We watch that continuously so it doesn't swell. But right now welike the pricing, and we always balance rising fleet levels with the price. But right now, we believe we will stay right where weare, enjoying these prices with much more retailing, protecting our residuals, which impacts our pricing on lease, and go steadystate like this as we go into '09.

Another favorable reason where we like being at these inventory levels, is that as we re-right size the rental fleet based upondemand, we have the capacity through our used vehicle net works at these inventory levels, to deal with those added units tobe disposed of, and that's extremely helpful to us in this environment as well. So we like to level, we are going to stay there, butwe also like the prices, and so we balance that. It will help the rental product line going forward in the future also.


Given that you're running 10% below your targeted levels, do you anticipate the gains on sale that we've seen over the lastcouple of quarters, is this the run rate we should expect as we get into 2009?


We think the pricing on the tractors and the pricing on the trucks will continue solid and stable as we go in to the next severalquarters.


All right. Can you just help us out here from the standpoint of we have heard how bad the used equipment market has beenfrom everyone, that some alternative channels have closed down, can you give us an idea of why your channel has stayed asrobust as it has, why the pricing has stayed as solid as it has?








We believe there is number of reasons. First, we do have a network of over 50 locations to do very solid retailing. We have avery strong loyal customer base for our used vehicles, we have a very attractive branded Ryder Road Ready and warrantyprogram, that goes along with those units, we also do some offshoring as well. I think fundamentally we spent years buildingthe momentum of this retail network for our used vehicles, with a lot of customer loyalty and a lot of good branding, and veryattractive programs for warranty. And we think that that strategy is holding us in very very good stead during this economicenvironment. We command a better price on that basis. We are going to continue to follow that strategy, and work with thoseloyal customers with our branded products.


Okay. In terms of the renewal of lease business, I understand the commentary about it taking a little longer to get a deal doneand that type of thing. Can you give us an idea, has there been any shift, material shift in the size of the deals, and if so, whatkind of magnitude are we talking in terms of number of trucks in a particular deal, or something along those lines?


Our strategy over the last several years or so has been to shift the focus of the sales force from a segmentation point of view tolarger customers, and that's been very successful, so what we see shifting in the pipeline, is those opportunities where the sizeof the fleet is larger. Typically our average customer would be three to five units, now we're seeing more in the 15 to 20 to 25range, and we like that really quite a bit. So we think that's favorable for us.

It helps the cost of our production from a sales point of view, and that works really very well in this environment. We see theshift in size of customer, it has been our strategy, we are going to continue that strategy from the segmentation point of viewof larger fleet customers converting from private fleet, and you will see that continue.


How about on existing customers that are renewing a deal. Can you talk about the shift in the size of those deals?


We have seen the downsizing within our division really plateau, last year, and we saw a lot of requests for downsizing, we'vereally seen the number of units for downsizing really plateau. So we think right now our customers have their right fleet levelsas they see going in to the future, and those large fleets, for the most part, are staying with the fleet levels they have. Consistentwith Greg's comment earlier, some of them are utilizing the vehicles a little less, with less miles, and I think that's because theyare changing some of their routes and visiting stores perhaps a little less frequently, but generally speaking they like their fleetlevels and they are renewing pretty much at the same fleet level. Okay, very good.


Thank you for your time.

Operator

Art Hatfield, you may ask your question, and please state your company name.







Arthur Hatfield - Morgan Keegan Co., Inc. - Analyst

Morgan Keegan. Good morning,. Greg when I look at the gains on vehicle sales line item, this may be a stupid question, but hasthat number ever been an actual expense as opposed to a gain?


Not in my 9.5 years, and I would ask Tony who has been here 31, I don't think so.


No, we set conservative residuals to make sure we protect the integrity of the balance sheet and also pricing of lease. We havenot had combined losses with the sales of used vehicles with any specific accounting period, no, we have not.

Unidentified Company Representative - Ryder System, Inc.

Art, the only other thing I'd add is that the write-down of the vehicles when they get to the UTC, the used truck centers, isactually on the depreciation expense line item, so that's one of the things - -


In fact, just one other point, if you go back to our low point, in the last downturn, which was like in 2000, 2001, in 2000 that lowpoint still had a gain of like $12 million to $15 million per year.


