Ryder System, Inc. (R) Earnings Call Transcript & Summary

All right. Welcome, everyone, to our next fireside chat here at our conference in Nashville. Next up, we have Ryder. And sitting to my left is John Diez, CFO of Ryder. So John, thanks for joining us today and supporting this event. Great to have you here.

Thank you.

We're going to go ahead and get things kicked off just with some Q&A. I'll ask a few questions and then open it up to the audience. So if you have a question, please raise your hand or let me know, and we'll fit in as many as we can in the next 45 minutes or so.

But John, maybe you could just kind of start with an update on the business, the CliffsNotes on the trends you're seeing out there. It's been a volatile environment if you look at the freight market, if you look at the economy this year, but maybe just set the stage for us. And then I'll dive into a few more questions.

Okay. Yes. So if you look at the market conditions that impact Ryder right now are pretty good, both from a freight demand perspective and customer demand, what we're seeing across the board. You add to that a tight truck capacity space with OEMs having a tough time producing trucks, really has lifted the opportunities for pricing in our space, especially around our used vehicles and our commercial rental business. You look across the horizon then switching to Supply Chain and Dedicated. The labor challenges we've seen, which really escalated from the first half to the second quarter and into the third quarter for drivers. That's really helped that business deliver some great sales results. We're going to expect that tailwind and that secular trend of driver challenges to continue to provide tailwind for our Dedicated business. So that continues with us. At the same time, that puts a little bit of margin pressure on what we're seeing both from a Dedicated and Supply Chain point of view. And then, obviously, supply chain now is top of mind for everybody. I think everyone in the U.S. now knows what a supply chain is, which is nice. So our Supply Chain business, obviously, is going very strong. Another record year of sales activity because of the disruption all the way through as people look at their distribution networks. So from a warehousing point of view, lots of demand there and then even from building transportation networks, that's also been a big driver of our growth in that space. So if you look at the secular trends and what's happening in the market, really good for growth in our business. On the FMS side, it's really helped us also not only on growth but also with pricing, which we've been challenged, as you well know, with used vehicles for the last couple of years. And now we're seeing a great rebound in that space.

And obviously, this year, the business has significantly outperformed expectations. So I was going back and looking at the numbers, and you started the year at the midpoint, guiding for EPS of $4.40. And I think the midpoint at the latest guidance is $8.45. So we're talking about earnings that have nearly doubled, but the stock hasn't. And the concern, obviously, is that this is the peak and it's as good as it gets. So let's just address that narrative kind of head on. And how you're thinking about things you can do to maybe change that narrative around the Ryder story and your focus on ways you could do that as we head into 2022.

Yes. No, great question. Look, for us, on the business side, what we've really focused on is building a stronger business model for long term. The FMS business had been the business that -- the Fleet Management business have been the business that have been impacted most from the used vehicle downturn. That business has come back in a big way. So if you look at our return on equity measure, which we've targeted 15% over the cycle, we started the year with a target for the year of 11%, which is in alignment with the numbers you just shared. We're going to finish the year at 18% to 19%, which is pretty remarkable. Clearly, used vehicles was a big component of that. But if you look underneath the fundamentals in the business, a few things. One, we've been working on pricing initiatives of our lease portfolio to improve the overall returns in that business. We're kind of in the midway point, 60% of the way there. We saw in '18, that portfolio was turning over a 7-year cycle. So that's already starting to produce good returns, and you're seeing that show up in the business. Commercial rental has been big for us. That business is up significantly. We saw that business, from a pricing point of view, be up 9% in the quarter year-on-year. So we've taken advantage of market conditions there. We've made tremendous progress in our initiative to take cost out of the business from our maintenance initiative. We had set out $100 million cost takeout, if you will, through efficiencies and process improvements. We're well on our way to be able to deliver that next year on the $100 million multiyear program. So all those things really have helped solidify our Fleet Management business. By the same token, if you look at our Supply Chain business, the margins haven't been there compared to last year because of: one, the labor challenges we've seen impact primarily our dedicated business; and then on the supply chain side, 1/3 of that business is impacted by auto and what's happened there. But if you look at the growth and the growth trajectory for those businesses, we feel really good about where that business is going. So we laid out 15% as being our target over the cycle. We think -- we're confident we're going to be able to deliver that. Yes, the 18%, 19% is elevated and record levels for us. What we said just recently is we believe this will continue into next year. So we do expect the momentum we have and we see right now to be better even going into next year. And then obviously, '23 and '24 may look different, but fundamentally, the business is a lot stronger and I think it's going to perform better over the long haul.

