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

Thanks, and good morning. I'm going to continue on in the transportation track this morning on Day 2 of the Citi Global Industrial Tech and Mobility Conference. So thanks again everybody for joining us. And very pleased to be joined by Ryder this morning. We have Robert Sanchez, the Chairman and CEO of Ryder. Welcome. Thanks for coming. Thank you for joining us.

Thank you for having.

So I'm going to turn it over to Robert for a moment to kind of run through just a quick overview of the company and a little bit of kind of current events you reported recently, and then we can kind of dive into some of the segments and begin to kind of talk through some questions from there.

Okay, perfect. Well, let me just give a quick overview of who Ryder is. Ryder is a $12 billion North America transportation logistics outsourcing company. We've been in business for -- this will be our 90th year in operations. We have -- we operate in 3 segments; Fleet Management Solutions, which is basically a truck leasing and rental business where we operate over 260,000 commercial vehicles, which is -- you can think of that as the outsourcing of a truck. And we have a Dedicated Transportation business, which is 15% of the company and that's the outsourcing of a truck and a driver. So think about this as a private fleet or somebody outsources that to a company like Ryder. And then finally, our Supply Chain Solutions business, which is the outsourcing of broader supply chain operations. You think about warehouses that we operate around 300 distribution centers for primarily Fortune 500 companies here in the U.S., 95 million square feet of warehouse space. We're also like as a traffic department for large companies where they outsource their traffic or transportation departments to us. And then we operate -- we move freight for our customers through third-party carriers, and there's about $12 billion of freight that we move in that form that doesn't go through our P&L. So everything we do, a customer can do on their own. So our job is to make sure we can do it more efficiently and more reliably than they could do it themselves. Disruption and anything that makes what we do more difficult is really good for Ryder because companies are more likely to outsource something that's complicated. So as you might imagine, COVID has created a lot of complexities around supply chain, which has been really good for our company. So 3 years ago, we established a balanced growth strategy, and the goal was really to balance top-line growth with returns and free cash flow. There's really 3 pillars to that strategy. First was to derisk and optimize the model. So one of the things that we had to do there is we had to lower the residual value assumptions for all of the leases that we were signing in the Fleet Management business. So you had less reliance on that final cash flow from selling the vehicle to make sure you're getting your returns. So we did that. We also increased the warranty on our vehicles to make sure we had less risk on the maintenance cost. We also exited and recently are in the process of finalizing the exit of our U.K. business. So we're now officially a North America focused company. And again, that was because our U.K. business, we've been there for 50 years and it was really underperforming. So derisking and optimizing the model, improving the returns in the free cash flow. The key drivers for that were really lowering our maintenance costs. We had $100 million maintenance cost initiative, multi-year maintenance cost initiative, to lower our annual maintenance cost by $100 million. We've exceeded that as of this last year. So improvement in bottom line from that. And then most importantly, we increased the spread on the new leases that we were signing in our Fleet Management business. The goal there was to go from 60 to 100 basis point spread, which was our historical target to now 100 to 150. And that initiative alone over -- as we reprice our portfolio is going to generate about $125 million of improved earnings for the company. We're about a little bit over halfway through that. We got about 60% of our fleet now has been repriced. So then again, that allows us to improve returns. Free cash flow, we improved by targeting our lease fleet growth to be 2,000 to 4,000 units. We've grown as much as 10,000 units in prior years and felt that 2,000 to 4,000 was more of a goldilocks. You can get the earnings growth without having a significant drain on free cash flow. And then last was really driving profitable growth, really focusing our growth more on our supply chain and dedicated businesses which had a better return profile. So those businesses have gone from -- if you go back to 2015, they were 37% of the revenues of the company. In 2022, they're 52% of the revenues in the company. So the profile and the make-up of the company has changed significantly as we've moved more of the business to the higher return, less asset-intensive parts of the company. We also have had -- because of our balanced growth, we've had the ability to do more acquisitions. So we -- in 2022, we did -- including a few months of 2021, we did 4 major acquisitions or 4 significant acquisitions in our supply chain business, about $800 million worth of acquisitions. And also, share buybacks and dividends, we've had money to do those. So we're able to buy back about 12% of the shares of the company last year as we had more cash coming in due to our balanced growth strategy. So over the last 3 years, we've achieved record revenue, record earnings, record free cash flow and record return on equity. Our return on equity, as an example, had historically been anywhere between 10% and 14%. This year it's going to be -- in 2022, it was 29%. And our target -- obviously, there was a lot of benefit from the used truck market and from rental, but our target is high-teens. So we're going from low-double-digits historically to high-teens. And we feel very confident that we can get there. Earnings, prior peak earnings have been $5.95. We delivered $16.37 per share in 2022. Free cash flow over the last several years prior to the pandemic had been breakeven to negative. Over the last 3 years, we've generated $3.6 billion of free cash flow. So we feel pretty good about where we're at. We feel that this balanced growth strategy is really working. We're -- we still got significant opportunities in continuing to improve the lease pricing, continue to drive additional growth in our logistics business. This year, in 2023, we are targeting now about $12 a share in earnings, which is down from the $16.37. But the important thing is it's down because of rental and used trucks, which is our typical cyclical part of our business. But the overall core, what we would call the core earnings, that's normalized rental and used trucks along with our contractual businesses, still continues to grow. So I think that's one of the things we're really excited about. Return on equity is somewhere in the high-teens. We're looking at 16% to 18% return on equity. And while we continue to grow our supply chain and dedicated businesses along with our fleet management in that more balanced growth approach.

