Rush Enterprises, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Rush Enterprise Four Quarters Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, just press star and the number one on your telephone keypad. I would now like to hand the conference over to your speaker today, the CEO of Rush Enterprise, Mr. Rusty Rush, go ahead, sir. Have a wonderful conference.

Thank you. Good morning, and welcome to our fourth quarter year-end 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 Controller, and Michael Goldstone, Vice President, General Counsel, and Corporate Secretary. Now Steve will say a few words regarding the 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 into December 31, 2019, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved annual revenues of $4.7 billion and net income of $114.9 million, or $2.04 per diluted share. In the fourth quarter, net income was $41 million, or $0.72 per diluted share, on revenues of $1.3 billion. We also declared a cash dividend of $0.18 per common share, an increase of 29% over the last quarter. We are proud of the team for their hard work this year, given the tremendous challenges they faced. Even though demand was negatively impacted by the expected downturn in the industry, as well as the effects of the COVID-19 pandemic, our disciplined approach to expense management, previous investments in strategic initiatives, and gradual economic recovery in the second half of the year enabled us to achieve strong financial results. Rush Truck Centers have been fully operational across the country throughout the pandemic, While we will continue to monitor the impact of the pandemic on our industry, including supply chain issues that may affect trucks and parts availability, we will continue to carefully manage expenses and take a disciplined approach to continued investments in our long-term growth strategy. As we look ahead, we expect the economy to continue to improve. Demand will increase throughout the market segments we support, and we believe our financial results will significantly improve in 2021. In the aftermarket, our annual parts, service, and body shop revenues were $1.6 billion, and our annual absorption rate was 118.7%. Our annual aftermarket revenues decreased by 9.2% compared to 2019. This decline was driven primarily by weak demand from the energy sector and COVID-19 pandemic-related issues, including production shutdowns and supply chain interruption. Our previous strategic investments in technologies, including Rush Care, Service Connect, and Parts Connect, enable us to continue to serve customers safely throughout the year. Looking ahead, we believe the nationwide economic recovery will drive healthy activity from a wide variety of customer segments. We expect parts and service revenues to grow gradually throughout the year and approach our 2019 levels. Turning to truck sales, in 2020, we sold 10,670 new Class 8 trucks. down 28.8% over the previous year, accounting for 5.5% of the total U.S. Class A market. Our truck sales aligned with the market, which was impacted not only by the expected industry downturn, but also pandemic-related production constraints and supply chain issues. In the fourth quarter, new truck demand increased due to healthy consumer spending, strong construction activity, and strong freight rates throughout the country. ACT research currently forecasts U.S. Class 8 retail sales will be 243,000 units in 2021. While the overall economy continues to grow, particularly in housing, automotive, and consumer spending, we are cautiously monitoring component manufacturer supply chain issues, which may limit truck manufacturers' ability to meet demand through the year. We believe our Class 8 new truck sales in 2021 will be consistent with the industry. Our Class 4-7 new truck sales reached 11,311 units in 2020, down 21.8% from 2019, and accounting for 4.9% of the U.S. market. Our decline can largely be attributed to the impact of COVID-19, particularly on leasing and rental and commercial food service customers, as well as production shutdowns from some of the manufacturers we represent. Our fourth quarter results were further negatively impacted by the timing of fleet deliveries. ACT research forecasts U.S. Class 4-7 retail sales to be 249,500 in 2021, up 7.5% from 2020. Looking ahead, while positively impacted by the overall economy, some challenges will remain for medium-duty truck sales, particularly production lead times. However, with our nationwide inventory of ready-to-roll trucks supporting a wide variety of customers, we believe our Class 4-7 new truck sales will achieve healthy growth in 2021. consistent with the industry. Our used truck sales reached 7,400 units in 2020, down 4.4% from 2019. Due to production constraints of new trucks, used trucks were in high demand in the second half of 2020, which helped strengthen used truck values, approximately 15% higher than their lowest point earlier in the year. In 2021, we expect demand and values of used trucks to remain strong. It should be noted that due to normal seasonal increases in employee benefits, and payroll taxes, we expect general administrative expenses to be sequentially higher in the first quarter of 2021. Our employees face some tremendous obstacles like this year, and I am truly grateful to them for their unending dedication to our company while protecting the health and safety of our customers, coworkers, and communities. With that, I'll take your question.

As a reminder, to ask a question, press star and the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. Our first question comes from the line of Justin Long. Go ahead, sir. Your line is open.

Thanks. Good morning, and congrats on the quarter. Thank you, Justin.

Appreciate it.

So maybe to start with parts and service, Rusty, can you share what you're seeing in January from a revenue perspective? And then just thinking about the quarterly growth of parts and service this year, it's probably going to be all over the place given the comp. So can you give a little bit more color about what you're expecting throughout 2021? Sure. Right.