Okay, that's very helpful. I was going to do that, but I hadn't had a chance to do that this morning. One quick question, anadditional question for Tony. Maybe my other ones will be directed at him, too, but, Tony had mentioned the credit worthinessof customers being very good. Have you seen any changes in that at all, or have you become concerned at all for any particularcustomers, large or small?


We have very strict credit standards within our company, and we've actually seen, on a year to date basis this year comparedto last year, the number of units coming back to us, either because businesses are closing or going Chapter 11, actually dropdramatically, so we are comfortable with the credit worthiness of our customer base, we do have very strict credit standardsgoing into the transaction initially, and so we feel good about where we are right now with the group.


Turning back to the extensions a little bit. I'm sure you have, depending on the vehicle, a maximum term that you're willing toextend a contract. If that's the case, have you gotten to a point where you're reaching the end of any extensions that occurredearlier this year, and if so, what kind of experience are you getting on retention with those customers.








We typically extend for about 12 to 18 months. That's the ideal lifetime that we have from that perspective, so that there is stilllife in the vehicles when they go to the used vehicle network to report those residuals and gains. And we do have good experience,those customers typically stay with us. So we have good experience with those customers, and typically it's about 12 to 18months.


Finally, this kind of a broader question, but I think us in the public markets tend to focus on you guys a little bit too much,inappropriately I would say, you probably want us to focus on you all the time, but with regards to the problems hitting themarket and how that may impact you, and I don't think we see or understand maybe the problems some of your smallercompetitors are facing. Can you talk a little bit about this environment that we are in, if you seen any commercial rental orleasing competitors that have had trouble and maybe even any failures that you have seen, and maybe if you've seen any kindof move to you from customers because of concerns about the people that they are with now?


From my point of view since you asked a broad question, I'm not sure that I have heard and seen that on any broad nature.Whatever may be going on inside privately held firms, I just don't know. If there is anything that we see from customer movement,customer transitions sometimes do happen; it may be hard to guess why that may be occurring, I don't know that we are atany point where we say there is some lack of confidence from the broad base of suppliers who are in this industry, is my sensethus far.


Have you seen anything with regards to some of these localized or regional leasing companies coming to you? Has that activitypicked up at all with regards to people seeking a merger opportunity?


Nothing appreciably different than what's occurred in the recent past.


Thank you, that's all I have.

Operator

Alex Brand you may ask your question, and please state your company name.

Alexander Brand - Stephens, Inc. - Analyst

Stephens, good morning, guys. I may have missed it, but have you guys given the figures on how much revenue and earningsaccretion you have gotten from your acquisitions?








We do know that and we could share that. We have some stats, but roughly we said a good proportion, maybe about two-thirdsof the revenue growth in contractual and lease, probably similar value for earnings has probably come from the acquisition.


Okay. I can get those numbers from Bob and follow up.


Two to three cents pretty much for the most part in the quarter.


Do you have a revenue figure, Bob?


It's Tony, about 25 to 30, something like that.


Greg you've mentioned that you feel pretty good about growing the contractual business including M&A next year, whichmakes sense that you're in a position to do that, what's out there to acquire? I didn't think there was much that was meaningfulto take a look at anymore.


In and of itself, there may not be anything big enough or material enough, but as you have seen in the last less than 12 months,we have had four in Fleet Management and we announced one that makes sense for us in Supply Chain. None of those arehuge. But put together, you can talk about something that adds $100, $125 million or more of revenue over a period of time,and the way we manage them and run them, they are accretive to earnings, so they make sense. No, there's no big one on thehorizon that makes a difference, but collectively and together they can add up.


I think your first question, there was some discussion about your levering up, it seems to me like, correct me if I'm wrong onthis, with all the extensions, you're likely to have lower CapEx for growth, for at least another year, you're going to continue tohave pretty strong free cash flow. What's your incentive to lever up at this point when you have a lot of free cash flow, and theenvironment's certainly not conducive to leverage?


There's two pieces, first you just probably mentioned one reason why we want to be cautious in this environment, until yousee more thawing of capital markets and access to capital, we want to be pretty cautious. But overall, remember that for ouroverall portfolio of which Fleet Management and leasing is the largest portion, the appropriate ratios for that sort of business







and leasing, it deserve a higher ratio of debt to equity. That's the long-term reason. That's the long-term target rationale, becausethat's what makes the model work. So that's why over time you do want to get there, but it's also why, as you suggest, we arenot rushing to get there right now in this environment.