Great. And you mentioned the supply chain, and obviously seeing a lot of disruption there. In the last few months or so, does it feel like stabilizing at all, is it getting better, is it worse? What are you seeing?

Yes. What we've seen, it's been really choppy, right? We support -- when you look at our Supply Chain business, we support a great number of the different auto manufacturers, and I'll talk mostly around the auto manufacturers. They've been impacted differently. You'll have one OEM who has had a tough time with the semiconductor shortage. Others have had difficult times on the labor side. And it's been off and on. So it's hard to gauge that. I think what we're looking at is we expect that to continue in the short term when we look at our visibility, and we expect that to continue into the first half of 2022. Broadly, when you look at retail and you look at CPG, I think the biggest disruptor to supply chains right now is the limitation on labor. And the challenge all of us are having trying to attract folks to be able to execute and move the products that are out there that need to be moved. So we've seen that escalator probably peak down in second quarter. We'll see third quarter kind of stabilize. We'll see if that gets better. And the sooner that gets better, then the better the business will perform over time.

Okay. And we have heard from some other companies about the labor situation getting slightly better. I mean is that something, just from a high level, you've seen here recently?

Yes. I think it peaked out in Q2 for all of us. We saw stabilization in Q3. And probably sequentially within the quarter in Q3, that did get a little bit better. But like I said, I think it's a few months. We just saw what happened with this new variant. I don't know what disruption that will bring to the labor markets as well. I'm sure there will be some disruption coming our way. But right now, it's stable, which is better than where we were where it was on an upward trajectory from a turnover perspective.

Okay. Great. And I'll ask one more, and then if there are questions in the audience, I'll turn it over. But from a used truck pricing perspective, the guidance that you provided for the fourth quarter and into next year, I just wanted to make sure I kind of interpreted that correctly. It seems like you're saying used truck pricing will hold steady with current levels on a sequential basis through maybe the first half of next year and then decline in the second half. Is that the right way to think about it? And maybe you could help us think through like the ending point next year versus where we are today?

Yes. So certainly, that's exactly what we called out on a sequential basis. If you look at year-over-year, what that all means is for us to be flat on pricing, average pricing for the full year, it would take about a 50% drop in pricing from where we finished the third quarter. So we don't -- right now, we don't see that as being a likely outcome, but it's within the realm of possibilities always. But certainly, if you look at guiding into 2022, the likelihood that pricing is down is going to be highly unlikely, right, with that vantage point. The other metric that we look at is market inventories. So inventories typically in the market, we see them in that 60,000 unit level. Right now, it's a little bit less than -- it's around half, 30,000 unit levels. So for us to see really a big change in the pricing perspective from a used truck landscape, that number needs to come up. And it's going to take some time for that number to come up. What we have seen is the OEM Class 8 production of new equipment, which is what really drives inventory levels in the used truck market, their projections for next year continue to come down, right? And the last 3 forecasts that they've come out with have dropped for '21 and 2022, pushing out a lot of the production into '23. So when I look at that and put that in a basket, you're looking at low inventory levels that in the near term, I don't see them moving up quickly enough. OEM production levels of new equipment coming down and the pressure coming down. So we do expect a pretty good pricing environment to push into 2022.

Okay. Makes sense. Any questions in the audience? If not, I will keep going and check back in a moment. But you mentioned the OE production continuing to get revised lower. We've seen that as well. What about the impact to that -- to your Dedicated and ChoiceLease business? And how do you feel about the capacity you've been able to secure for growth in those businesses next year?

Well, Dedicated, we really have no constraints because Dedicated, we're able to allocate slots to fill the needs of that Dedicated business, and that business should continue to grow. What that means is it pushes off available equipment to -- away from ChoiceLease and into our Dedicated model, right? So from a ChoiceLease perspective, we haven't seen the growth, even though we've had 2 great sales years back to back, the growth hasn't shown up in our fleet count just because the delivery windows continue to get longer and longer and we're still catching up to some of that growth. So I think what you'll see is you'll see some growth in the second half on ChoiceLease for next year and then into 2023. But overall, for the full year, you're not going to see significant growth. What that does for us is, obviously, there's a great number of customers that we've got to continue to work with them and provide them rental equipment in the short term and give them that support. But we're going to need to be even more selective now with our capital and the customers that we do business with. We haven't gotten there yet, but we are being a little bit more selective as to which customers perhaps benefit from the available capacity.

