Rush Enterprises, Inc.

Good morning, ladies and gentlemen, and welcome to Rush Enterprises Incorporated Results Third Quarter 2020 Earnings Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call may be recorded. I would now like to turn the conference over to your host today, Mr. Rusty Rush, Chairman, CEO, and President. Sir, the floor is yours.

Good morning, and welcome to our third quarter 2020 earnings release conference call. On the call today are Mike McRoberts, Chief Operating Officer, Steve Keller, Chief Financial Officer, Derek Weaver, Executive Vice President, Jay Hazelwood, Vice President and Comptroller, and Michael Goldstone, Vice President, General Counsel, and Corporate Secretary.

Now, Steve will say a few words regarding forward-looking statements. Certain statements we will make today are considered forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Because these statements include risk and uncertainties, our actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include but are not limited to those discussed in our annual report on Form 10-K for the year ended December 31st, 2019, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved quarterly revenues of $1.18 billion and net income of $34 million or $0.60 per diluted share. We delivered a cash dividend of $0.14 per common share, and as previously announced, we declared a three-for-two stock split earlier in the quarter. The COVID-19 pandemic, along with the previous anticipated industry downturn, continue to have a direct result in our financial results in the third quarter. However, when compared to the second quarter of 2020, we experienced a notable increase in revenues, primarily from increase in truck sales and increased profitability due to our previously implemented expense reduction measures. We remain focused on monitoring COVID-19 and its effect on the economy and our industry, and we are cautiously optimistic that we are not only right-sized to support our customers, but that the economic recovery, though gradual, will continue. Turning to our operations, in the aftermarket, our annual parts, service, and body shop revenues were $400 million. Our absorption ratio was 119.4. While our revenues declined year over year, they did improve 6% when compared to the second quarter of 2020. This was due to increased aftermarket activity in August and September, especially from refuse, construction, and over-the-road customers. Looking ahead, uncertainties remain about the pandemic and overall strength of the economy, and the energy sector is still much slower than normal and likely will not improve significantly for some time. That said, though, we expect some typical seasonal decline through the winter. We believe that the gradual recovery of the aftermarket business will continue. In truck sales, we sold 2,584 Class 8 new trucks, which accounted for 5% of the total U.S. Class 8 market. Due to the pandemic and an industry-wide downturn and slowdown in Class 8 truck sales, our results were down significantly year-over-year as we expected. However, our new Class 8 truck sales did improve 38% when compared to the second quarter of 2020, and our used truck sales increased 16% compared to the same time period. Government stimulus payments issued earlier this year, combined with state reopenings, bolstered consumer spending in the third quarter, which strengthened freight and spot market rates throughout the country. As a result, we experienced an improvement in quoting and sales activity for new trucks, primarily from over-the-road customers. Further, the availability of new trucks off the production line was limited due to manufacturing shutdowns earlier in the year. This resulted in an increased demand for stock truck and used truck sales and improved used truck values, which is consistent with what the industry experienced. ACT Research adjusted its Class VIII retail sales forecast to $186,000 300 units in 2020, a significant increase from earlier estimates. We are encouraged by our third-quarter truck sales results, but we expect COVID-19 and uncertainties about our economic recovery to continue to impact Class VIII new truck sales for the foreseeable future. We believe our Class VIII new truck sales in the fourth quarter will be consistent, though, with our third-quarter results, and our used commercial vehicle sales will also remain solid. Our Class IV through VII new truck sales were 2,941 units, accounting for 4.8% of the U.S. market. These results were up 26% over the second quarter, primarily due to increased activity from landscaping, residential construction, and other small businesses. ACT Research is forecasting U.S. Class 4-7 retail sales to be 216,100 units in 2020, another significant increase from earlier estimates. Although we expect medium-duty truck sales will continue to be directly impacted by the uncertainties around the pandemic and the economy in general. We believe our class four through seven truck sales in the fourth quarter remain on pace with our third quarter results. I am truly grateful to our dedicated employees for focusing on what's important, protecting the health and safety of themselves and those around them while serving our customers and helping our country recover from these challenging times. With that, I'll take your questions.