Sure. You bet. I, uh, I'll be happy to speak about January. Well, the acceleration and growth in parts and service has continued as it was in the back half of the year in January. Okay. That said, you know, it's still less than January of 2020. You know, you gotta, as you look back over, as you said, you want me to look at it at quarterly. As you look back over last year, we know it was a little bit lumpy to say the least. Um, You know, I would expect the first quarter to be maybe not quite back all the way with last year's first quarter, a little bit shy of it. At the same time, we know, you know, you think about it, I always told everybody that last year was like a 13-month year, right? Because it was about two weeks of really March that COVID really took effect, right? So the first quarter had a little COVID effect last year. But so it was a, it'll be a, Fairly difficult, but I believe we'll get fairly close. We start out a little light in January where we're continuing to see acceleration in our business, pretty much across the board. I'm happy later to go through geographically what it looks like. But at the same time, we are seeing continued growth and acceleration. Again, our comp back last year is going to be a little tough because we hadn't hit COVID yet. Then we get into Q2, and obviously Q2 is going to be up. If all things remain the same and we continue down the path we're going, it's going to be up quite dramatically over the last year, right? So, you know, you would average that out and think that, you know, you would probably, if you were slightly flat to down in Q1 and you're up, you know, high teams over Q2 of last year, something like that, mid to high teams, you know, say that in Q2, you know, you could average the two and see where you'd be at mid-year. And then hopefully as we roll through mid-year, we will continue to accelerate. As I said, gradual acceleration. You know, it'll look like a lot in Q2, but it's really not. We just take this year a snapshot of this year. You know, we expect to continue to see, you know, nice gradual acceleration, which is, you know, the way I want it to go. You know, I want nice consistent growth throughout the year back where we're back operating like we do in normal times where, you know, we can see the work of the investments that we've made in the past come to fruition and so you know hopefully as we get towards the end of the year you know we'll look for something you know close to a 10% blended growth rate but they won't be flatlined okay because of the way last year was when you're confident year over year but you know we feel pretty good about where we're at but we feel very good about where we're at and you know where we're headed in the overall marketplace pretty much across the board

That's helpful. And thinking about parts and service gross margins, do you feel like 36% to 37% is the right range to be thinking about for 2021 as well?

I'd like to say 36%, you know, when you blend it. You've got to remember, I know everybody's going to say, well, sequentially, you know, you were up. You know, we had a couple tougher quarters in the 35s and Q2 and 3 and obviously Q4. was up to 36.8, if I'm not mistaken, right? So blended. What's that? I'm sorry. Yeah, we had one. Well, it was above the 37 during the middle of the year. Yes, if you want to take it and blend it and average it, a lot of that has to do sometimes with timing and rebates and other issues. And also, as we know, it depends on the mix, right? Obviously, service margins are quite a bit higher than parts margins. But to give you just a flatline broad answer, yeah, I think we can maintain 36. blended throughout the year, and we'll try to do a little better as we go. Hopefully, you know, we might have a little higher service growth rate next year. Parts seem to hold in better throughout the pandemic than service did, especially in the middle of it. So, and I feel good that we're, from a technician perspective, you know, we had gone down quite a few during the pandemic and also a little bit of evaluation on our part. And we're going to try to steadily add back technicians at a nice, steady pace to support the market as we go forward into this year. And we've seen that over the last four months or so, but that's what we've been doing. So hopefully we'll be able to continue that throughout the year. You know, bring back a little service a little faster, which has a little higher margin, so that'll support the numbers that you're talking about.

Great, and last quick one for me. You mentioned the first quarter, and I know seasonally we always see some sequential pressure in the first quarter, but is there any more color around the step-up in G&A that we should be expecting in 1Q?

I would say to be in line with historical. I don't want to get into the exact numbers of it, but you can look back historically. There's a lot of employee benefits, equity comp costs are high. or people that have maxed out and you're not paying them later in the year. Those types of things are what we see in Q1 historically, and it's no different this year than the past. So there will be a step up, and then I think you'll see it flattening out and maybe even going down. But I also think at the same time you'll be seeing a higher, especially in Q2, I'm counting on a better revenue growth pace. Once you get into the middle of the year, our revenue should be far out exceeding our expense growth as we've talked about trying to get to. We're basically finishing up getting everything back to reinstatement. We made the dramatic moves or drastic moves during Q2. We rolled in most of that in the back half of the year, back quarter of the year. So, you know, we should, as we get through Q1, I would hopefully see, you know, some nice growth margin retention to the bottom line and the back ends of the business, especially if we can continue to grow them, as I think we will. Great. I'll leave it at that. I appreciate the time.

You bet.

Thank you. Our next question comes from the line of Jamie Cook. Go ahead. Your line is open.

Hi. Good morning. A nice quarter. I guess a couple questions, Rusty. First, in your prepared comments and the press release, you noted supply chain risk a couple times. I'm just wondering if you could elaborate where you see that sort of concentrated, to what degree it limits production in 2021 or the forecast out there, and is there potential it lengthens the cycle? And then my second question to you, understanding the energy business is quite depressed for you guys right now, I'm just wondering if that's a potential tailwind in 2021 to your earnings. So if you could comment, you know, sort of what you're seeing on that front. Thank you.