Okay. A question here.

On your Dedicated business, one of the issues that the market here is, is you have big [indiscernible] drivers. But Dedicated, it's got specialized equipment, but it's got drivers with special skills. They're sort of [indiscernible] anecdotal, they're operating specialized truck -- driver books off and you send in a school bus driver. So how -- in this increased complexity, how do you train the drivers to cover that? I mean -- because you've got an incredible portfolio all across different types equipment and businesses. How do you handle that?

Yes. No, that's a great question with regards to our specialized nature in Dedicated. So our Dedicated business, just for the benefit of all, is -- a good component of it is specialized delivery, whether we're handling bricks and offloading bricks off a flatbed, whether we're handling steel material. And it's very specialized in nature, to your point. We don't do a lot of the Dedicated capacity, which is bumping docks and just going from dock door to dock door. Many of our deliveries require specialized handling. So with that, the driver space becomes that much more challenging. So we're constantly looking to get ahead of the turnover to make sure we can maintain service because if we don't deliver on service, we're not going to be successful with our customers. So I would say, look, that is an area that has become that much more challenged. Wages in that space for specialized professional drivers have probably escalated quicker than your traditional over-the-road driver. So that is another component that we're looking at is how do we increase our wages, how do we improve our benefit package to retain many of those drivers.

And how are you thinking about the framework for growth in Dedicated? And kind of going back to what I was asking on kind of OE production, are you able to grow that business high single digits, I think, is the target next year? And maybe does that framework increase, just given the substantial demand we're seeing in Dedicated right now?

Yes. So we've come out. Our target there is high single digits. We did -- we posted a double-digit growth in the third quarter. That number has been scaling up. So we expect that to carry into Q4 and good numbers next year. What we really see there is just the secular trend. And we're seeing at many of our FMS or Fleet Management customers that do it themselves today, they're coming to us and saying, "Look, we can't find drivers. I'm in the home goods business. I'm not in the transportation business. Take it over. Help us out. You guys know how to find drivers, how to execute. We want to give that to you." So I don't see that slowing down, whether it's 8 or 9 in the short term. I think it's going to be better than that. But over the long term, I don't think we're ready to move off that 8 to 9. Because there will be some cycles in the future with Dedicated, but we feel really, really good about the momentum we're seeing there. We're going to post another record year of sales activity in 2021, which should carry into 2022. And just what we're seeing is private fleets are coming to us and saying, "Hey, we need your help. We can't continue doing this on our own."

And is there a way to dissect the growth you're seeing in dedicated between private fleets that are converting, fleets that you already have in your customer base that are expanding and then maybe upselling ChoiceLease customers as well? I know that's an important piece.

So for us, traditionally, our Dedicated business has benefited from the Fleet Management business. Historically, about 50% of the sales activity, new sales activity in Dedicated come from that Fleet Management portfolio. This year, we're looking at 60%. So it has actually moved up. So as you look at the profile, those private fleets are looking for more help. We've also seen folks that have participated in the carrier space to deliver their product with the spot market going through the roof. A few of them have decided, let's look at a dedicated solution as opposed to a carrier network to create stability in service as well as maybe a reduction in costs relative to the carrier network. And we've seen some of that. But I would say, look, by and large, the pain point on the labor side is really permeating with the private fleets and they're coming to us and seeking help there.

Okay. Great. Any other questions from the audience? I guess maybe sticking with the Dedicated theme. Is there a way to frame up the Dedicated pipeline today versus normalized levels? I keep hearing it's at record levels from companies and it's really strong. But any kind of order of magnitude you could share with us?

Well, look, we're coming out of a record level sales activity. What we're seeing is the pipeline strengthen based on the private fleets. So I would say the health of the pipeline is probably better than we've seen in the past. Obviously, we're seeing good activity there. The other thing we continue to look at is our conversion rates and our conversion rates on closing out those opportunities has moved up, which is really encouraging. So when you look at the health of the pipeline, when you look at our conversion rates and overall volume, we're pretty pleased. Whether that will continue to scale up, we'll see. I think we could see with this variant cause even more disruption on the labor side, and we may see that produce more opportunities for us.