Thank you, Speaker. Ladies and gentlemen, if you have questions at this time, please press star, then the number one key on your touchtone telephone. If your question has been answered, you may wish to remove yourself from the queue. Please press the star key, the pound key. Thank you. We have our first question from the line of Mr. Justin Wong from Stephens. Your line is open.

Thanks. Good morning, and congrats on the quarter. Thanks, Justin. So maybe to start with G&A, continue to see some pretty positive trends on that front in the third quarter. How should we be thinking about G&A in the fourth quarter? And then looking into next year, assuming that ACT number is right on truck sales, what kind of G&A would we see in that environment?

All right. One thing I'm very proud of is the reduction in G&A that we've been able to accomplish so far this year. And of course, that's always the question, right? What does it look like going forward? From a Q4 perspective, I'm going to tell you we're going to be relatively flat. We have to eat into some holidays, but you have a few less working days that offset that. So I would tell you probably relatively flat with Q3. We are seeing some gradual increases. and some of the expenses as our parts and service business has picked up. As I've told you, we've got some goals going forward and how much we're going to retain as gross profit continues to grow. We will try to spend less than what we have historically. I'm very confident that we're going to be able to do that. I just finished a conference with all our folks, and I think everybody's got their heads wrapped around it pretty good as we come out of this where we've been with what looks like a pretty good run going ahead of us here, we believe, once we get through this pandemic and all things settle down, that from an industry perspective that we're going to do a better job of managing these expenses and where we're taking them down to as we go forward. Understanding, though, that it does take a little extra expense and more gross profit, right? We sell parts. We turn wrenches. We do all these things. That's how we make money. But looking out into next year, oh, I would tell you, you know, our goal is to be somewhere in that 35, you know, every gross profit dollar we produce in parts and service is to be somewhere around 35% of that we will probably spend, the rest hopefully dropping to the bottom line. But as a basis... You know, we're using, I would tell you to look at Q2, not Q3, because we're already seeing, you know, we're already starting to increase some stuff. But I still believe we'll be close to flat, maybe slightly up in the fourth quarter. We'll just have to wait and see how it pans out. There won't be any big rise for sure. So, but, you know, that is the goal. So using, you know, Q2 as your baseline, not Q3 from an expense perspective. You know, that would be as we grow gross profit off the Q2 level with the expense from there. you know, back-end gross profit. Remember, we're not talking about trucks here. We're talking about parts and service, okay? So I'm not talking about trucks. And, you know, I was split. There's S and G and A. We look at it, we manage it separately because S is always, you know, a variable component tied to truck sales, and G and A is the overall cost of running the business. So I hope it gives you some flavor on it.

That does. Thanks. And with parts and service, it sounds like things really picked up in August and September, right? Have you seen that strength continue into October? And any thoughts on parts and service, top-line performance in the fourth quarter versus what you just saw in the third?

Well, yeah. I don't know that we're going to increase a lot. We look at it as the working days a lot. And the fourth quarter is the shortest working day quarter of the year, right? You've got really three less. Now, we work on Saturdays and stuff, but we measure it by how many Mondays and Fridays you've got. You've got three less working days. Q4 so I'm going to believe that we will be slightly off because you know three less work you have 62 days versus 65 so I'm going to believe will be slightly off but I do expect to maintain at least the average per day where we're at you know it's always a little bit Wintertime is always, you know, November, December, January, and February are not always my favorite months from a parts and service perspective. Holidays are nice, but they're not exactly good sometimes for our business. But that said, I do believe we'll maintain. Some years we go backwards a little bit in gross profit per day average, but I don't expect that to happen. But you just have less working days. So slightly down from the gross profit perspective, but not dramatically. You know, we picked up. It was interesting that we went from like April, May, June, July. We're all very similar. We dropped, obviously, as I told y'all last call. March was, you know, it's a 13-month year. There were two Marches. But once we dropped into April, it stayed flat. But we started to see the increases come back in August. And parts more dramatically some in service, to be honest. But, you know, I think it's sustainable. And I think once we get through the wintertime, I think you'll see us start growing it again. Okay? I really believe that.

