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

Welcome. We're continuing Day 3 of the Citi Transportation -- Citi Global Industrial Conference today with Ryder. I have with me Robert Sanchez, Chairman and CEO of Ryder; and John Diez, CFO and EVP. And I think it might be helpful if we actually just start off with a broad overview of Ryder, who you are and just a warm introduction for investors.

All right. Great. Well, let us give you a quick intro. By the way, it's great to be live again, James. It's been 2 years since I've done one of these without having a Zoom call in the middle. So to start, Ryders in the transportation logistics outsourcing business, we've been in business for almost 90 years, just under $10 billion of revenue in 2021. Our business is made up of 3 primary segments. First, our fleet management business, which is a truck leasing and rental business. We have a fleet of about 250,000 vehicles, commercial vehicles that we lease to our customers, typically a 5- to 7-year lease on a vehicle. We also have a rental fleet to support that. And then we provide all types of maintenance services on those vehicles as part of the lease and the services we provide. We're one of the leaders in that segment of the business, that again makes up about -- historic has been about 60% of the business. But now with some of the acquisitions we've done in the other segments, we're probably going to be about 50% of the business. The next one is Dedicated Transportation, which is the outsourcing, if you will, not just the truck, but the truck and the driver. That makes up about 15% of the business. And that business is really around providing a private fleet outsourcing for a customer. So as you might imagine, with the shortage of truck drivers over the -- certainly over the last 10 years, but more acutely over the last couple of years, that business has really grown significantly as more companies are looking for help in managing their fleets and their drivers. So we're in that business. And then we have a more of a Supply Chain Solutions, a broader third-party logistics business, which makes up the balance of that business. And that's where we provide not just trucks and drivers, but we provide transportation management services, so we can act as a traffic department for companies that want to outsource that. We also run warehouses. We have over 300 distribution centers that we run for companies, primarily large Fortune 500 companies that outsource that part of the business. It could be an inbound warehouse into a manufacturing plant, an automotive is an example, or it could be an outbound in -- distribution center for retail space. So the good news is that with COVID, all of that focus around supply chain disruptions and resiliency has been really good for Ryder because as more companies look at what they're doing around their logistics and supply chain and are looking to outsource companies like Ryder who have an expertise in that to the fold. So all in all, I think the segments that we have are really benefiting from secular trends that are making everything we do a little bit more difficult, which is really good in the outsourcing world because it means you're going to have more companies outsource.

Great. I want to just start off with some questions around FMS. Now I think you've commented that you're expecting about 4,000 truck deliveries this coming year. Just wanted to sort of get a sense of the shape of that. I think you've commented that it's more back half weighted, but I really just wanted to understand sort of the risk around those deliveries. We still hear a lot of things about challenges in the supply chain. I wanted to understand sort of the risk around those deliveries and then broadly, what you think sort of truck deliveries could do relative to what people are expecting now.

Sure. The truck OEMs are still working through the semiconductor and supply chain challenges that over the last 1.5 years. So I think that continues as we go into this year. We have -- for those leased vehicles, the 4,000 growth that we talked about, we already have signed leases. We don't order a truck until we have a signed lease. We're one of the largest purchasers of commercial trucks in the country. But we typically -- we have slot dates that we fill in. So given the constraints over the last couple of years, our sales force has already sold most of the vehicles that are going to be coming in this year. So if the OEMs do get delayed, those will get pushed off from back half of the year into next year possibly. But we think right now, based on what we know the OEMs are in terms of their production capabilities, we feel pretty confident we're going to get that 4,000 in the back half of the year. Since it's in the back half of the year, we'll spend the money just on those trucks. But really, the earnings from that will really hit us in 2023.

And if we think out further, I think you've commented that basically deliveries in any given year could range between 3,000 and 10,000. There's a lot of demand for tractors out there that's not being met because of issues. Are we sort of at a point where you could see like a multiyear cycle where you're at the top of that range for the foreseeable future or for a few years? Or is it something that's a little bit more gradual on the up...