Okay. And maybe we could shift to rental for a moment. I know historically, you've tried to keep that fleet at a percentage of kind of your ChoiceLease fleet. And if I look at that percentage, it's been maybe 25%, 30% of the ChoiceLease fleet. Is that still the target going forward? Or could we see some more aggressive growth in rental relative to ChoiceLease, given what you were mentioning earlier on ChoiceLease?

Yes. We're going to continue to look at that. I think generally, we're not going to move that -- we're not going to deviate from that range, but we have seen a shift in our commercial rental business. We're orienting it more towards that lighter duty market. With e-commerce, we're seeing just the demand there go through the roof for light-duty and medium-duty trucks, straight trucks as opposed to tractors. So we think that's a market that could provide stability in that product line for longer, provides better returns for the business overall. So we're going to continue to look to invest in that. There may be that we invest disproportionately there, and you may see elevated levels from a commercial rental point of view. But traditionally, we're going to keep that fleet kind of in line with our lease fleet. Because our commercial rental business, still a good portion of that is in support of our lease fleet. So it will dictate, to a large degree, the size of the commercial rental fleet, at least for now.

And how significant could that mix change within the rental fleet be as you think about that shift to less heavy duty?

Yes, we've been now 2 years going with the strategy. I think in a few years, probably if you look out to 2025, you're going to see a significant shift there. We're talking about today our light-duty and medium-duty trucks represents about 60% of the power fleet in commercial rental. We do have some trailers. We're looking to take that up, and it could be as much as 70% as we look forward.

Okay. Great. Maybe going back to the used truck environment. If we do see upside into next year, OE production remains pretty muted. Any impact that could have on residual values actually in a positive direction? Is that too far fetched to think? I'm just reflecting on the fact that your residual values are basically at historical lows, the used truck pricing cycles lasting longer than we think. So at what point is there a potential to see that?

Yes. Right now, we're -- we go through a periodic review of our residual values, and we don't expect to make any changes right now. We do expect this environment to stay stronger, right? We call it stronger for longer. So we may revisit those, but we're in no -- we have no indication right now that we're going to move residuals up in light of what we've gone through. What we've really done is try to derisk the business even for the next downturn. So we recently, in Q2, made a modification around tractors for those coming out of service in the next 24 to 36 months when we see things maybe take a turn and taking some additional -- just a modest amount of depreciation to protect us there. So yes, I think ideally, what we're looking to do is give investors the confidence that they're not going to see losses from used vehicles, that we're going to continue to deliver gains. They're not going to be at the same level we experienced today. We've been able to print $200 million of gains this year. So that number is at an elevated level, but we do expect that the business will continue to produce gains even in a softer market.

Okay. Maybe shifting to SCS. We haven't talked on that yet. Could you just remind everyone of the financial targets there from a growth and margin perspective? And at what point you'll kind of get back to those targets post dealing with the challenges in the auto market?

Yes, sure. So our Supply Chain business is about $2.5 million (sic) [ $2.5 billion ] of our $8.5 billion business. So about 25% of the business is supply chain. We set out a target for revenue growth, top line growth of 8% to 9% or high single digits. That business produced in the quarter double-digit growth, has been performing in line with that on the revenue side. On the return side or on the margin side, we've set out high single-digit returns there last year, and we've been at that level for quite some time, and we've been able to deliver growth along with the margins. The last 12 months, things have changed a little bit. Primarily 1/3 of our business is auto related. So the auto space, which is a big component of our supply chain portfolio has obviously felt the impact, and the impact has come by way of threefold. One, volume levels are down year-over-year, and we posted an 8% drop in our auto business, even though the overall Supply Chain business was up double digits. So auto is down year-over-year in the quarter. If you look at the volatility of production cycles in auto, that has created a lot of angst and a lot of turnover in our employee base. So that has introduced a structural shift there and costs that we're having to recover now from. So once that stabilizes and production comes back up, we think the margins are going to improve. And then the last component has been a big portion of our auto business is transportation, inbound transportation into manufacturing plants. And we've seen the same impact on the driver side impact that part of the business. So we're going back to customers looking for price increases to really keep up with the wage inflation we're seeing in that space. We've made good progress on that side. And then I think the market conditions are going to improve. The rest of the business is performing relatively well. There has been some impact on the labor side to other components of the business. Clearly, last year, we did get a little bit of a COVID rush with our Last Mile business in supply chain, which was performing at all-time levels from a bottom line and top line perspective. And that business has kind of come back in line with normal margins, which are in line with the high single digits. So I think there's been some movement in the portfolio based on market conditions. As things stabilize, we expect that business to continue to deliver good returns. And the top line is going to continue to grow. We're having another great year there. So I expect that business in the second half of next year to be back in line with the high single-digit returns that we've signaled.