Okay. Great. I'll leave it at that. Congrats again on the quarter.

You bet. No, we're excited about where we're going.

Thank you. We have our next question from the line of Jamie Cook from Credit Suisse. Your line is open.

Sorry, hi, good morning. I hope you guys are well. Nice quarter. I guess just, you know, first question, Rusty, the margins, you know, on the truck side were fairly good in the quarter up from where you were in the second quarter. So can you just talk broadly about trends, you know, how you expect that to progress in trends you're seeing in terms of, you know, ordering from the big fleet guys versus more of the vocational markets where potentially people you know, are slightly more concerned about going forward, just as there's concerns on, like, state and community budgets and stuff like that. And then I just guess my second question, if you could just decipher more within your parts and service business, the margins were a little lower this quarter relative to where they've been trending. Any view on that or just color on what you're seeing parts versus service in terms of mix within that segment? Thank you.

You bet. Around truck sales, I would tell you that new truck sales in Class 8 were slightly up. I think used margins were dramatically up. Even though they make up a lot less sales, used margins were almost. They were in the sixes last quarter, and they were 12. And that was indicative. That's what really had some effect on it. We were up slightly, I think, five-tenths in new from Q2, but in Class 8 new. But really, used truck margins were up because, you know, you've got to remember the used truck market took the hit, right, in March. Boom, you lose 10%, 12% out of everything, right? So you right-size your inventory, as we always do. You know, as you finish Q2, and then you roll into Q3, and here comes the market, right? So market picks back up, values go up, and fortunately, we captured some of it, right? You know, you're marking the market unused all the time because that's a moving target. So we got the good side of it this time where, you know, the 6% in the Q2 was down from our typical 8% to 10% because you had the COVID hit and nobody was buying anything for a while. And then when everything picked back up because, you know, that's when inventory started to move both on the stock inventories on the new side and on the used side. So, you know, that helped truck margins right there. From a parts and service perspective, we parts more than doubled the growth of service. Okay, in the quarter. And remember, parts are a lot less margin than service. Parts run, say, in the 28% range. It's just varying. It just bounces. But service typically is 65%. So it's sort of a mixed issue right there. I would expect that what you saw, I think, is going to be trough for combined parts and service margins. I think service is going to start accelerating back up, keep more in line with the parts growth. As we go forward, like I said earlier to Justin, I'm not sure that we'll pick up a lot per day here in Q4, but staying where we're at and maybe picking up slightly on a per-day basis is better than we usually do in November, December, January, and February. It's just the way it works. The reason for the overall margins being down was basically a mixed issue, to be honest, with parts growing at a much higher rate than service in the quarter.

Okay, and then just to follow up, you know, you talked about why the margins were better on the truck side, but, you know, how concerned are you about sort of or what you're seeing specifically on vocational trends and just concerns out there with state and municipal budgets? I'm just trying to understand your viewpoint on that.

Yeah, I guess, you know, I don't tie vocational totally to government, okay? I look at it in a broader perspective. When you still see, you know, residential construction is still strong, okay, at least in a lot of areas we're at, I can tell you. I just barely got here for the call. Between a wreck and all this, I had to go over three different ways this morning to get here. You couldn't believe how many trucks I had to try to get around hauling aggregate and stuff this morning. But, no, you see, we still believe that the vocational side will, outside of oil and gas, and I understand where commercial buildings are at, but residential construction in a lot of areas we're at is still pretty strong. And we're still, you know, when it comes to customers that are in that type of construction, housing construction, you know, road construction, stuff like that, we're still seeing, I think there's still a lot of money spent around those areas. Now, sustainability, folks, you know, I'm not... I don't know what I can tell you how sustainable. I got a six-month window. It's hard for me right now in this environment. I challenge anyone. Everybody puts stuff out there, but to give me a 12- to 18-month outlook with all the uncertainties we've got right now. But, you know, I feel decently blessed. The margins you saw in the quarter, other than used, I don't think that's 12 sustainable. It would still be solid, not six. More in line with our typical 8 to 10. I would look at the truck margins to remain where they're at, to be honest with you.