Yes. Look, our target, if you will, for growth, we want to be more selective around growth in this capital-intensive leasing business. So we think 2,000 to 4,000 growth is a good range to be in. We're probably going to be grow -- on the high end of that over the next -- this year and next year, primarily because we really haven't -- we didn't grow last year due to the supply chain constraints. So I see us having a little bit of catch up here in the next couple of years. But yes, I don't envision us going back to the years where we were growing at 10,000 to 11,000. The capital intensity of that, I think, was not something -- it was good for the business. We think there's a better balance of growth and free cash flow, that we can then allow us to also focus our investments in technology and focus on investments in our supply chain and dedicated business.

Got it. And I think you've also commented that about 40% of the way through repricing your portfolio broadly. But just understanding that like sort of there are shortages, there is unmet demand, have really prices essentially moved where there's still an opportunity sort of to reprice that 40% when it comes up again? Just trying to understand sort of how the market's moved over the past 12 months versus when you sort of announced a lot of some of the more strategic initiatives that you had coming into COVID?

Yes. Look, I think that's in a way we feel very good about where we are with the pricing spreads that we're getting today that can over time that we're going to continue to try to find ways to add more value so that we can get a bigger spread with technology, some things we're doing around our fleet management software and apps that give our customers more visibility and control of their fleet. So I think over time, we want to continue to push that. But right now, I'd tell you, we feel good about the spread we're seeing the earnings coming to the bottom line in the business. And unlike our rental and used truck business, which is more transactional and more cyclical, this truck leasing business is contractual, multiyear. So regardless of what happens in the freight cycle, you're going to see that business continue to deliver and continue to provide those improved earnings.

Got it. And I wanted to touch on one more point before we move on. You're exiting the U.K. business and just -- and you've also, as you pointed out before, sort of changed the balance between like growth and pricing in your FMS business. But like about the U.K. business specifically, as you look back on your experience there in the expansion, what have you essentially learned that's going to inform how you sort of take on growth in FMS? Broadly, is it different than sort of like what you learned when you revalued your domestic business?

Yes. We -- look, we've been in the U.K. We were in the U.K. for 50 years, been there a long time. And I think what we learned certainly over the last couple of decades is that the market in the U.K. for truck leasing and rental is different than the market here in the U.S. We don't have the same relationship with the OEMs there. The market for spot rental is very different there than it is here. And we really weren't seeing the -- we hadn't really seen the kind of returns that we want for a long time. So we -- that's why we've made this decision now. We're working with our employees in the U.K. and working through the regulatory environment there to find way to really exit that market and really invest our capital in areas where we think we're going to get a better return.

Got it. So moving on to supply chain, CS , you've completed Whiplash. M&A has been a larger part of the story there. Are we at a point where essentially sort of the scale of the transactions you take -- will need to take on or want to take on or sort of at Whiplash's level or possibly even above recognizing that, that is the largest transaction you've done there? Or is there actually sort of -- or you didn't take more of a sort of more routine sort of slower -- or smaller M&A or amount of M&A activity relative to Whiplash moving forward?

Yes. The targets that we've set externally are organic. So the acquisitions are above and beyond those target levels. I think we're going to be strategic about who we acquire. We want good companies. We want companies that give us additional capabilities that we don't have. So Whiplash, for example, leaders in e-commerce fulfillment and omnichannel, which is a really growing -- fast-growing sector within logistics. We saw that as an opportunity to really make a lot of progress in that area with this acquisition. So we're going to be surgical about which acquisitions we want. The good news is based on our balance sheet, we have capacity to do a bigger one if we saw the right one. But other than that, it's more likely to be smaller deals where we're picking up these capabilities that we can then use the power of Ryder to really grow and expand.

And thinking -- but when we think about the 10% organic growth that you have talked about, like how do you actually think about that sort of as the growth that you see among the existing accounts you have and the addition of sort of new customers on to your platform? Just like understanding sort of the growth profile and the 2 sources might be helped.