Great. Well, that was a fantastic overview, and obviously, some impressive stats over the course of the last couple of years, what you guys have been able to achieve. So maybe we'll start with FMS. As you noted, the rental and the used truck markets are sort of your barometer to some degree of what's going on from a freight standpoint. So I always like to ask you, because of that, given your exposure there, what you're seeing in terms of activity there on the rental side and what you can maybe sort of take that information and what does it suggest about the sort of health or lack thereof of the freight economy as it stands right now?

Sure. Well, as everybody knows, the freight economy really heated up coming out of the pandemic and we got to levels where there just wasn't enough trucks on the road to handle all the freight that needed to be moved. So spot rates really went through the roof. All that started to come down at the beginning of last year. We started to see the freight cycle start to come back down. As far as Ryder, we're not a truckload carrier. So where we see that is in our used truck prices. And then in our rental business, our truck rental business, which we do trucks and tractors, tractors is more over the road. So we saw used truck prices come from the stratospheric levels that we were at, start to come down through last year. We're expecting used truck prices to continue to come down through this year. And really, on average, for the year, be in a more normalized level as we go through 2023. So that's kind of what we saw in January is really that used truck prices continue to slowly come down as we go through the cycle. On the rental side though, however, we're still seeing pretty healthy rental demand. We're seeing a little bit of softening, but not as much as we would have expected. Some of that is coming from the fact that there's just a short -- there's still a backlog of new trucks to be built. So as you -- as it relates to Ryder, we're the largest purchasers of commercial trucks in the country. We have already sold out most of our allocation for 2023 with leases that we've already signed. So there's a real backlog of new truck production. That backlog of new truck production is creating, I would say, a little bit more buoyancy in our rental business as companies are still waiting for the trucks to come in. They're going to continue to rent trucks. But we've got a pretty good asset management model that as we start to see the rental business start to soften, you're going to see us really start to reduce our rental fleet to make sure we keep our utilization where we want it to be. So we feel good about our -- where we're at. We also feel good about our ability to respond as it continues to decline. But what we built in our forecast for 2023 was continued declining used truck prices and then some softening in the rental market as we -- especially as we get into the second half of the year.

And that softening in the rental market in the second half of the year, that's really -- do you think that's more driven by increased availability of new equipment or do you think that's a combination of that and maybe softening macro conditions?

Clearly softening macro conditions. We're already beginning to see some softening macro conditions. The difference is that as we get into the second half of the year, we're also going to have the new truck production catching up and more new trucks at the market.

Okay. Makes sense. I was interested about the lease spreads that you were talking about, the ability to get sort of 60% of the fleet repriced recently here. I guess, are you able to achieve those types of spreads even in a somewhat softening environment? So what's sort of the value proposition that you're going to your customers with to be able to achieve those types of spreads and be able to reprice that rest of the business potentially in a softer market?