Okay, great. That's helpful. Thanks again. Be well.

Thank you, Jamie. Good to hear from you.

And we have our next question from Andrew Obin from Bank of America. Your line is open.

Good morning.

Good morning, Mr. Obin.

So a couple of questions. So how should we think about rush in an upturn? Because, you know, you do have specific brands, you know, Peterbilt and Navistar are the big ones, I guess, international. And, you know, Peterbilt behaves in terms of market share, right? It sort of does not behave like the rest of the market. And then you have your own very industry-specific exposure relative to the industry. So how should we think about your market share relative to the industry in an upturn over the next, you know, let's say 12 to 24 months? Are there going to be any big differences?

No, I don't believe so, Andrew. I mean, when you look back, you know, I will tell you this. I would hope that our market share from Class 8, Trough, and Q3, that that 5% is the bottom. We have historically been, you know, high fives to, you know, low sixes. in that range, depending on what the volume is. I don't think Peterbilt's market share is going to fall off. I look back at what they were in 2019, a big year, and it was solid on historical terms. Navistar's market share, I believe, will continue to grow as they go forward. I feel pretty good about where my Class 8 OEMs are. And I would look for us to maintain where we historically have been. Probably the biggest headwind for us, to be honest with you. I think we're capturing new customers. But folks, we used to sell oil and gas trucks. I feel like that's one of the reasons I'm so proud of the print. And the prints we've been having is because we've done that without OG. And we couldn't have done that four or five years ago. So the organization has done a very nice job You know, when you look at our exposure, Oklahoma, Texas, Colorado, New Mexico, lots of oil and gas places, right? And we've had to do all this with huge declines in those areas and sort of reinvent ourselves around it, and I'll let the results speak for themselves.

I guess what I was referring to, and maybe we can take it offline, but I always thought you have more exposure to vocational programs And so, you know, at the peak of the cycle when large fleets come in, that's when you sort of lose some market shares just structurally, and particularly Peterbilt would. But that's what I was referring to specifically.

I think if you look, historically, you could have been right, Andrew, back years ago. But if you look at the last uptick, no disrespect, in 18 and 19, they grew market share, okay? And those were big market over-the-road years, too. So... You know, they've broadened their customer base. And from our perspective, now it starts back in the game. Okay? So we feel very good. I'm not worried about the size of the market and us getting our share, just to answer. I wish I had oil and gas and I'd do a whole lot better than what you're seeing, but I don't. But we're picking up more over the road business than we historically have.

So I can model you in line with ACT forecast effectively.

That would be correct. I'm buying into their numbers. Right now, I mean, like I said, it's hard to look at 18 months or 15 months to me, but, you know, I feel pretty solid about activity that we're seeing right now and, you know, stuff that we're booking. Much, you know, much better than, you know, we've seen over the, obviously during the pandemic, but even right prior to the pandemic, you know, we were not, didn't seem to be getting the order intake that I've seen over the last 45, 60 days.

Gotcha. And just a follow-up question, Rusty, you've done it in the past, but could you just walk us through, some of your key geographies in terms of, and just walk us through, you know, what are you seeing in terms of economic activity by key geography? Thank you.