Yes. Look, within the customers that we have, you're always going to have expansion opportunities in those relationships. We have very high retention rates with those customers. So once we get a new customer, we're going to have that customer for decades. So we're going to have opportunities to grow within that. What we saw over the last year as we also saw companies that had not outsourced before that we're being challenged by all the supply chain disruption that we're seeing and really came to start outsourcing components of their supply chain as they really needed help. So I think that certainly an environment we're in now, as long as that continues, this focus on supply chain resiliency, you're going to see more new business of new customers that come in and start to outsource to companies like ours.

And as -- but if you think across like 2020 and 2021, obviously, the nature of what's needed from your customers has obviously changed. There's a large pent-up amount of demand. But like how has it necessarily changed in what they demand from Ryder? And essentially, is that sort of new business that you need to take on with these customers, a mix positive relative to what you already have been doing?

Well, it's different for different sectors, right? So I think if you look at industrial type companies that have been coming to Ryder, they're really coming to Ryder for our expertise, right? They've been struggling with all the challenges in their supply chain. We understand how can Ryder help, especially as some of them have started looking -- started a couple of years ago when people started looking at how do I make my supply chain shorter, where I was maybe in Asia, maybe now I need to be in North America. So we have a very strong presence in Mexico. So helping companies that are making that transition for consumption in the U.S. So we're seeing -- those companies taking advantage of the capabilities we have today. There are other companies like in the sea fulfillment space in the last mile space that are now saying, "You know what, I've been a traditional retailer for furniture or office equipment or whatever. Now I need to go more e-commerce, how can Ryder help me with Ryder Last Mile? How can you help me with the new capabilities that we have in e-fulfillment?" So I think that's where they are looking for new capabilities that we've now acquired and brought to table. That's kind of how we make the decisions of what are the acquisitions we need to do for capabilities that we may not have today.

And as you think through those end markets that you do have, obviously, like the global pandemic has impacted them all differently, but which one are the ones that are centered to, sort of poised for sort of the most structural sort of longer-term growth coming out of this? Obviously, e-commerce, you guys have a large auto exposure that probably could see some upside from rebounding to like of these, which is your favorite child essentially?

Yes. Auto has been -- for a long time, auto was really where Ryder got into logistics back in the '80s. And auto has been a very steady business for us, right? The auto company, auto production is a very -- so they've been a very stable business. You know how many trucks are going to be -- how many cars are going to be built and you basically just support that. It's basically inbound to manufacturing. So what happened over the last few years was really a huge anomaly, something we hadn't seen in 20, 30 years. So I think what you're going to see now is you're going to have a catch-up period and maybe that's in 2020 -- late 2022 into 2023 and 2024. So I think there's certainly coming out of this, some good years ahead for auto. And I think Ryder is going to really be able to benefit from that. I think e-fulfillment, as you said, is really an exciting area for us because not only our traditional customers are looking for help there, but new customers, new start-ups that our new retailers that are coming out, e-retailers that need that infrastructure in North America to deliver their product, we see a big opportunity there. And then I think the other piece in logistics that we see a lot also is in the industrial sector. You've got industrial companies that are really trying to figure out how do I get better, how do I get more efficient at supply chain. And I think we've got an opportunity there to take the learnings that we've had from other industries and really bring them to many of those industrial businesses.

You talked about the demand in each one of these sort of end markets being different in terms of what they ask from Ryder. Are they showing capabilities that you feel that Ryder needs to develop more sort of bring it in-house that they don't currently have to meet these demands or do you largely think you've got what you need?

Yes. Look, I think technology is an area that we have really focused on over the last few years, and I think there's still a lot more we're going to do there. We introduced -- as an example, we introduced RyderShare, which is a visibility and collaboration technology. We introduced that a couple of years ago, really rolled it out more intensely in the last year. And the feedback has been phenomenal. The acceptance with the customers, the visibility they now have to their supply chain. We now -- it used to be that you can basically see where your order is on any truck, whether it's a Ryder truck or a third-party's truck, but now we've also expanded into the warehouse. So if Ryder's running your supply chain, you could see that order regardless of whether it's -- still hasn't been picked and it's in the warehouse or it's sitting on a truck on its way to your retail store. So it allows companies to be a lot smarter about how they manage these and how they respond to their customers. So that has become a differentiator. It's one of the reasons why we're winning some of the business that we're winning. So I think there's ongoing expansion of that capability and visibility, continue to find optimization capabilities that we want to -- we had historically bought those off the shelf. We're going to possibly be building more of that on our own or partnering with companies that are going to help us build it.