Yes. I think what's happened is private fleet, people that own their own trucks that have been doing their own maintenance over the last 10 years, have run into many of the challenges that even a company like Ryder ran into. Maintenance costs gone way up with changing technology and then the volatility of the used truck market. A lot of people felt the pains of that volatility. So what we've seen is that customers are willing to pay a little bit more premium to -- because of the pain that they felt through that process. So time will tell, but we're now 3 years into this pricing model where we've lowered the residual assumptions and we've increased the spread and we continue to be able to get it in the marketplace. As I said, we've sold out most of this year already. So what we're selling now is primarily the 2024 deliveries. And so far, so good. Our goal is going to be to continue to search for that higher spread. Even if it means a little bit lower growth, we want to -- we think that's a better trade-off.

And how long will it take to go from 60% to the rest of the fleet?

That's going to be over the next couple of years. So if you think about it, it's -- we have about a 6 year holding period. We got about 3 years in -- 3 and a half years in. We got about 60% of it already on the ground. We've got another 20% that's already been priced. Those are the ones we're willing to bring in. So as we get to the end of 2025 into -- at the end of 2024 into '25, we'll have the whole fleet done. So 2025 is when the fleet will be done.

And that's 100%, okay. And then we'll go from there.

100%.

Okay. That makes sense. That's interesting. I guess, when you think about the used truck market, that was sort of where I wanted to go next. And obviously, you talked about the amount of vehicles that you have and then sort of your ability to sort of modulate that. I think your longer term target of used vehicle inventory is in that 7,000 to 9,000 range. Obviously, you have the U.K. business, which is going to probably be a bit of a dampening effect on kind of getting back to that. But what have been the key reasons to be behind the -- below that sort of longer term average? Is it just the availability of equipment or how do we think about that, and ultimately, maybe the multi-year trajectory of the inventory?

Having low inventories in used vehicles is a first-world problem. I mean, it really is not -- it's because we're able to sell what we have at good prices. And the only downside is you may not have as much on the lot to be able to show a customer. But over the last 5 years, we've also seen much more market acceptance to buying vehicles online. So there's less of a need maybe to have some of that inventory. So I would tell you, the inventory -- the low inventory has really been a significant problem. What would make that inventory go up is obviously as more vehicles come up for renewal of leases. A new vehicle comes in, the old vehicle goes to the used truck market. And we're expecting more vehicles to go through that this year. So we're expecting our inventories to come up some, and this year probably still stay at the bottom end of that range that we're talking about. But again, we're in a good spot. I think we've now -- one of the things that we did over the last 3 years is we've increased the capacity of what we can retail or use -- what we can -- the number of vehicles we can retail. And that's really given us an opportunity to keep those inventories kind of on the low end of that range. So our goal would be to still keep them, wherever possible, try to keep that inventory on the low end of the range.

And you talked about prices sort of normalizing. I guess, can you -- I don't know that you want to be like overly precise about where you think the numbers are going to go here in the relative short-term. But how do we put sort of where the pricing environment is into historical context?

Yes, I think if you took -- we have a chart that we -- you can see it in our earnings presentation that shows you 22-year look at used truck prices. And you can see that over the last 2 years, they just went through the roof. I mean, they went to levels they've never been before. But we're expecting those prices to continue to come down throughout the year and get to more of that normalized what we've seen historically in that 2022 year period -- that 22-year period and get back into a more normalized cycle, right? So you'll go through a period where more trucks will come on to the used truck market because more new trucks are being put into the market, creating a used truck that gets sold in the used truck market. And then that will go through its normal cycle. Typically, those cycles last 12 to 18 months and then you see it start coming back on an upswing.

If there's any questions from the audience, feel free to jump in. From a supply chain standpoint, I want to kind of move there and talk a little bit about that business. Obviously, there's some I think megatrends of outsourcing and opportunities for folks to be sort of taking advantage of your services in a more complex supply chain environment. So can you talk maybe a little bit about sort of organic growth? I know you've done some deals in that space as well. But can we talk a little bit about organic growth and the type of pace that you're seeing either in 2022 and then kind of the outlook for '23?