Sure. Look at the coast. Let's start on the ends, both ends. Both are strong. You know, surprisingly, California, as with everything going on, California has been, you know, pretty strong, especially from a parts of the service perspective. From an over-the-road, you know, in Florida, Florida, while it took a dip, you know, we have a lot of Orlando stores, you know, right, with Mickey Mouse clothes for a while and all the other stuff there. But it has, with the growth in Florida driven by growth in population and construction, you know, it has been, you know, good. And also, Florida's always been a lot of car haulers. Well, you see what the automotive business has done, right? So they've had varying factors that's picked Florida up. As I work my way around the country, you know, we've hit some, you know, from a truck sales. It's different, right, in my view, from a truck sales or parts and service perspective. Pretty solid. You know, Virginia, North Carolina, pretty solid. Ohio, truck orders, intake was good. Illinois, coming around. You know, if you look for negatives, we're still suffering, say, in some of those areas. Arizona's strong, too, by the way. I would tell you Arizona, California, and Florida being the strongest. But we're still suffering in some areas that are oil and gas related. Not doing as well as we like out in West Texas and, you know, into, you know, New Mexico and Colorado so-so. picking up better than what we were last year from a return perspective up in the Mountain West in Utah and in Idaho. So, you know, I mean, I'm just running around the map here. I'm looking at the map over here to my side. And I will say, you know, it's broad-based, but those would be the ones that stand out.

Thank you very much, and congratulations to you and your team on all the hard work and great results.

Thank you. We appreciate the comments. As I said, it's a print that I'm very proud of.

Thank you. Once again, if you would like to ask a question, you may press star 1 on your touchtone telephone. Your next question comes from the line of Joel Tiss from BMO. Your line is open.

Mr. Tiss, take it off mute, Joel. That's the best question.

Your line is open. I think we have to move on. We have two more questions. We have a question from the line of Sean Kim from Gabelli Funds. Your line is open.

Hey, good morning, guys. I'm not Joel, but hopefully I suffice here. I just had a quick question for you guys. I had a quick question for you guys. I wanted to follow up on the big news from Friday. Obviously, you guys have an ear in the pavement, but, Rusty, I wanted to get your thoughts on the Navistar trade announcement, when you think the final documents will be signed, anything else that could shed some light on that combination and how that impacts you guys long term.

Well, You know, as far as the closure of the deal, I'm not totally in the middle of all that. I would expect, I would imagine that they've already done, you know, been pretty far along the path from a due diligence perspective. They announced that prior, remember? So I would expect that, you know, they'll get a document signed here, I would think, in the next month or so. And then I would imagine working through the SEC and things like that, sometimes close and sometimes it's spring. I would think, you know, late winter, springtime. would be my guess, but that's something they would have to tell you. That's a little conjecture on my part.

What do I think about it?

I think it's great. I think it's great long-term. It brings a strong global partner. When you talk about Trayton, you talk about Scania as being a partner to leverage off of. From a new product perspective going forward, especially with the amount of of money it's going to take with all this new technology, you know, with the green wave and new technology over the next decade or plus as we transition. You know, that transition is going to happen. Sometimes I tell you it's not going to be as fast as people say. But that transition will happen. And that takes a lot of money. So they have the ability to leverage off the, you know, the global efforts of Freighton, not just to stand alone. So from my perspective, that's a win-win big for both organizations. Obviously, you know, Volkswagen is a great job. North American brand. Don't come into this country and start from scratch. It just doesn't work that way in the commercial truck business. So I feel good about it. I really do. I'm excited about it. I think it's needed to happen. No disrespect to the old Navstar, but from a long-term view of the organization and growth of the organization, It's product-based. That's great. It's great. I look forward to that. It's not something that's an add water and stir. But remember, they've already been, you know, they've already had LTAs and agreements and, you know, cut costs and things like that already as joint forces over the last year or so. I think they're done like a normal acquisition. They're well on the development team for energy products already. and started prior to this. I mean, this is just the conclusion, the culmination of the way it was supposed to work when Tray Talk bought a piece of it three or four years ago.

Got it. Appreciate the color. Thanks, Rusty. Congrats again on the quarter. Thank you very much.

Thank you. I think we have the line of Joe Ortiz from BMO. Your line is open.