Yes. And since you actually bring it up, I do want to ask about one of Ryder's other technology initiatives, which is COOP. And it was recently a larger announcement a round of being rolled out nationally. And I believe on the last call, you had talked about sort of taking a harder look at it and knowing sort of where -- what it can be moving forward at the end of this year. So like what are the open issues and sort of like what is the range of outcomes when you think about that business and sort of like you want it to be or what it could be moving forward and what you hope to gain across this coming year?

Yes. Look, on the high end, this start off as an idea of an Airbnb for trucks, right? And is there excess capacity out there? Are there folks that have trucks sitting on the sidelines that they could put into a COOP that we could then turn on and rent it? So the initial markets that we've been in have been very encouraging. Companies not only that have surplus equipment -- and you would think in this environment, nobody has surplus equipment, but there are people -- there are companies that have surplus equipment because they can't find drivers. So rather than have the truck sit, let me put it on COOP, it'll start earning some money for me. So we're seeing that. We're also seeing -- this is the part I'm really getting more excited about. We're seeing folks who are buying trucks and putting them on COOP as a business. So they're able to get a good return by buying a vehicle, whether it's a truck or a trailer or a tractor and put it on COOP, rent it and provide and get a return. So we want to really continue to refine that model because we think if we can get that model, you really could have basically a distributed rental fleet that you basically have people invest in and you provide that online in an easy transaction. So this is a big year for us. We want to see how this thing -- how we can scale this nationally. And going into next year is when we start to really see it produce. And I think over the next -- I would see it over the next 3 to 5 years, if things go as well as we would want them to go, you can see this start to be a contributor to Ryder's earnings in a meaningful way because it's a very asset-light product within our FMS business and within our truck business.

And one of -- part of the value proposition of it is it improves asset utilization for those that put the trucks on it, but it's also sort of creates efficiency in any place you sort of drop it into. And so if you think about the one thing that's going on in the market right now, it is in efficiency more deadhead like -- it's like right now essentially a sort of sweet spot for adoption do you think? Or do you think this actually sort of can have a solid pickup no matter what the market is?

Yes. No. Look, I think this is a good market. There's a lot of demand, but it's not a good market that there's -- the supply is not as good as it's going to be when things soften, right? You're going to have a lot -- you're going to have more trucks sitting in a softer environment. So it's finding -- we haven't been through that full cycle yet. So it's finding how this thing behaves during different parts of the cycle. But if I can get investors who invest in trucks to put them on COOP, that means that even regardless of the cycle, you're going to have a good supply of trucks, which ultimately is the limiting factor. We have plenty of man, and there will always be demand for spot rentals. It's a matter of can you get the supply in at the right time.

Got it. And actually while we're on the topic, I think Ryder has done a very good job -- or at least I think a very good job of sort of finding new businesses to roll out across sort of the large asset base and user base you have. Are there other sort of aspects that are sort of more expansionary that you think are opportunities that haven't necessarily been sort of pushed out or explored yet fully by the market?

We've got a lot of different ideas. One of the things that we did as we started Ryder -- if you look at our business over the 90 years really until a few years ago, we were still -- we've been selling the same products that our founder came up with 90 years ago. So it's great in terms of the longevity and the value add of the products that we have, but we really hadn't rolled out a lot of new things over that period of time. So we're looking at numerous ones. You mentioned COOP as one. Obviously, we're expanding now into e-commerce fulfillment. We bought a company -- we're in the last mile business. So part of the Ryder model going forward is new services, new products either through acquisition or through development on our own. So we have a product development group within the company that you mentioned, COOP is one of the things. There's others that we aren't ready -- that are I would say aren't ready for prime time yet, that we haven't announced yet. But our view is to continue to find ways to leverage the Ryder capability, brand market and bring new services to our customers.