I'm not sure what you guys are using, but your share buy back, you bought a lot of stock in the 60's it sounds like, stock's at 40now and you've got a pause on that buy back, are you guys using some parameters for valuation internally that will drive that,or is it just a comfort factor before you come back?


It has everything to do with a period of uncertainty in this market that I think just makes everyone pause and be careful. Whenyou are in an environment that we haven't seen for three generations, when people are afraid to even have their money inbanks, you are in an environment that none of us have seen in our lifetimes. That just suggests that you want to be pretty carefulabout your sources and uses of cash until things thaw out, banks are willing to loan each other money, and they are willing toput money in the marketplace, in the credit markets for businesses and consumers.


Safe under the mattress but a little uncomfortable.


We got a lot of it in rolling stock.


My last question, Supply Chain has been a struggle of late, and I know you're going to take steps to right that. It also has thebiggest auto exposure, do you need to reduce auto exposure meaningfully in order to really get that business right?


I think that considering that we have ridden a lot of auto manufacturing down over the last few years, if you look at even therevenue growth which we break down in the U.S., that hasn't been as severe even as their entire industry. That means we areconnected to many of the better served products in the automotive industry. But I think that, the longer term broader question,for our portfolio as well as anybody else's, is diversification is always better. There are some areas in some business segmentsthat we believe we can do well in diversifying. I think that just helps generally regarding the perception of us, even as much asthe result, so I think there are areas that John Williford and his team are looking it a at. It may be premature to say where exactlywe may be focusing, but diversification is a target. If there is anything you want to add John.

John Williford - Ryder System, Inc. - Pres, Global Supply Chain Solutions

I think we have a strong team in automotive, and so even though volumes are declining, we are probably gaining a little share.The way to diversify from that is to grow our other products faster than automotive. We're putting a lot of energy into that rightnow. As Greg said, we don't have specific plan we are ready to roll out yet. But, we don't want to cut our automotive business,we want to keep growing there, and we want to grow our other products and industries faster.








Okay. Fair enough. Thank you for the time, guys.

Operator

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

Ed Wolf - Wolf Research - Analyst

Wolf Research. Rental fleet, Greg, how do you get in front of this again like you did last year? How quickly can you take downthe fleet and what's the right number?


Tony is in front of it, so I will let him answer.


Ed, here is what we do with rental. What we saw in the third quarter beginning about early August was a little bit of a seconddip on the rental demand. So what we did is very expeditiously, is re-right size the rental fleet very quickly within the quarter.That actually negatively impacted our performance by several cents a share. We do not procrastinate in our needs to re-rightsize the rental fleet. We have learned from past that hurts the Company, and you cannot do that. So, we re-right size the fleetvery expeditiously, we have 134 rental markets that we really continuously monitor by asset class, and when we see there is anout of calibration between demand and also the fleet levels, then we will act very quickly to put them become in tosynchronization.

So, with those 134 markets, and with that synchronization, the fact that our used vehicle inventory levels are lower now, is ableto accommodate any of those reductions, and so we are able to adjust the fleets very quickly, and to further follow up on apoint that Greg had mentioned earlier, more than 50% of our rental fleet is really dedicated to support our lease business. Whenwe downsize the rental fleet , there is really less of the fleet left to support the pure product line that we have within rental. Itactually self corrects the cyclicality within the rental fleet during this kind of environment.

So we are prepared to do what needs to come, we are comfortable going in to the fourth quarter with our rental fleet. If we seethe demand continuing to soften, we will do what we need to do, because we do not procrastinate with that asset


Quickly because we are into other people's calls and such, is this down 5% from quarter to quarter, how much down did youtake, what were the actions that you took, and how did it cost you a couple of cents?


What we did is the third quarter versus last year, it's down 5%, and we anticipate at the end of the year we'll be down about4%. What we did is take out those vehicles that are not renting. We know by asset class that the light vehicles are the ones thataren't renting the most, so we'll move those out into the used vehicle network, and we'll sell those units off. And we're able to







do that, and still maintain the pricing in the UVS Operation, so we do it by asset class. We were down about 5%, and we'll bedown probably 4% at the end of year.