I'll take them in reverse order. What do we love? Are we counting on energy? No, we're not counting on it. We've sort of changed the company, as you know, over the last four years. We used to be quite dependent upon it. We have evolved. At the same time, don't think we would love to have some energy tailwinds, Amy. I can tell you that we've seen a better, obviously everybody knows the price of oil has been stable and rising a little bit. But that's pretty iffy. The Saudis have held back on supply, and that's allowed the price of my mind to get there. Do I see anything? Do we have anything in our numbers? Not really. I would tell you there's a little bit of activity out there, which is better than zero that we had, but it is so slight that, you know, if I was to sit here and tell you we weren't even 2% of our parts and services, and I'm talking no activity on the sales side, okay, on the capital goods side, but slight starting rumblings of a little bit of activity. But if we were less than 2% last year, which we were of our parts and service revenues and gross profits, We're still less than three, okay? So, but it's, there's a little bit of, we see a little bit of movement out there, but I am not counting on it. I think it's too fickle. But if you answer your question, if we got it, yeah, it'd probably be a little bit of a tailwind. So, you know, we'll just have to watch it because I just think it's very fickle given, you know, the price of oil and the reasons why it has risen in my mind. And obviously consumption's gone up too because the economies around the world have picked up consumption. addition just to all the Saudis. But at the same time, we'll just have to watch and see if it would be nice. It would be nice if there was, but I'm not going to prognosticate our forecast out there right now that it will be and will be solved. But yes, your basic question, would it be a tailwind? Yes, man, it would if it picked up. Now you want to talk about suppliers. Now we'll talk about suppliers. I didn't know anything Little I knew about chips a few months ago, probably less than anyone you know. Have I had to figure out a lot? You know, trucks used to live in their own world, right? I think I've learned a lot here lately. I've learned more than I ever thought I would. But everything we deal with, I don't care if it's a toaster or, you know, You know, everything's got chips in it, and you've only got a few manufacturers. And when they fall down somewhere, you get into some. I'm concerned that that sub-tier three supplier may be affecting the tier two suppliers to the OEMs in different ways. I know everybody's scrambling, just like you read about automotive and everywhere else. It's not the same exact chip, and only the same people make them all. So I have concern out there. And it goes around. The ramp-up period is the fastest in 30 years. When you look at the acceleration of what happened with trucks here, we've had big volatile markets that go up, but not that fast, okay? And a lot of the lead times on some of this stuff are 20, 25, and 30 weeks, even when you get into steel and other things outside of chips. So I've just got concerns. Now, this doesn't dampen. In my mind, it's even... Not a bad thing, okay? I don't think it dampens demand. Because I think the demand is there. You start getting 5% GDP and three-something the next year, I mean, that's going to tell you where your demand is going to come from. And, you know, the growth in domestic product. But, you know, I think we'll catch it. I think there may be, I think the supply side will get to it. It's just it ramps so fast. We may be looking later in the summer. Okay, it's early fall. Not that I think we're good at current levels, but the order intake has been so strong that as folks ramp up across, and it's not one person or one thing in particular, it's just the overall demand, because it's not just the drug business. It's the demand for goods across the country. And so, you know, it just stresses the whole supply chain, not just on drugs. I think from my perspective, everywhere there's going to be stress until, you know, the supply side catches up with it. And by the way, it's not just a wrap-up. I mean, I look around my business, and until just the last few weeks, you know, the shortage of employees from COVID was, we had more in November and December, and we had the whole, since March, out. You know, I mean, there's just been a lot of stress points here. You know, and so I just feel that there may be some, a little bit of stretching out of what, you know, the demand, the order intake demands. I don't know if we can meet them. We'll meet them. It'll just stretch it out, which for me is actually a little better thing. Okay. I don't think the demand is going away.

Is the supply chain issues, is it just concentrated in chips or do you see risk? Are you seeing, I guess, any other, you know, I think there's, I think there's other risks.

There's no question. I mean, And I don't like things I hear. I've heard things this week that I haven't had time to explore, like oxygen in Mexico for excelling tanks because they said put it in the hospitals. I don't even know what that means. I've heard other things. I just think, I saw the other day about rubber, okay? You start talking about tires. I think it's going to continue to accelerate and be broader, okay? I do think we'll catch it. And I'm not an expert on this, but we need to be cognizant that that may put some constraints. Because I know the manufacturers, all manufacturers, not just one, all manufacturers are raising bill rates. So as they raise bill rates, that just continues to put more stress. As other parts of the economy demand similar type things to build their products, the demand is just huge. It's across the board. Nobody goes on vacations. They just go buy bicycles and washing machines and refrigerators now or TVs or Xboxes. And it's that way inside of our industry supporting that because freight demand is so strong. And it's going to take a bit to catch it. This is my opinion. I'm not an expert by any stretch. But that's what I see as I... is I look out there and talk to people in other businesses too, not just in the truck business. We will catch it, but I think it's going to be, I think you'll see it hit things I haven't thought about today. Clusters, you know, dash stuff, all those types of things are going to be under stress because, and it's not just us, you've seen what the automotive guys are doing, and I think you're going to find out across the world. I do believe we'll catch it, but I believe we might be, you know, and I believe the OEMs will get, They'll be able to ramp production. I just don't know for sure. They're going to ramp production. Everybody's doing it. Is it enough to meet demand at the levels it should to keep backlogs, you know, at a decent level? I don't know about that. That's what I don't know. That's what I don't understand. I'm not sure. If that makes any sense, what I'm talking about.