Got it. Now turning to Dedicated. You talked about record sales, a very strong pipeline. Broadly, if I think there's just a very solid demand for that product. Should we expect sort of the pricing to improve and the margins to expand there? I think one of the things you had talked about is sort of hitting your return target. But sort of as you think about the environment, why shouldn't we sort of be thinking about sort of the deals signed being significantly above return targets that are out there?

Yes. I think -- look, I think we're looking at 2 things. One is we're getting a lot of growth there. We're going to -- we see it -- we have a direct -- we have line of sight to get us back to our target, a high single-digit margin range. There is a path to get above that. That requires more structural changes within our business. We operate that business as a pure dedicated provider. So you've got a fleet of -- you need a fleet of 20 trucks that do your you deliveries. We're going to brand those with your name with your company's logo and our drivers are going to be dedicated to just yours. We have not yet really found the secret sauce to leverage capacity across customers and to get critical mass in certain areas, we can do that. So that's one of the things that we're focusing on. That's not an overnight thing. That's a multiyear initiative. But we're confident that, that is the -- that's kind of the piece that is missing to get us above that high single digit and get us into the, what I would call, low double-digit type margin range.

And is that the structural change that you mentioned at the start of -- when you started sort of talking through that? And sort of what is the time frame for sort of hitting that sort of -- obtaining that sort of cross customer utilization in that structural change?

Yes, it's still TBD. It's still something that we've got to figure out how do we get that critical mass? Is there going to be some acquisitions possibly involved or is it going to be organic? So we're still doing work on that. But there's plenty of opportunity to get us -- if we can just get -- if we get ourselves back to that low single-digit margin range, and then we can grow the top line at high single digit, double digit, you're talking about really good earnings growth over the next several years as we work through that.

What are the headwinds obviously were -- obviously, the headwinds to growth are probably like trucks and drivers. But as you think about the costs that come through with that, what are you sort of expecting in sort of driver wage inflation and the increased costs for the truck in terms of how that might impact the growth in that business over the next year or 2?

Yes, it's going to be very much market-driven. And the thing there, since it's market-driven, all that gets -- will get passed through to the customer. The customer has got a choice, they go buy it and hire the drivers themselves or come to Ryder. So I don't see that being a big limiter to the growth. I think it's continuing to have the operational expertise to do this type of business, continuing to be best-in-class at driver recruiting and being able to find drivers, where other companies that may not specialize in this cannot. We've got just under 10,000 commercial drivers who work for Ryder, and really, it's continuing to work with that team and not only bring in new drivers, but also make sure we're doing a good job of giving our drivers opportunities to -- and desire to stay with the company.

Are you seeing any sources of new drivers sort of on the horizon in '22 that maybe not -- weren't necessarily there in '21? Obviously, driving schools are open and producing sort of a higher amount of throughput. But is there any sort of like body that might return to the force or anything else that we should be expecting that might ease driver availability in the coming year?

Yes. As wages have gone up, you would expect to see more drivers. You've got a pool of folks that tend to move from industry to industry, depending on what's paying better. So I think you will start to see some more folks come back to being drivers. We are doing a -- we've got to focus on trying to get more women into the driving profession. We've made some good progress there, but still a very small portion of our -- of the overall driver population. But I think continuing to focus on that. I mean, over time, I think this doesn't get solved that easily, which is not necessarily a bad thing for Ryder because that's why people outsource it. But immigration, I think, is probably an important component to this at some point that could help solve this. I just don't know if we have the desire within the politicians to make something like that happen. So I think in the meantime, we're going to continue to find folks who are moving from different industries, other types of trades that ultimately, they see what they can do with a driving job now, and they come back into the industry.

Got it. I wanted to also touch on how that business manages sort of like essentially inflationary costs overall. You talked about a CPI tie within the contracts right around 3%. But what is essentially -- how should we think about margins and the profitability of that business? We see sort of like a 3-year outlook of inflationary costs running at like 5% or sort of mid-single digits number and above that cap. Is it something that you could actually still pull back from your customers?

Yes. We -- you almost -- the way that these things are priced and John ran our -- before he was the CFO, ran our Dedicated business. He can tell you this better than I can. But it's typically built up as a cost plus a profit percentage, right? So as you start to add cost, the pricing starts to incorporate that plus the profitability. I don't know if you want to...