An additional four, or some of it's going to come bac?


The additional four is pretty much year-over-year. Where we were at the end of last year versus where we will be at the end ofthis year. It will still be lower at the end of this year than it was at the end of the third quarter.


Okay, but your idea is, you're going to be flat from here right now is your thought process?


We'll probably taking it down a bit in the fourth quarter as well, which was our original plan to do.


Okay. How big is the UK fleet versus the U.S. fleet?


Over 80% of our rental is really in the U.S.; the UK fleet is really the smallest one, it's less than 10% of our total rental.


Okay, on the leasing side, in the old days customers would hand back trucks or not take ones that they had ordered as theycame in when the economy softened. Are you seeing any of that, and how do you respond to that today?


Actually, our early terminations are really down. We are really thrilled with that. Our downsizing requests have really plateauedas well. But I think the most important indicator of that Ed, really is our early terminations are down. We are very happy withthat.


Okay. The buy back, Greg, at a time when it's most accretive, the stock's at $41.00, recent days we seen signs the credit marketsare beginning to thaw, what are you looking for, what do you need to say we are stable and we can go back and buy somestock, because it would be quite accretive right here.








That point's not lost on us either. I think that when we see the ability for both consumers and commercial borrowers to getreasonable rates, without having the equivalent of an exorbitant credit [inaudible] qualify, when I think that the broad averageis improving, when commercial paper rates on the short-term continue to come down, I think when all of the combination ofsigns make you feel safe and secure, then I think you can seriously consider it.


Do you think that's a quarter or two quarters, best case scenario?


I hope it's sooner. I'm not Paulson or Bernakey, but I hope it's sooner.


What was the Supply Chain acquisitions in terms of what you paid for them and what's the revenue?


That hasn't been announced yet. All we did was announce the intent to proceed with that, so those details haven't been sharedyet.


Oh, so that won't be in queue?


No.


Okay. What's the total auto exposure in terms of percentage of revenue right now?


I believe it's 5% of the total company, and about 15% to 17% in Supply Chain of the total revenue.


If you take out supply chain what's the (inaudible)?








I'm sorry I thought you were asking about the biggest client. The total would be in automotive if you're counting OEM's plusthe next level tier suppliers is about 60% of Supply Chain.


What is it of the total company?


60% of 30%. 18 to 20%.


Are you saying there is no auto related business in leasing or rents are dedicated?


Yes, but they are not directly working with OEM's necessarily, they may be tied to the industry somewhere on a secondary basis,especially in the upper Midwest.


It's just really just the Supply Chain side?


Primarily, yes.


On the Supply Chain side your pretax basically doubled over last quarter. That's basically the fixing of what was going on inBrazil. Is that how we should think about that, or is there something else going on?


That's where the improvement came from. You asked the question last call would it be long period or quarters, we said it wouldquarters and we'd be making progress each one, and I think that's the case.


There's more to come?








Yes.


Average age in a tractors sold this quarter that you reported?


About 60 months, 62 months something in that nature.


Has that changed at all over the past couple of quarters?


No, it really hasn't. Our asset management principals are pretty standard. If there is life left in to it, it gets redeployed. Typicallythat's our life cycle when it goes to our used vehicle inventory.


The Dedicated side, you mentioned results were [negatively] impacted, even though they were good results by safety insurancedrags.


Yes.


How much was that?


The improvement I think was 80 basis points in total, so in mix. The large improvement came from operational performance,and a little bit of negative impact from safety and insurance costs.


What was that little negative impact. Was it more than a million dollars, do you have sense of that?


I don't know. That may be roughly right. I just don't know.








Last question, miscellaneous, what's in that miscellaneous net that you reported as a million dollar expense, it's been a negativeexpense most of the last third quarter, if you look back historically, it swung to be real expense this quarter, what is going onin that?


That was activity in the [rabbi] trust that we have for deferred comp that went against us as the market went down.


Ongoing as an expense?


We've got it down as kind of a similar expense in the fourth quarter.


Okay, thank you very much for the time..


Let me add one thing though, that is offset on the employee related cost. It does get offset in there. The net, net, if you're tryingto model out for the fourth quarter is zero.