Yeah, no, that's helpful. Just one more question, and I'll get back into you. The strength in the margin, the new and used truck margins in the quarter, the 8.7%, You know, with that gains on used truck sales, I'm just trying to understand what drove the margin there. That's what it was?

We had solid new truck margins, but at the same time, record used truck margins, okay? Okay. The used truck margins was the best quarter we've ever had, okay? So everybody says, whoa, what about sustainability, Rusty? Well, supply side on used right now, I got the lowest inventory of used trucks I've had in years. Wish I had more. Normally I don't say that, but I do. You know, used truck demand. When we shut down factories for a couple months and then slowly ramped back up. Let's go back to April, you know, and started ramping back up in the summer. Then the orders, boom, you know, you had freight blow through the roof. Spot freight, spot markets up 30%, 35% demands there. They can't get new trucks. New truck inventory gets taken down on used trucks right behind it. And so people, to meet that freight demand that was out there, well, guess what? I don't have to explain this economy to you. It's called supply and demand, right? So boom, you know, your margins go up. People are scrambling for product. You're able to get better margins. At least I hope so. That's what we get paid to do. My people do. And so that's what happened. So do I, I'm sure, you know, somebody might ask me a used truck going forward question. I look for used to remain solid. I said that a minute ago in my notes. I look for used trucks to remain solid. Don't know if the volumes can get there because supply side is a little tight right now. But at least for the foreseeable future. That doesn't go forever, as we all know. Used is pretty technical. But for now, used should remain fairly strong, you know.

Okay. All right. Thank you. I'll let someone else get a question in.

Yes, ma'am.

Thank you. Our next question comes from the line of Andrew Obin. Go ahead, Claire.

Yes, good morning, Rusty. Well, good morning, Mr. Ogun.

You there?

Yeah, can you hear me?

Can you hear me? Now I can. I lost you there for a minute, buddy.

Yeah, sorry about that. You know, a lot of stuff in the news about sort of new technologies for trucks, batteries, hydrogen. Maybe can you talk about what you're seeing – how this will impact the industry in the next three to five years maybe, and maybe even give us some thoughts about longer-term projections. Thank you.