We've had really strong sales the last few years in our supply chain. But just to give you an idea, our revenue growth -- organic revenue growth in supply chain in 2022 was about 22%. So we had another -- we had 22% plus another 22% that came from acquisitions. So a really strong pipeline. Companies as a result of COVID, whenever you hear these companies talk about supply chain resiliency, supply chain disruption, all of that is really good news for us because those companies typically will come looking for help, help us in designing a different supply chain, adding facilities, adding distribution centers. So we see continued growth there, especially as companies look to near-shore [ branches ]. We are in North America, U.S., Mexico, Canada. We have very strong operations in Mexico. So we do a lot of business with companies who are doing manufacturing in Mexico for consumption in the U.S. We do one of the companies that does the most border crossings between the U.S. and Mexico. So we're very well positioned, I'd say, for what's happening there. And we're just seeing it across the industrial -- especially industrial-type companies. So industrial automotive as companies are looking to bring or change their supply chains, I would say. And as they open up their new plants, maybe rather than opening up overseas, they might look to Mexico, they might look to the U.S. and that really fits right into our sweet spot.

Can you walk through -- is there a question over here?

Each business has its own margin profile and profit profile, the asset-light versus the asset-heavy business. Can you kind of tell us about each of the margin and profit profile for each and then initiatives you have underway for tuning them to the place you want them to be?

Sure. So as you might imagine, the more asset-intensive business, the fleet management business, the higher profit profile. We're looking to be in the earnings before tax as a percent of operating revenue. We're looking to be in the low-double-digits for our fleet management business. So we ended the year way above that because of what's going on with gains. But we feel, as we go into next year, we're going to be in that low-double-digit range. As we go -- as you look at our supply chain and dedicated, that's more high-single-digits. So less asset intensity, a little bit lower in terms of margin targets. We were at those levels. We will approach those levels certainly in the second half of the year. As we go into next year, dedicated, we expect to solidly be in that high-single-digit range. Our supply chain business we think will be approaching that. And that's primarily because we have amortization from the acquisitions that we did. This put a little pressure on there. If you take the amortization out, we certainly would be -- we expect to be in that high-single-digit profitability range.

When you think about your verticals on supply chain -- in the supply chain business, can you walk through a little bit of sort of what those end markets look like? You mentioned industrial, automotive. Do you have anything from what were consumer e-com, those kinds of things?

Sure. So let's just talk auto and industrial, that's more the manufacturing type. We're seeing a lot of demand in those businesses right now. They've all been -- still continue to work in through some of the supply chain disruptions that have interrupted their manufacturing process. So looking for help from Ryder. We've been key partners in helping them get through some of that. We're seeing new facilities opening up as they work through that process. In some cases, we're building new distribution centers to store some just-in-case inventory for these companies as they come out of this. On the CPG side, I think that's been the vertical that's been the strongest throughout the pandemic. People continued -- CPG continued to do very well. So we continue to see just ongoing growth in that business. On the retail and e-commerce omnichannel side, I'd say it's where we're seeing more growth now because we're in the e-commerce and omnichannel business. We bought a company called Whiplash at the end of -- at the beginning of last year. And that really gave us a stronger position in being able to provide e-commerce fulfillment solutions for companies. So that -- now we have a solution that only -- not only can we attract the larger retailers that you might think of, but also -- but I would say, earlier phase companies that are still early life, they may not completely start-ups, but just getting off the ground. And they need a company that can help them manage their e-fulfillment business. And we're doing a lot of business, those types of companies. We're seeing a lot of growth there. As we open up new facilities, they're typically sold out before we can -- before we have the ribbon cutting. So we see that business as a really significant growth driver for us going forward.

How do you break down the pipeline in terms of those verticals? Where is the concentration in the pipeline if there is concentration in terms of the e-comm versus industrial versus CPG. So when you think about the pipeline of supply chain, how do you sort of break it down?