I think the important thing that we've done is we've transitioned many of our contracts away from a CPI limiter. We've transitioned them to a different index, which captures the labor wage inflation that we've been seeing. So going forward, you could expect as inflation, especially wage inflation in that driver base, moves up and maybe outpaces traditional inflation, we're going to be able to keep with that cost element in our pricing. And as a result, you should see a more stable margin profile for that business over time.

How accepting were the customers around that? Like are they broadly understanding of the difficulties and understanding pricing had to go like essentially only 1 way on this?

Yes, go ahead.

Yes. It's been broadly accepted, I would tell you. Many of our customers have their own fleets at the same time that they manage or they hear it in the industry. So they understand it. They recognize the challenges everyone is having finding capable drivers to deliver goods. So overall, I think they've been accepting. We deliver great service and got great value. If you don't deliver great service, you're really not going to get a voice in that discussion. But being that we deliver great service, we've seen great acceptance. And we expect that trend to continue being -- I think everyone understands the inflationary pressures we're seeing today that may get even worse as we get deeper into this. So I think everyone is very understanding it's been accepted.

The only thing I would add to that is that I mentioned earlier, we're peer dedicated, right? So you have a -- the drivers that are working for an account are very integrated with that operation. Think about delivery to a retail store. Our driver is seeing those retail employees of that customer a couple of times a week, picking up. They know who Joe or Jim or a driver is. So when price -- when wages start to go up, if we're not keeping up with the market, you're going to get a lot of turnover. So our customers see it directly. They see it in their operation. So that makes it very clear. It's a way to really see clearly that, yes, we're not paying what we need to pay, therefore, we need to stop this turnover.

I want to make sure I touched on -- I know it's something that's probably your favorite topic, but used vehicle pricing and the outlook there. I think you probably get asked it a fair amount. So I just want to ask it in sort of a separate way. Do you think there's actually something structural going on with the sort of the pricing of used vehicles? You have seen an uptick in owner operators, and you can just look at like new business formation data, but like as you see sort of higher percentages of owner operators, do you think that sort of the price of used trucking is like -- or used trucks is like permanently moved up? Or is this really all just on both accounts, just largely cyclical, and we should expect a reversion over time?

Yes. I think on the margin, you might have more demand on the used truck. But it's really -- right now, it's primarily a supply issue. It's -- there's just not enough used trucks in the market for the demand that's out there and that's why pricing is doing what it's doing. I think that is driven by the constraints around new truck production, right? Because if a new truck can't be built, a used truck can't be created. So how long does that take to unwind I think is the key. Just intuitively, OEM truck production is not expected to really skyrocket in the next couple of years. They're going to try to get to more normalized levels. So that would tell you a more normalized level means just keeping up with demand that they have today, making up for the backlog, which really would -- is what would create more of a used truck inventory than normal is going to take a while. And we're assuming that there's going to be some softening in the used truck market, maybe in the second half, slow softening only because we're expecting some of those new trucks to hit the market, create some more used truck inventory. But with the demand we're seeing on the used truck side, I think that inventory is going to be eaten up pretty quick. So our -- I guess our cautious estimate is that if there's a slow decline in the second half, it may not. And then I don't see it dropping off dramatically unless there's a big recession or the truck OEMs decide to really blow out production and have really big production years, which would then generate a lot more inventory in the used truck market. So this could be stronger for longer type of a glide down over time. But the important thing for Ryder is look, we have lowered our residuals to what we think are really safe values. We've incorporated a significant downturn back to trough levels for tractors in that number. So we've done everything we can to ensure that even in a very soft used truck market, you're not going to see losses on the used truck side and you're not going to see the need for accelerated depreciation. So anything can happen, but that's the way that we've tried to model this after what happened in '19. So we don't want to be in that business again. We want to -- the volatility to really reside in the gains line. And the rest of the business, we've done a lot of things to make sure that the core business within the leasing -- within the FMS business is giving you a better return, that's -- those leases that we're repricing and then really trying to accelerate the growth in our Supply Chain and Dedicated business, which over time are really the higher return, more stable businesses.