You bet. Well, you think I ramble. Get ready. You're fixing to get a ramble here. I've been trying to get my head around this myself. Obviously, this next decade is going to be the biggest disruptor decade I've seen in my career. Absolutely. with everything going on from a political perspective, from a climate perspective, hit from every angle, where we had a pretty stoic last decade from 10 to 20. After going through all the stuff we went through from 2000 to 2010, everybody just drove up a few miles in 10 to 20 with not a lot of government regulation. Well, here it comes. As most folks know, CARB has issued a 2024 and then a goal for 2030 also, right? The rest of the EPA has a 2027 initiative out there. So this is where the... I don't have time to go into all of it, but the political driver is going to be huge, you know, from the requirements, from emission requirements, right? We all know we're hearing about EVs every day, right? Everybody's in EV and you hear about hydrogen. Well, this is not... an add water and stir issue. Technology has not arrived at what people believe and want demand to be. That being said, as we go forward, I guess the best way I could describe it, dealing with all the political issues that have been driving environmental protection stuff, whether coming out of California, which right now has passed to 2024. Right now, New Jersey is the only state that's aligned with Californians. for their 24 emissions. Their 24 emissions demands are similar. You've got to understand this to understand what's going to happen with, you know, from a propulsion or from an engine perspective as we go forward. The 27 EPA, right now, even though it's not finalized, is similar to the 24, saying, you know, we've got to have, you know, knocking down the greenhouse and NOx, right? I would tell you that what will happen is it's going to be driven a lot by market segments, okay? EVs, as we go forward, as it ramps up, we still don't have our... There's only people out testing them right now. Do not get carried away with thinking there are big fleets running up and down the highway with full electric fleets. There are not. Remember, barriers to entry, infrastructure, you know, technology, battery weight, all these other things. These are going to be wrapped around. EVs are going to be best suited... For operations, you know, that return to base on a nightly or every day and have set mileages, okay, if I was to look at it, you know, as we go forward. There are demands put on. It will come. It will be in more of those types. It will be for sure in your class four and five, right? I've got to believe. And in your class six and seven. Class eight. it's not going to be in the truckload side. Anybody that thinks that we're going to be running in five years electric vehicles that are going to be running long haul has another thought coming, another thing coming. That's not going to be the case. The technology is not suited to run over the road for long distances like that. Too much weight, batteries, that we're just not there. And I don't think long term Even looking out 15 years, I don't believe that it will be in the long haul Class A. You know, I don't want to get into all the different percentages. I've talked to a lot of folks, a lot of manufacturers, a lot of folks. And I've got to tell you that actually tomorrow, ACT has a report coming out. And it's an independent report. And Kenny and ACT have an electric or alternative fuel report coming out tomorrow. But if anybody ought to want to pick one up, subscribe to it, I would suggest you do. It's well put together. I've talked to the folks. Seems to be well put together without ulterior motives involved. So, you know, from an independent view, he's got coming out tomorrow, actually. I think it's going to give a pretty good overview of it. But talking to multiple folks, you know, electric's going to be there, but it's going to fit in the segments where it belongs and as we get to it. So, you know, I don't look for it to take over. Like, if I was to look out, say, to 2030 in Class 8, maybe 12%, 13% of the market would In 24, it might be 3% of the market. Now, if you go to class four and five, you're going to see that by 24, it might be a quarter of the market, 26%. And these are just from talking to people, everybody's estimates. Because it takes, you can wish and want everything you've got. But just because you want an electric vehicle, can your grid support it? The grid can't handle it. You've got to go in and work with the electric companies. It's like some folks, I say, they think it's like a hair dryer, just plug it in. Well, it's not. There are so many other things that are involved. It's not like just pull it up to the pump and fill it up with diesel, folks. It's not. Another thing you're probably going to see is, I think, natural gas, and especially R&G, renewable natural gas. I think you're going to see an uptick in that as we get into the mid-decade, okay? I think there's going to be an opportunity for RNG. If people really studied RNG, they'd see it's the cleanest thing out there. You remember electric still got 50% of coal burning in plants, okay, that make electricity. So, you know what I mean, class six and seven, it will probably move up into the, you know, in the next four to five years, you might have 10%, 12%. of it by 24. Not now, not 21, not 22, not 23, but probably when we get into 24, and then probably move up in the 30s by the time you get to 2030. But you're not going to see that across Class 8. I don't believe you're going to see those same numbers in 8 just because of applications. Think about electric. There are certain applications, not just long-haul, but electric, I don't think it's going to work good for. It'll work good in refuse. All right? It'll work good. We know it'll work in buses. We know it's going to work in that type of stuff, in medium products that run around town. It's not going to work on a dump truck that's sitting on a job site doing this, that, and the other and not moving and waiting for three or four hours. I mean, there's just certain applications, whether it's weight sensitive or this or that, that it's going to be difficult for a while to get to. Now, when you ask about hydrogen, you know, folks say that hydrogen is the answer for long haul. I've got to tell you, hydrogen is a little ways out there. That's even further out. Electric is closer to us, even though it's not going to overtake the whole market, as I said. Everybody's a little bit out there thinking that. But hydrogen is further out. The application of hydrogen, you're talking 10 to 15 years, I think. Not that they won't have hydrogen trucks testing them or don't have them now and running them, but infrastructure is huge around that. and costs, you know, fuel costs and other costs, there's still a lot of, you know, and hydrogen's just really elaborate, and they just make electricity with hydrogen, right, at the end of the day, when you get into all this. And I'm just, remember, I'm not a technical expert, but I'm doing my best to keep up with it while adding a little bit of practicality to things. I think that's what I'm pretty decent at, is that a little practicality to things when the wishes and wants of folks and everybody out there trying to sell and toot their own horn. You know, I just think that all fuels are going to be in play for the next 20 years, okay? We're not just all of a sudden 2030 like they want. Everybody wants to go zero emissions, and I get that. And also, these demands we're putting in 24 and 27, they're going to raise the price of diesel dramatically. The price of engines, and I don't mean the price of fuel. Fuel's driven by something else. But the price of engines are going to go up dramatically to meet the requirements of the government. I'm talking more than 2006 and 2010 and all those. I think the costs are going to go because of the active treatment systems and the demands that are going to be put on the diesel engine. It's still going to be cheaper than electric and everything else, but I know, and you can get into payback periods and all that. I don't have time on this call. Again, though, I would You know, I've learned a little bit. I would recommend trying to get that report because I think you, you know, it sounded like a pretty good report. Snippets that I've been getting from it, from an independent view, as you just try to get your arms around where we're headed. So, you know, it's hydrogen, but that's out there. It's going to continue to be in the news, but at the same time, I do believe you're talking 10 to 20 years, electric quicker, market segment driven, You're not going to be able to use it in every segment. But technology still has to rise. Battery, you know, the battery storage and usage and weight and density. Then you're going to run into problems with lithium or whatever for batteries being controlled by certain countries. I'm not going to get into all of it. There's going to be, don't think, everybody says, well, costs are going to come down. And they are going to come down. But there's going to be a demand that's also going to drive costs up in certain ways. Those are things to be sorted out as we go through this next decade. And I probably have rambled long enough. I'm probably not your number one expert, but I've tried to give a little bit of color. Diesel's not going away. I don't care what they tell you. There's still going to be seven diesel trucks. and 2035, folks, okay? Especially in Class A long haul, I don't see it taking that over. Other applications, as I said, will be where you really pick it up at, but not in certain applications. So I'll leave it at that. I could probably go on longer, but I probably talked long enough.

As long as I got you going, I'll ask a follow-up. Any thoughts on autonomously?