Well, I would say, e-commerce has been the new addition, if you will. So we're seeing a lot more growth than that we had historically. But I still -- we still see a lot of strength in CPG as companies look -- and some of these bigger companies like to outsource different parts of their supply chain. And then on the industrial and auto, because of the disruption, we started to see some revenue slowdown there. But now we're seeing it all as those companies get back, catch their stride and start really ramping up manufacturing and production. We're seeing improvements there and new companies that are coming in also.

Is the average facility and supply chain, is it a multi-tenant facility? How do you sort of approach that versus maybe single-tenant buildings?

The majority of our traditional supply chain is single-tenant. Those single-tenant for -- we opened up a distribution center for one customer. The business that we picked up now with e-commerce fulfillment is mostly multi-client. So these are a network of facilities that are multi-client. And then I forgot to mention our Ryder Last Mile business. We're doing final mile delivery of big and bulky. Think about furniture, office equipment, fitness equipment, that type of stuff, appliances. That is all multi-client also. And then the only other exception in our traditional is in CPG. We bought a company called Midwest Transportation that actually has multi-client for CPG companies. We have a small multi-client presence there.

And when you think about the margin profile of those different approaches, is any one of -- either from a vertical standpoint, stand out is either good or bad relative to the overall sort of segment margins or does multi-client versus single-tenant have any difference from a margin profile?

Not significant. I mean, there is some benefit to being multi-client. In terms of margin, you have a little bit better margin on some of the multi-client business, but it's not significant.

So I guess, when you think about the near-shoring, that's one of the megatrends that we've heard a lot about over the course of this conference. I guess, you mentioned industrial and auto is probably where you see that the most. How much of that is U.S. specific? Is it sort of connecting the U.S. with Mexico, like you said, you can do and help with that cross-border business? Where does that opportunity sort of present itself? And what do you think the timeline really is around near-shoring?

It's funny because it is a longer term what we're seeing with our customers. There's -- we haven't seen a lot come and say, all right, I'm just picking up my manufacturing in Asia and I'm bringing it to Mexico or the U.S. It's more of the next plant that we opened. The next facility we opened. We're looking to make a move, and we're going to do that one in the U.S. or in Mexico. So that's more of what we're seeing. It is longer term. It's clearly a multi-year process that I think we're still in the early innings of. But we feel we're very well positioned because of the presence we already have in Mexico. The capabilities we have there to perform the same activity. We'll give you the same flavor of service in Mexico and in Canada as we do in the U.S. And it's really one company that these companies can come to.

And then last question on this before moving on. Anything from an M&A perspective within supply chain that would be interesting to you, either whether it be vertical or geography that would be new or interesting?

We're typically looking for -- on the acquisition front, not so much role, it's more than -- it's more about finding a new capability that we may want, maybe entering a new vertical. So reverse logistics. Now we've picked up e-commerce fulfillment, reverse logistics is a hot topic for this business. So if we find the right company there, we might -- you might see us do something there. New verticals, healthcare is one that we've been wanting to get into. We've actually won a couple of key accounts there organically. So we certainly like the organic growth also. But yes, I don't -- we're not looking to do a big mega deal. We're probably looking to do deals that can get us into new verticals and new capabilities.

That's helpful. So let's talk a little bit about dedicated. That's typically, like you said, it's sort of outsourcing both the truck and the driver. So when we think about dedicated, I guess, there's a couple of different ways to look at it. There's sort of the replenishment business for some of the key customers. There's private fleet conversion business. There's maybe a couple of different ways to think about it. So maybe just broadly talk a bit about the composition of dedicated and how you guys are structured within that? Then I have a few more questions.

Sure. I mean, dedicated is a pretty broad description of an industry, but what we do has been traditionally the more specialized dedication. So you think about a delivery to a storefront where it's not -- you're not just backing into a dock door, the steel metals type, flatbed-type deliveries, those types of things. So we've been in that business for a long time. We've got -- I think we've got a very strong position in that business. And there's still a pretty significant growth trajectory there. It is primarily about private fleet conversions. These are typically private; running private fleets until somebody decides they're going to outsource it. The secret sauce for us is that over 50% of our sales in dedicated come from our truck leasing business. So this could be a company that's currently leasing a fleet from Ryder. And then the size they're having -- they're having trouble finding drivers, they're having trouble creating optimal routes. So they come to a company like Ryder and say we'd also like to outsource the driver, and that's how we get -- we continue to grow that business. So we think that business has opportunity to continue to grow at high-single-digit, maybe even low-double-digit levels at a pretty healthy clip with really just taking advantage of that opportunity that we have to sell more value to our leasing customers. It's not going to work for a 2 truck account, but an account that has 20 to 100 trucks and wants to hand over all of that to Ryder, we've got a great solution for them.