Got it. But it seems like the outlook that you have for pricing is essentially also up into the right across the course of the year. And so like as you sort of earn that excess cash, like how do you think about deploying that? I know you're coming off of the year with nearly $300 million of gains, and you just did basically a $300 million ASR. Is that sort of the way that we should be sort of thinking about the surplus gains being put into share buybacks? Or is there another way to think about it?

We're going to -- we did 2 acquisitions. We're doing a share buyback. We've got plenty of capacity still to do more acquisitions and the buyback program that we had already announced. So it's a good time to make sure we have our balance sheet the way it needs to be investing in the parts of the business that we really want to grow, like the e-fulfillment stuff that we did. So we're in a really good spot. I think what we want to show is that, that core business, the lease portfolio is going to get us a better return, is going to continue that return. We still got 60% of that repricing to happen over the next few years, that's going to help boost earnings, the core earnings. And then getting the supply chain dedicated earnings back to our target levels, we feel really good about being there in the second half. So once we've done that, you've got a core business that's really earning at a better return. And then you're going to have the volatility when they use truck and -- that's why we tried to stress on the call, our primary focus -- we want earnings, but our primary focus is return on equity. So we were targeting a 15% return on equity over the cycle. We now raised that to high teens. So think about it as 18%, 19%. In a really strong used truck market like we're in today, we're going to be in the low 20s on return on equity. And in a really bad used truck market, like you think about trough levels, we're going to be in the mid-teens, in that 15%, 14%. That is very different that we just went through. And the difference is the lower residual assumptions we've made and the improvement in the core returns for the lease business.

Is there actually a means to improve the return on equity in the core leasing business sort of like excluding maintenance outside of pricing? Are there new services that you should want to roll across the top of it, like both sort of working your way through the repricing of it over the next few years?

Well, a big one has been our streamlining of our maintenance costs, right? We set a target in 2019 to reduce our maintenance -- our annual maintenance cost by $100 million. It's about $1.2 billion line item for us, so by $100 million. Well, the good news is we're going to exceed that. We had $90 million already in the bag that we got over the first couple of years. This year, we're going to exceed that number. We're going to get another $30 million from the $90 million, so we're going to be $120 million. We think that -- there still continues to be opportunity there as we streamline our operations. So that's in addition to the lease pricing initiative that we have. So yes, over time, there's an opportunity to continue to drive costs out there.

In terms of that maintenance opportunity, would you say the $100 million, you've blown through that target or would you say you're sort of 75% through the opportunity or put more closer to the end of it and that's sort of the full...

No. Look, I think we set a bogey of $100 million because it was a nice round number. But the more you dig into it, and the more technology evolves, you start to find ways of being even more efficient and how do you drive more efficiencies in the way we're maintaining these vehicles that are much more sophisticated now. And that's where I think the ongoing opportunity is.

Understood. And we're close to the end right now, but I think there's one question we seemingly are asking everybody, and so I'll ask you. It's like when do you actually see the supply chain sort of difficulties and challenges congestion? How do you want to think about it? When do you sort of see that resolving itself, and what do you see being the cause of it like a pullback in demand, is there some sort of extra capacity coming on?

Yes. Look, we don't see any signs right now in our business of pullback in demand. The economy is still moving really strong. I think the supply chain challenges start to loosen up when we get past this COVID and I think we're getting close, we hope unless there's another variant. So you start getting to that normalized range, then it's going to take a while. It's going to take a while for everything to start to get it back into its normal operating function. As we look at the auto sector, which we do a lot of business with, second half of the year, we're expecting things to get -- for some of the OEMs to get back to more normalized levels. Some are still, I think, a little challenged. And I think around -- across our industrial companies, we're seeing some of the same things. We're seeing some that are saying that we're not going to see things get back to normal until 2023, depending on what the issue of semiconductors or transportation. But yes, this is probably a late this year, certainly into next year, you start to see at least the flow of product that get back to something more normal.

Interesting. Thank you for making time to come down to our conference, and we'll call it there.

All right. Thank you.