Okay, thanks.

Operator

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

Todd Fowler - KeyBanc Capital Markets/McDonald Investments, Inc. - Analyst

KeyBanc Capital Markets. Greg, with the FMS margins here in the quarter and the improvement on the year over year basis, youlaid out a couple of items that were favorable, a few things that were maybe going the other way, if you had to put those in abucket, what would be the largest drivers as far as seeing the margin improvement in FMS, also how do lease extensions workthrough the margins as well?


I will ask Tony to comment on that.








I think the most significant areas for margin improvement comes from the productivity improvements that we have within ourmaintenance operations side. We have very definitive programs within the area, and they have been very successful and continueto accelerate. The first and foremost for margin expansion is productivity, relative to our maintenance operations. Secondarily,I say the accretive acquisitions that we've made last year and also earlier this year have a lot to do with margin expansion aswell. They are tuck-ins and typically a large portion of those fleets get added to existing facilities that we have.

The most obvious one as well, is just added productivity and production from the sales force in driving more growth, and thosegrowth units also go through, for the most part, a relatively fixed network of the vehicle maintenance operations. Relative toextensions, basically there is margin enhancement on those because we typically re-rate those largely at the same rate thatthey were during the initial term. But the fixed costs tends to decline on those, because the book values are lower in the interestexpense for them therefore lower. So there is some margin expansion on the extended units as well.


Okay, that's helpful. What was the impact of fuel and margins in the quarter, maybe even on earnings? I can't imagine it wasthat much based on what happened. Maybe color there would be helpful.


For the most part, for the most part on fuel, it is our longer term objective for us to just be a basic pass through with our leasecustomers. This quarter had very volatile pricing relative to fuel, and as a result inventory activity and valuation with the fuelthat we have in the ground. For the most part in the longer pool our intent is that it would be largely pass through. There arerental customers that add to the profitability of fuel. That was in there in the month, there was some enhancement to profitabilityin the quarter as a result of the volatility of fuel. That was about possibly about $0.02 to $0.03 possibly.


Around.


Then with the statistics on miles driven being down on a year-over-year basis, did you notice that trend consistently throughoutthe quarter? Did it accelerate as we got into the back half of the quarter and the macroenvironment really started to slow? Andthen just from some historical context, maybe during past down turns, how long have you seen miles be negative on ayear-over-year basis? Is that going to play out for maybe two or three quarters and then you'll see an improvement, and I guesscolor around that would be helpful.


We actually see that the reduction in the lease miles, typically mirrors the same timing that we saw the second softening of therental fleet, which was late July and also in the early August time frame. We probably feel that there won't be a dramatic swellfor the Christmas season this year, so we think for the most part that that level will probably continue on for the next quarteror so. Keep in mind, there is a offset to the reduction in mileage, that is that our running costs and maintenance costs are typicallylower when the mileage is lower, so there is a net offset from those reduced miles. We saw it pretty much mirror the samereduction in utilization on rental, and we think that will probably continue in to the first quarter.








That's helpful Tony. Greg one last one here in the fourth quarter guidance, when I think about the magnitude of where the thirdquarter ended up at $1.22 or so, and then the midpoint of where the fourth quarter is at, from the commentary that you guyshave laid out today, it seems like you're pretty comfortable with where the rental fleet is at, as far as the size of the fleet, and itsounds like there is going to be a little bit of a head wind from higher borrowing costs during the fourth quarter. Is the majorityof the magnitude in fourth quarter decline from the where we were in the third quarter, is that really related to the fact you'renot anticipating the peak season bump from the rental activity in the fourth quarter, and that's the biggest driver? Or is thereanything else there that is really impacting the fourth quarter guidance.


I think you've captured it. This will be the third year where generally, this is way beyond us, but this is the third year where therewon't be a peak season. This will be the softest and toughest of the three. I think you have captured what the primary issue isthat we are seeing, and I think many others in the environment.


Okay. Thanks a lot.

Operator

Thank you, Michael Pack you may ask your question and please state your company name.

Michael Pack - Bank of America - Analyst

Mike Pack, Bank of America. Good afternoon. I'll run through this real quick given the time. Can you, Greg, give us a sense ofthe commercial rental contribution margin during a normal cycle?