Great. And you partially answered my next question on final mile. Could you just give an update on kind of what that business looks like today in terms of its size within SCS? And it sounds like, from a margin perspective, it's kind of in line with everything else. From a growth perspective, is the framework different for final mile versus everything else in SCS?

Yes. So our Last Mile business, we purchased a company 4 years ago called MXD. They're in the big and bulky delivery. So anything from exercise equipment, which took off last year, white goods, whether it's refrigerators, washers, et cetera. Furnishings, we do a lot of furniture delivery into folks' homes. That business continues to grow with the acceleration of e-commerce. We're seeing that business grow at double digits consistently. So the growth trajectory and the profile for that business, I think it's a little bit different with an accelerated growth relative to the overall business. We are making investments to expand the number of nodes we have there. We support the entire country in the U.S., but we are looking to get more density in select markets where we have the opportunity for growth. And then from a margin profile, really we feel like that business has performed remarkably well relative to our competitors. Last year, it outperformed really our supply chain traditional margins because of some of the COVID volume rush that we saw. It's kind of come back, back in line with normal high single digits, which is what we see for the rest of the business. So we're excited. It's a business that has great growth opportunity, delivers good returns. And I think we can continue to grow that business successful.

Great. A question here.

Historically, when you look at your business, you were early movers on supply chain, dedicated, right? And then everyone else said, hey, this is a great sandbox, let's climb in. As I listened to you talk about final mile, it kind of seems like a little bit of déjà vu all over. I probably heard 6 people talk about final mile, that's where I want to be right now. So -- I mean -- I think your assessment is correct, but can you look at the past as prologue of what happens when you see a business and then it becomes attractive and everybody wants to be...

Yes. Definitely, that's something we're facing. We bought that business, like I said, 4 years ago, early in the cycle. COVID accelerated that business. So our timing was pretty good. We look at that space as being one of a few others that we see opportunity. What we're doing in e-commerce with fulfillment centers and e-fulfillment, that's another opportunity for growth for us as we look at that business. Every one of our customers is challenged today to really get their product to people's homes. And many of them don't want to go through the Amazon network or having challenges even operating their own networks. So they're coming to us for help. So that is another opportunity as we look ahead of where we want to take the business from a growth trajectory. I think the whole e-commerce movement, whether it's Last Mile for us or final mile for others. I think the e-fulfillment space is another opportunity, where as we look at the acquisition landscape, we're looking at capabilities that we could buy early in the cycle and really can propel us to deliver good returns for the future.

Just -- and a follow-up sort of on the e-fulfillment, are you providing the warehouse too? Or are you kicking it from the customers' warehouse?

So what we're doing today is we have right now 3 nodes around the country. They're multi-customer facilities. So you could just plug in and drop in your product into our fulfillment center. We're going to pick, pack and ship it out to its destination on your behalf with our technology. We're going to continue to expand that. We're going to look to grow that organically over time and be able to provide that as a service for the broader customer base.

I was asking really more about the final mile. It sounds like the only thing harder to find the drivers right now is industrial real estate.

Well, yes, on the real estate side, it is a challenge. We've had good success finding real estate today. So I would say the bigger challenge is the labor. When I put them in parity, the labor side, it's a lot more challenging than the real estate side. We're going to continue to grow that organically. If we find opportunities to build density in great markets, metro markets, we'll look to buy businesses that operate already in those segments. And that's what we'll continue to look at. The growth trajectory there organically is pretty strong. We opened up 2 new facilities. They're getting filled up pretty quickly. Customers are coming to us, "Hey, you could support us in Phoenix. We like you to be here." So the quicker we get there, I think the sooner you're going to see some of that revenue start coming in. So yes, I think, hopefully, that gives you a little bit of color as to how we see the real estate, the labor and then the opportunity for that business.