Oh, boy. You think I'm a scientist here, Andrew? You know me well enough. Well, all right. Let's talk and talk. All right. Automation. There's five stages of it. Remember, everybody thinks when they say autonomous, boom, there's a truck and there's nobody in it driving it, right? Well, I don't think it works quite like that. There are stages. And by the way, there's a lot of folks. As you know, Packard just signed up there with Aurora and Too simple is now the star, and you've got Wham-O out there, and you've got always M-Park. I mean, there's autonomous being worked on as we speak. There are trucks running up and down the highway in certain states that have been running now for a while being tested with different levels of autonomous. I do believe that we, but first off, there's going to need to be some more state laws and regulations passed to allow it, okay? That's got to happen first, okay? There are areas that are being run right now and tested, no question about it. But does that cover the country? No. Does that cover 50 states? No. There's going to have to be legislation passed, first and foremost, before you can really have autonomous trucks, you know? But you're not going to see level five in my mind, because level five means there's nobody in the cab, okay? I don't see that happening for a while. I do think that you will get some legislation and you will have a technology going forward that you will get, you know, level four, maybe in three to five years in some areas, which that means there's still a driver in the cab. Now, he doesn't have to be right behind the wheel. I'm going to scream. Here's scientist Rusty, which I'm not, okay? But, you know, there's a guy in a cab, but he's maybe working on his books or he's doing this or he's doing that, but he's not behind the wheel the whole time. I think you're going to get that within five years or so. But remember, there's still going to be legislation and other things passed to allow that. Full autonomy, level five, driverless driving. I'm not so sure how far down the road. Will they get there 10, 15, 20 years? I don't know what the answer is. Probably. But look, we haven't even gotten automotive cars all the way there yet. And people are much... The natural human being watching an 80,000-pound vehicle go down the road with no driver, the first thing they're going to do is make a right-hand turn and get out of the way. So there's a lot of perception there. to get through from that perspective, even wherever technology gets to, which we'll be dealing with once we get out there. But I do believe, as I said, you'll get into the lower levels of it, there's no question. As we go forward, there are large fleets that are wanting to rely, because what's their big cost? It's drivers, right? So, you know, what's the big arrow all the time? It's drivers. So they're wanting... Because even if they don't get the full autonomy, the skill set required would be less than possibly the skill set that is required now from a driver perspective, you know. So I hope that helps. I think we're going to get somewhere. I wouldn't look at full autonomous for a while, but I think you're going to get different levels of it maybe sooner than you think, you know, three, four, five years down the road. But we've got to get through the legislative piece first, too, also. You've got to get laws passed that will allow such things. I hope that helps.

Thank you for a very thoughtful answer on both counts. Thank you and great quarter.

Thank you, Andrew. I appreciate that.

Thank you, sir. The next question comes from the line of Joel Pith. Go ahead, please.

Hey, guys. I hope you didn't put your $500 bonus in GameStop. Well, it depends on when I put it in and I pulled it out how well I did, doesn't it? Yeah, that's true. So I wondered if we could go in a little bit of a different direction and just talk about some of the lessons you guys are learning around, like, flexibility on the cost structure, because that's pretty amazing, you know, a billion-dollar decline in revenues and your net income was down, you know, $25 million. And so I just wonder how you guys are thinking about, you know, holding on to some of that and what are some of the things that you learned in 2020? Thank you.

Well, I think I mentioned on the last call I learned more than I – My stubborn old you-know-what-ass thought I ever could, right? It was an interesting year, but it was very learning. Was it a hard year and a hurtful year in a lot of ways? For everyone, yes. But at the same time, lessons are supposed to be learned in those types of environments. So let me look. I'm going to take it down a little further, deeper, Joel. Let's look at the fourth quarter. Let's look at year-over-year Q4. How about that? Revenues, flat. Maybe Class A truck sales up a couple hundred. Medium off $400 or $500. If I remember right, I'm going off pretty flat use. 4% off a little. Parts and service off $600 or $700. Let me see. Net income, $0.41 and $0.72. I think we're learning something here. So if we learned anything... We are going to do a better job. And by the way, you may look and say, well, your G&A was up this and this and that, and, you know, we stripped this out. I tell you to look at the results. You can tell I feel pretty good about it, and I feel good about where we're going to be headed, you know, with what we have learned about how we can manage. And right now it was a little muddy in the corner. In a lot of ways, we had reinstatements. I gave out extra money to all the employees. I'm very thankful for the hard work and dedication throughout the year. I did this and I did that. But at the same time, I go back to what I just talked about, and that was the results. When you comp the quarters year over year, the biggest change was net earnings. So regardless of how it may look a little muddy inside of there, obviously expenses were a whole lot better and in line. where they should be. And so I feel really good about that. And that's part of the goal inside the organization. You know, I mean, I'll even speak to some of the things we've implemented. Just like sports, guess what? We've got salary caps around us now. All right? So, you know, if you grow revenue, you can grow your salaries. It's pretty simple. It's going to be tied to some strict numbers. So there's other, I don't want to get into it, but there's other things that we learned that we're implementing, not saying we won't add and take care of business and do this, that, and the other, but we can do a better job than what we have done historically. And sometimes it's hard for you all to see it. Don't look at it in the quarters. Look at it in a year and look at it in the results because quarters can float and fluctuate and things going on, especially as I've been doing reinstatements and this, that, and the other. But I feel very, very good, and I think you'll see the results will show that as we go forward. Look, I think, you know, the truck business itself, if you look out there, and I can't control sales, but truck sales ought to be pretty good the next three years, okay? 24 we'll worry about when we get to it and we start implementing all these other costs and stuff in the products and as technologies are changing. But I'm going to tell you, for the next three years, you know, you've got to feel good about that side of it. And I feel very good. about where we're at. I feel very good about what we're going to do with our parts and service business, with the initiatives that have not, we've not squeezed it all out of there. They're not to fruition, and we're continuing to invest and spend money in other ways that I'm not going to talk about, okay, to support the growth of the future. So, you know, I mean, as I would tell anybody, look at the balance sheet, all right? Look at the cash, look at the balance sheet, look at the situation we're in. We're set up to continue to invest and continue to grow and do what we've done and also do it better with the knowledge that we got from last year. I don't know. You know, you wanted me to talk. You get me going. I get excited about it. But I truly believe that we're a leader company. And I think we're not alone out there. But I think what we learned today, It's up to us to be able to look back in two years and say, hey, we walked the talk, right? I can sit here and talk all I want, but it's up to us to execute and talk, and that will end up showing up in the numbers hopefully as we go forward.