So what do you think the truck growth will look like for 2023 into dedicated side?

So if you think about our dedicated business, we probably -- in terms of power units, I think we've got about -- I think on the dedicated segment, not including what's in supply of about 5,000 units. So we're going to grow that high-single-digits, maybe double-digits. So 500 units could be -- power units could be a pretty good number.

When you think -- look forward to the advent of EV really making its way into the truck business, do you foresee infrastructure cost that you're going to have to take on at some point?

Sure. I think obviously, we're working very closely with not only the traditional OEMs, but some of the start-ups around EVs piloting some of those vehicles. We've got some of the early versions of them. We've had some of the early versions of some of the other start-ups and OEMs. The way we're seeing it right now is we think that's probably going to first go to market on the lighter duty delivery type vans. So we think those are probably closest to not only having a viable product, but also one that has economic. It makes sense from an economic standpoint. Along with that, you're going to have some charging infrastructure that you've got to build in. So we believe that we're very well positioned to help in transitioning the industry over time as you have a big truck rental fleet. So what a better way to try an electric truck than to rent one from Ryder as they become available. We're going to build some infrastructure in order to do that. But more importantly, we also want to be the one-stop shopping. So companies that fleets are looking to transition to electric can come to Ryder and then we can connect them with basically a one-stop shopping around installing the infrastructure. We've got partnership with companies that are going to be doing that for us and really help companies make that transition. I think that transition will take decades to really go through. And you think about it, you're going to have periods of time where you're going to have part of your fleet be electric. Other parts are going to be diesel. Some may even be hydrogen. And I think that just adds more complexity to how you're going to manage a fleet. And that's why I think Ryder is going to be in a good position to be able to help companies through that transition.

What do you think of the timeline of some of that penetration? Any sense of...

Again, I think unlike duties probably sooner. I think there's some light-duty vehicles today that are already getting close to that good value prop for companies. The heavy-duty stuff is going to take a little longer because the technology certainly is just a lot more expensive still. But over time, we think that could get through that. But I think it's -- you're looking at years out. You're looking at -- this is going to take decades to kind of get through.

Back on the dedicated side, how do you think about the pricing environment? So we spend a lot of time thinking and talking about truckload pricing, but dedicated is a different animal. So can you talk a little bit about sort of, #1, maybe what your contract cycle look like in terms of length of contract, then how do you think about sort of the pricing environment in '23?

Sure. First of all, our contracts are typically 3 to 5 years, but then they go evergreen and the renewal rates are extremely high in the '90s because once the company is comfortable with the service, they typically don't want to make a change. In terms of the pricing environment, it's a truck and a driver and we don't buy a truck until we have a signed lead. Until we have a signature with a customer, we don't hire a driver. So there's -- and neither do our competitors. I think you don't have a lot of pressure there. Where there's some pressure always is what's going on with the spot market. So there's always a portion of dedicated that could be truckload. So when you start to see the truckload market really soften, you might get on the edge as some customers revert back to truckload, as they say, it's worth taking the risk on truckload because the rate is low enough. So you're going to see some of that in the margin, but you've still got a core fleet that needs to be dedicated where you continue to see that. So you could see some pressure on growth. It's more pressure on growth rate than it is on pricing. I think the pricing still generally stays pretty disciplined.

And within a 3 to 5 year deal, there's normal sort of escalators on an annual basis that roll through?

There is, and that's one of the changes that we're working on. We got about 40% of the contracts already re-done to derisk the business because we had never seen wage inflation of 7% to 10%. So our contracts were typically set-up to handle 3% to 4%. So we had to go back and renegotiate those rates. It took us a while. Our margin suffered for a period of time. So as we've gone renewing those contracts, we've put in new language that allows us to more easily pass through higher wage increases if we get into that situation again. So we have about 40% of the fleet already been -- or the contracts have been re-written, if you will, with that clause. We've got the other 60 that we're going to do as they renew.