And just 1 last piece. What about temperature control? How do you feel about that?

That's a space we haven't participated in a big way. We are looking at health care. Health care does depend on temperature control. So that is an opportunity for growth for us. And we are looking to either buy our way into that space or continue to grow organically. We don't play a major role in that space right now, but that is an opportunity that we're looking at.

John, I feel like Ryder has been one of the companies at the forefront of exploring some different technologies that are either in the market or coming to the market, whether you're talking about electric vehicles or autonomous vehicles, et cetera. Can you just speak to some of your early observations from some of those investments that you've made and some of the partnerships you have from a technology perspective as we think about what could be meaningful to the market here in the next several years?

Yes. I'll start on the autonomous side because that's where we've made some announcements that we've collaborated with a number of folks, whether it's TuSimple, Waymo, Gatik and a few others. And in that space, we're looking at how can we participate. We think we have a great business model that can be leveraged for autonomous vehicles, whether it's operating different hubs for customers. These technology companies are technology companies. So by way of logistics or transportation, they're looking for support. So we're also exploring a project on the last mile delivery and operating that last mile delivery with autonomous vehicles on behalf of these technology companies. And then the third component that we continue to look at is, okay, how do you maintain and service these autonomous vehicles and keep them rolling. And we're doing some work there. It's early. What we're looking to do is figure out how can we create value long term, whether it's leveraging our real estate, leveraging our capabilities and know-how or just simply just leveraging our service maintenance capabilities to support that business. That is a big opportunity for us as we look forward. The technology is still in development. And clearly, where we've seen it is primarily in good weather climate areas. So Phoenix in the Southwest and the Southeast part of the country. I'm not sure that technology has [ a vault ] where you would put it in Chicago and snow conditions and something for that. But it will evolve. It's continuing to grow and continuing to gain momentum. And we're excited about the opportunities we could participate in there. If you look at electric vehicles, which is the other component, we've worked with a few of the startups over the years, and now we've tested a few of the first units that the traditional OEMs, whether it's Daimler or Navistar or some of those players, they've come out with demo units that we've been able to introduce and put into applications. I think that technology in the light-duty space is going to start getting a good level of adoption over the next couple of years. The good thing for Ryder is our fleet and the composition of our fleet is more geared towards the heavier product. So that's an opportunity for us to grow and participate in. The economics on the Class 8 side, when you look at an over-the-road tractor and the technology that's needed there to really propel that level of weight and the cost elements with it, the economics just don't work and the physics are still under review. So I think that will be longer term. But if you look at adoption, Nissan just came out this week. They expect passenger vehicle adoption to be 30% by 2030. GM, I think, is at 40%. We think we could see 10% for the truck side based on what we're hearing. We'll see how that evolves. That could accelerate pretty quickly. So we're going to be ready and prepared for it. But certainly, on the light-duty side, we see the opportunity there, and that's something we'll look to participate in.

How are you thinking about the economics, just to follow up on that -- on the autonomous side? I know there was a white paper that was recently put out. I believe you put a press release on that. But maybe you could talk about the economics there and penetration of autonomous vehicle similar to what you just said with electric.

Yes. Look, the economics there is how do you deliver a more efficient transportation network to support our customers. And I think there is tremendous amount of savings if you're running that network, if you will. And that is really an opportunity for us as a transportation and logistics provider. If you look at the service elements of servicing those trucks, obviously, less maintenance and less activity probably down the line, but the componentry will be highly specialized. And I think our technicians, if they're properly trained, could present a big opportunity for us. The big thing with that is going to be whether the adoption will be there and the size and scale of those networks, are they going to deliver the benefits that people expect. But we think participating and designing the networks and operating those networks, we could see some good returns over the long run for us.

In your penetration, if it's 10% electric by 2023, I think, is what you said. Do you think autonomous is lower or higher than that number?

No, the 10% on electric is really looking out to 2025, 2030.

Okay, sorry.