Well, that's great. Can you give us a little bit of a sense of your best guess, kind of a free cash flow in 2021, and just the thinking around your $100 million share repurchase? Are you going to do that all? more front-end loaded, or is that more of a multi-year rollout?

Well, we've got to prove that. I feel good about what our company is going to do, but I can't control markets and market corrections. So we want to make sure that we're set up. We've been nibbling at it, and we're going to probably accelerate that some, but more on a consistent basis. As we go throughout the year, at the same time, you know, we'll have powder there if we believe that we're being dissed because of a market correction, not a rush correction or something that we're doing. You know, we feel very good about our strategic plan, and that's why we continue to buy on it, and we will probably accelerate that somewhat. Cash flow, Steve, I can answer. Go ahead, Steve.

Free cash flow, and I know it gets masked in the cash flow statement. But if you just look at the number we printed at the end of the year, even in a year like 20, we grew our cash considerably in the year with $312 million. That will continue. Free cash flow is going to be, I'll call it $175 to $200 million next year. And kind of piggybacking on Rusty's answer on share repurchase, our guideline is to try to return about 40% of that to shareholders of free cash flow. That's our capital allocation guideline. But that includes both the dividend, which we just raised considerably. Actually, we've doubled it from a year-ago quarter. When you do all the split adjustment, it was $0.09 a year ago, and it's $0.18 now. So that's going to eat cash. And then the balance of that 40% of free cash flow, we would expect to deliver through a share repurchase. And if we see an opportunity... to actually repurchase more than that because of market correction. We've got plenty of dry powder to do that.

Yeah, the balance sheet still holds a lot of cash. The numbers. We'll still spend a lot of cash even returning that. So, you know, and the balance sheet's holding a lot of cash right now. So, you know, we feel compelled to continue. Because I don't, you know, you're going to say, well, what about acquisitions? I don't have a lot of big ones, unfortunately. I wish I could. And we're continuing to look. But with a market as strong as it is, I don't know what opportunities would be out there given the breadth of our network already. And when you're the largest for four or five manufacturers already, it becomes a little bit more difficult sometimes.

Well, having a lot of cash is a beautiful thing. Thank you very much.

You bet. I mean, if you really look at it, just to piggyback on that real quick, let me finish this up, ma'am, is Really, other than a couple of small items, the only debt we've got is lease trucks and floor plan. We don't really consider that debt. Lease trucks are just viable because we've got an 8,000-plus unit, 8,500-plus unit leasing fleet, and it's just tagged to an asset. We always have gain on sale. We run it conservatively in the floor plan, and we turn it three or four times a year. It's just a trade payable to us. We feel like our balance sheet is in good shape. Okay, man, I'm done for once.

Thank you. We do have one more question left from Brian Sponheimer. Go ahead, please.

Hi, good morning. Good morning, Brian. How are you, buddy? I'm terrific. I'm 12 in the basement, but that's okay. How's your boss doing?

How's your boss doing up there?

It was wonderful. I'll send your regards.

Tell him I said hello. Tell Mr. Cabelli I said hello.

Certainly will. A couple questions. Lease and rental customers, you had called this out as an area that had been weak. What do you see in there?

We're seeing strong lease and rental again. We've started off the year strong. Typically, And you get separated from leases into rentals. You know, did we deal with, you know, when we had to go back to when COVID hit, did you have some of your food service businesses, things like that? When I called out on the call, I was talking about customers buying vehicles earlier, not necessarily my lease and rental. Which one are you referring to, what my sales are or my lease and rental business? I think both. Oh, of course you would. Lease and rental purchases for next year have accelerated, no question. They were way off from lease and rental companies last year. They aren't coming back this year. They can't stay out of the market long. They've got to turn that thing, right? Things roll up. So, yes, the lease and rental companies are back in the market much stronger this year than they were last year. Our lease and rental business... was quite resilient last year. I was very proud of the effort of our lease and rental guys. While, of course, it wasn't a record year, it was a great year under the situation and what we dealt with. As I look out there right now, typically we used to always say you get to Christmas and this is old school and your rental goes down. Your utilization rates go down. Ours hasn't gone down here, it appears, right at the moment. And that's indicative of but the overall economy, right? Your utilization is in good shape from the rental perspective. And our lease business, I'm sure, will continue to grow. We don't grow it fast. We only grow three or four or five points a year. But we expect that to continue as we go forward. We run it fairly conservatively. But we run it very profitably in all markets now, especially over the last five years. They've really tuned the game up over the last five years, our folks have. I've been very pleased with the results of our lease and rental business over the last five years, and don't think that's going to change as we go forward.