Oh, okay. Can you hear me now?

Okay, I was making sure you were awake, Joel. That's all.

I was worried I'd be falling asleep. Oh, okay. Well, the first question is the most important one. Rusty, how did you manage with a 25% salary cut? I think everybody knows you're kind of paycheck to paycheck.

I still haven't taken mine. We did bring back, by the way, that's the question, we did bring back all by October, we started bringing back some of it was in Q3, and that's part of where we'll have a little bit of expense creep as we reinstate. The only thing we haven't reinstated is my paycheck and our 401k, but all the normal reduction things that we did, those things will be reinstated as we, you know, I'm The plan is, as we continue to get more clarity, I'll be able one day maybe to get my money back. Not back, just get it started back, because my creditors are seriously after me, Joe. You're right. Joe, we're making sure he has enough money for tequila and food. That's all I get. I get a tequila and food allowance. That's it.

Oh, that's good. And everyone's kind of dancing around, and I just wondered, do you think like on a three- to five-year basis that your Navistar dealerships are going to be a lot more profitable with what's going on with Trayton, or it's too early to tell, or it's not going to matter?

No, you better believe it matters, because I still, the returns are not anywhere, you know, where I'd like them, right? I don't have to go back through the history of the last decade. So those returns have not gotten there. Are they getting better? You better believe it, okay? For two reasons. One, You know, the growth, the avistars, you know, getting back on solid footing, forgetting Trayton. And, you know, our internal, you know, our internal growth thinking after we got through all the Max Force and then, you know, our internal from a personnel perspective and from many other perspectives, just getting our arms around it. So when you add that together and then you throw Trayton in the mix. You better believe that's still what I believe is one of the biggest growth pieces of the organization, right? I believe it's, you know, we don't have the 55 years of being a Peterbilt dealer like we do with, you know, with Natastar. So that's only going to get better. With Tregton getting it, that's only going to help. Like I said, they can stay in the ballgame with all this new technology stuff and not be having to worry about, you know, CapEx budgets quite as tight as they probably had to have been. So the investments that will be made in product and people and the whole thing across the board can be nothing but a win. And we're still, look, we're still in the third inning of running these things. And we're getting better. I feel much better about where we were for now than where we were a few years ago. So, yeah, that's got a lot of runway on it in my mind. You better believe it.

And then with all the disruption in the market, that's the last one for me. all the disruption in the market? Are you finding more acquisitions or is that something you're likely to get back into that? Or there's too much work to do internally to, uh, drive profitability.

I'd like to find some, but unlike me, they all spelled PPP. Okay. So, uh, That propped up everybody, and then the markets come back strong. Remember, it was such a sharp, steep decline and then rose back up with what happened with the freight markets, you know. And freight just rocketed back up because everybody was buying whole goods with all the money they got. So, you know, so everybody's... You didn't see, if you'd have told me what was, I didn't really foresee exactly that happening back in, say, May and June, you know, but that's exactly what happened. It was such a steep drop and then a comeback from a, you know, transportation perspective because you had to fill the shelves back up. First you had to fill the inventories, then you had to fill the shelves back up. So, you know, you've seen what Freight's been doing and what everybody, the miles being run. So, you know, unfortunately, there haven't been much, you know, M&A. But don't think we're not always looking. Something will show up somewhere, I'm sure, somewhere down the line.

All right. Thank you very much.

You bet.

Thank you. Once again, if you would like to ask a question, you'll be pressed star one on your touchtone telephone.

Okay.

Speakers, I am not showing any further questions at this time. I would like to turn the conference back to Mr. Rastiraj, Chairman, CEO, and President.

Well, this will be the last time I speak to everyone once we get through an election and then the holidays and everything else. And I'm not going to worry about the first one, the election. But from a holiday perspective, I wish each and every one of y'all all the best with your families. It's been a long year for everyone. So please make sure to enjoy and savor the moments with your families throughout the holidays. Other than that, we will see you and talk to you again in February. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.