And then I guess maybe coming back a little bit on sort of the big picture and the cycle and how you guys kind of fit into it. So we've been asking a lot of our truckload folks as well as the LTL folks about '23, '24 as '23 is sort of the trough year before we begin to see things pick back up in '24. So maybe just big picture, not looking for exact specifics, but big picture, how you think this sort of cycle plays out from a demand perspective? Does it feel like these next several months might be the trough and then 2024 is a little bit more of a positive year?

Yes. If you just think about historical cycles, you would expect rather than the truck when I look at it more from the used truck market, we kind of probably see that going down throughout 2023, getting towards the bottom at the end of 2023 into 2024. And then in 2024, you would expect it to start coming back up in a more normalized way, but it's early.

So in that context within used truck, and you guys have done a lot of work I think on residual rates and kind of putting yourself in a good position there. So if you think about the $12 in earnings in 2023, how normal of a number is that in terms of where the gains at?

So if you think about -- we put a number out there which said, we have over-earnings around rental and used truck. So we said we're in a more normalized environment. So if you take what we would call normalized gains of $75 million and then our utilization, we're expecting somewhere in the mid-to-high-70s. The $12, if you take those out and you bring it back to those normalized levels, you're more like at $11. So we think $11 or more what you would expect to be what we would call...

There's still $1 left in the numbers.

There's still $1 in there of primarily gains, primarily more used truck gains in the $75 million.

And so as we think about beyond kind of 2024 number, that would just be the base level as you think about it and the core business that you've been able to build around it?

Correct. You would expect that number, the core earnings to continue to go up each year as you build more earnings from supply chain, more earnings from our leasing business, more earnings from dedicated. The rental and used trucks are going to go through their cycle, but this core level will continue to go up.

And if you think about, you've talked a little bit about how that revenue pie has sort of balanced to a degree as you've seen significant growth coming from your other segment, your non-FMS segments, as you think out over a couple of years, what are you the most excited about in terms of the growth potential within the segments?

I think the capabilities that we have in supply chain and dedicated especially are really unique and that I think we can really bring a lot of value. We know how to execute well around these supply chain activities that are complicated and have gotten more difficult. So there's a great opportunity there. At the same time, we have a very strong presence and capability in our leasing and rental business. So as we go through a technology transition in trucks, I think we're extremely well positioned to help fleets make that transition. The only change we've made, if you think back from where we were 10 years ago, is that we're saying, hey, this business that was a mature business, as the technology change start having, we realize we can grow this at a pretty significant rate, this leasing and rental business. And we said, you know what, we want to grow it, but we want to make sure we're growing it profitably and balanced with our free cash flow. So we think we can clearly do that as we go into the next 10 years. As we go through this technology transition, we're seeing customers continuing to be able to and want to pay a premium for the services that we provide around their truck fleets.

And I guess, maybe the last question, just coming back, as you mentioned, free cash flow is a big piece of sort of what's transitioned in this business and how we think about it going forward. That dollar of sort of extra earnings, is that the right way to take that and translate that back to free cash flow and that would be maybe a more normalized sort of pace of free cash flow?

The free cash flow is going to get a little lumpy depending on the replacement that we have of [ Leisure Lux ] But I think if you look at what the core business could do, we've said from a free cash flow standpoint, we're going to -- we're expecting to be certainly positive over the cycle and really positive in most years. So we've generated in the last 3 years, I think $3.5 billion, $3.6 billion in free cash flow. We're forecasting next year -- I'm sorry, this year to generate $200 million. We have more replacements and we're expecting to grow our lease fleet somewhere in that 2,000 to 4,000 unit range. So that's going to get us -- still get us a positive $200 million. If you look historically, we typically would go into a more negative free cash flow environment and that type of growth.

Well, listen, I think we're pretty much up to the end of our time here. Really appreciate you taking the time to join us today. Thanks so much.

Great. Thank you. Thank you for having us.

Thanks, everybody.