We do not break it down to that level. We keep it at the upper segment level, and that's again for being the only public companyin this space that tends to give out too much information. We don't break that down at that next level.


Is it fair to say that given its short-term oriented - - short-term rentals that the margin would be higher than versus the lease?


That's a reasonable principal, sure.








Okay, and then on the free cash flow seems like it's tracking towards your guidance pretty well, are you still comfortable withthe $300 million at year end. Is there anything in the fourth quarter we should consider, seasonally or anything like that, onworking capital or other cash flow items?


No, we are comfortable with the cash flow projections through the end of the year.


And just a couple of balance sheet ones, what's your discount or implied rate on the commercial paper during the quarter orpresently right now?


This is Robert, commercial paper as you know shot up about mid September, we were historically about 3% and went up to6%. However we did have other sources of funding, such as our AR backed program which allowed us to mitigate most of thatincrease. But as you know, CP is still high, certainly from where it was towards the early part of the year. At the end of the year,the one month CP rate that I'm sorry at the end of the quarter, at the end of September, one month CP rate, not the AR backedbut the unsecured, was at about 6%. And we have seen that come down to kind of the low to mid fives, right now. We arehoping that continues to get into a more reasonable rate and we will continue to leverage that. We are assuming that it staysin the level it's at now for the rest of the quarter.


So you were able to renew the trade receivable program it sounds like .


We did.


It was what $300 million.


We renewed 250 of it.


Okay, 250. And let's see, that's all the questions I have, guys, good luck the rest of the year.







Operator

Thank you. David Campbell, you may ask your question, and please state your company name.

David Campbell - Thompson Davis & Company - Analyst

Thompson Davis and Company. Full service lease revenues were flat sequentially from the second quarter to the third quarter.Why, given the fact that acquisition revenues contributed to some growth there, why was that revenue flat?


I don't think it was flat.


On the net basis. Operating revenues, I have $516 million in the second quarter and $516 million in the third.


It would be the rental offset for total operating.


So you have an increase in full service lease revenues on a operating basis?


Yeah.


I must have the wrong numbers.


I'm sorry it's flattish, but the there is an offset on the rental.


He is only asking about full service lease.


It's flat. Right it is flat.








It's flat right, so given the benefit of acquisitions, - -


Up 4%. Quote the numbers that we are looking at on our tables. The second quarter full service lease revenue was $516.1 millionand the third quarter was $516.4 - - (inaudible - background noise) It was up,versus the third quarter of the prior year by 4%.Now we got it.


It was flat sequentially, why was that given the fact there was some benefit of acquisition in the third quarter, versus the secondquarter?


I'm sorry I didn't understand the question, but the sequential aspect really is the mileage being down and also the translation.


But you seem relatively optimistic about driving that revenue up in 2009. You would have to assume therefore there would besome improvement in mileage driven, is that what the assumption is?


It's predominantly based upon our retention rates and our reduction in lost business, and also the strength of our pipeline, andalso that the acquisition activity is positive as well.


Right. Right, okay but the visibility of the full service lease revenues has to be questionable. So you can't really be sure of anything,can you?


I think there is a general statement in 2008, considering what has happened the last two months, I would say you can't be sureof anything.


Right. And you're assuming higher interest costs in the fourth quarter despite LIBOR rates going down, that's because commercialpaper rates are still higher than they were in September is that right?








That's right, and you're going to get the full effect, more of the full effect of the higher rates in the fourth quarter than in thethird.


Right, right. My last question is on the Supply Chain Services, start up in the U.S., could you be more precise about what that isall about?


Little bit but not too much. Very often during a start up phase where you have maybe multiple processes in a major location,you may face some start up and activity costs and challenges that you don't normally have when you have a full break in period.That's kinds of what I would describe that as.


So it's a new contract that you have just begun to implement?


Yes.


Okay. Thank you very much. Appreciate the help.

Operator

I'm showing no further questions. I would like the turn the call over to Mr. Gregory Swienton for any closing remarks.


Well, we had plenty of questions and we got to all of them, but as it's late in the day for anyone still on, thank you for hangingwith us and appreciate your time. Have a safe day.

Operator

This concludes the conference, thank you for participating, and you may disconnect at this time







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Economy & Finance

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