Yeah, that's great. Going back to the cash question, you're sitting on quite a bit of it. What's the M&A environment potential for you to grow? Obviously, I know you can't grow the PACCAR part of your business, but other brands?

It's tough, man. When a market gets like, you know, let's go back. You would have told me in March, April, I thought, oh, boy, I was rubbing my hands together, licking my chops. I thought I was going to get a chance, right? Well, it accelerated back up so fast that the opportunities out there dried up pretty quickly. So I would tell you that right now, am I looking? Yes. Have I got anything real and big? No, not really. But that doesn't mean something won't show up. I mean, you know, we've still got a JV up in Canada. First part of 22, we'll consolidate that to some degree. But outside of that, a couple little things, but nothing really big that I can say. You know, I wouldn't tell you if I had something anyway. So... I've never told you to begin with until when the mailman tells you, right? Until I get it inked up and done, I'm not going to tell you to begin with. But I would tell you it's, you know, we're out there looking, you know, but with a market acceleration like what we've had, a lot of folks like to clip coupons. And so instead of take a buyout, okay, they'd rather keep clipping coupons. And, you know, you've got a pretty good, Runway, as I said earlier, it looks like there's a pretty good three-year runway out there for the truck market, given changes that are coming in the back half of the decade that are going to demand a lot more costs and products. And when you've got the economy, you start running 5% and 3% for a couple years here. We haven't seen that since pre-'09 or pre-'06 or something. I don't remember when. So that usually bodes well. you know, for the product business. We'll grow with it.

Yep. Last one. Any change of behavior from customers now that Trayton will be wrapping up Navistar likely in the next few months?

I think the acceptance of the one thing you don't hear that we used to hear, you know, say four or five years ago, you know, you had that issue of long-term viability. Just wipe that off the board, okay? That gets taken care of. The other piece is I see some of their announcements, you'll see, you know, some of their alignments, whether it be with General Motors the other day working on hydrogen or with Trayton. They've already been working, collaborating together over the last couple, three years on products that I think you'd be coming to market. It's not like it just started because they were collaborating anyway on stuff, and they've already taken advantage of the – Purchasing, we're doing more and more of that. From a customer perspective, it just makes a stronger outlook for the organization. We feel very good about it. Actually, they're building a new plant down here in San Antonio right now. I think they've got a lot of good things. One thing I know is our suppliers or our manufacturers, I feel very good about You know, Navistar, I think, is in a better shape than they've ever been, and Packard, they're always in great shape. So we feel good about both going forward, and also all our medium duty suppliers. They've got a little hiccup here or there, but sometimes on the supply side, on the medium side, a couple OEMs. But I do believe that will all get ironed out, and it will work. I feel very good.

Excellent. Well, good talking to you, and best of luck this year. Hey, good luck finding those stairways.

Hey, good luck finding those stairs out of that basement.

We're getting there.

Okay.

Thank you, sir. We do have another one from Joel Tiss.

Yes, sir, Mr. Tiss.

You get one more chance. But I just wondered if you can give us a little bit of a sense of what's behind your next three years are going to be strong in the industry. Is that sort of more of a gradual pre-buy ahead of all these new zero emission standards or anything else in there?

Oh, I think you'll see some of that in 23. Okay. I think most of it, Joel, just has to do with the economy right now at the pace it's running at, you know? I mean... People took whatever income they had and they stopped traveling. When's the last time you went anywhere? And then they decided to spend it and then government stimulus and everything else and the whole goods sector. Well, that's got to get there by trucks. We're not back to Star Trek and beam me up Scotty. And until we figure that out, trucks are going to be the way that things are delivered. And that being said... And then you've still got demands on the driver side, there are shortages. I realize there's distribution changes going on. Everybody sees the Amazon trucks running around town. But at the same time, that's actually created more truck drive. It's driven for more trucks because nobody goes to the malls to buy it, okay, driving home in their vehicles. So it's just created further demand across the board and changes in distribution. And, you know, with GDP being up like it's going to be and all those other factors, I think it's just that demand is out there. And that's what, and I just don't see, I mean, I could be wrong. I mean, something, you know, this economy, I have my own overall concerns about how much money you can give away. We're not going to get into all that. I'm not holding that kind of show right now. But I have my own concerns one day. But I do still believe that outside of some big national deal that drives national economic, you know, like a recession or something like that, which I don't see now. I have concerns longer term about that. But it's just going to bode well for truck sales across the board. You don't see demand. You see freight up. I mean, freight's still up and strong. And I don't think people put as many miles as they used to because, Distribution dynamics have changed. They don't put as many miles on trucks, et cetera, et cetera. But it takes more trucks to get it done, if that makes any sense. There's nothing I see out there that says it's going to be bad over the next couple, three years, okay? That's all. Okay, great.

There are no further questions, sir. You may proceed.

All right, well, great. Well, since it's been a while since we talked to you last time, since it was the Q4 release, we will talk to you in a couple months in April, it looks like. So thank you very much for your participation this morning. We appreciate it.

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