So not in the short term. On the autonomous side, it will be interesting. We're like -- we're still working with these startup companies to understand the technology and its applicability, and they're leveraging our capability to figure that out. I think it's still a little bit soon to be able to make a call on that just because the regulatory environment hasn't really caught up, right? It's not like electric vehicles today -- all of us can operate an electric vehicle as long as it goes. With autonomous, it's a little bit different and jurisdiction by jurisdiction have different regulatory requirements to be able to do that. So it's hard to say on that one. But the technology exists. We've participated in it. It works. In select applications, I think it could be a huge success. So it's a matter of how do you roll that out and get the adoption we need.

Got it. Question?

On the EV side, because we've been looking at, especially in California, how would you differentiate between the physics, which I'm talking about really the Class 8.

Class 8, yes.

We acknowledge there's an issue versus the life cycle cost, because the costs seem fairly attractive, but we're not sure we can haul the load up the hill. So...

Well, on the Class 8, we haven't seen -- through our due diligence, we haven't seen the economics play out even. So you got the physics component and the number of battery packs that you've got to dedicate to that application. But on the economics, here's where we're at. On the economics, the cost from a total cost of ownership, the cost of electric Class 8 vehicle is easily 2 to 3x that of a diesel-powered unit. So you're looking at a front-end cost of $100,000 for a tractor. On the electric side, you're looking at $300,000 to $400,000, just to put in perspective the magnitude of the difference. Clearly, as that technology evolves, the cost will come down and you'll find that parity where you'll get that adoption. But I think we're still trying to figure that out and what's that tipping point. For commercial applications, as we well know, there's got to be an economic value to adopting that technology. So that's, I think, going to be the limiter in adoption for Class 8, not only the physics side of it, but also the economic side of it.

What about the third piece, the regulatory? So if I was in California, if you were -- would that equation be different?

Well, clearly, the regulatory environment is something that can tip the scales here, right, whether it's California or other states. We've seen it in Europe, right, where they've mandated it. So that will accelerate the adoption naturally. We've seen a few states talk about it, but we haven't seen broad momentum around that just yet. I think clearly, on the passenger vehicle side, you're seeing that, and you're seeing the OEMs react to it. We haven't seen that yet, but we're keeping an eye on it. And certainly, that's the great equalizer here without a doubt. If they mandate it, then we're all going to need to move into that. But it's going to come at a big cost.

But they've got that $0.40 gas tax, paper stuff. So I mean it was -- I'm just -- it's a big question. We...

Right. On the transport side, the states have benefited from the mileage tax that they've been able to participate in and the fuel mileage tax. So now there's going to be a trade-off. They've been getting that fuel mileage tax from diesel that now they're going to need to rethink that when it comes to electrification and how do they get their budgets in alignment with that over time and how do they recoup that lost revenue, if you will.

There's a lot of money...

Yes, yes.

We're almost out of time, John. But one other thing I wanted to ask about was free cash flow. I think on the earnings call, you made the comment that next year, free cash flow would be lower than 2021 because of some of the deferred equipment deliveries, which makes sense. But do you still expect free cash flow to be positive next year? And maybe you could talk about your view on free cash flow over the course of the cycle?

Yes. So I'll touch on our business and what we laid out with moderate fleet growth on the lease side should produce, with 2,000 to 4,000 unit growth, about $400 million of free cash flow, right? If you look at our cash flow profile, we produced $2.3 billion in cash flow from operations, generated $600 million of proceeds from used vehicle sales. And then we have replacement CapEx of about $2 billion. And then the rest of that, right, that $900 million that's left over is really for growth and other small items. So if you look at our business, we produce $400 million with normal fleet growth. You've got the $400 million that's being deferred from '21 into 2022. If we get fleet growth, you're going to see kind of neutral -- free cash flow being neutral next year. If we don't get that fleet growth because of what's happening with the OEMs, you may see some positive free cash flow. Over the cycle, what we're targeting is that $400 million over that cycle on an average, right? And that's what you can expect. So that gives you, I think, comfort around where we expect to land. All we said, we were going to be down from the $1 billion we're producing this year on the heels of a record year last year of $1.6 billion. So you will see a decline as the lease fleet starts moving up.

All makes sense. And in the interest of time, we'll end it there. But John, thanks so much for being with us today. I appreciate it.

All right. Thank you.

Thanks, everyone.

Thank you.