This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: Thank you for standing by and welcome to the Rush Enterprises, Inc. Report's first quarter 2021 earnings results. At this time, our 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, you will need to press star 1 on your telephone keypad. Please be advised that today's conference is being recorded. If you require further assistance, please press star 0. Thank you. I would now like to hand the conference over to your speaker, Mr. Rusty Rush, Chairman, CEO, and President. Please go ahead.
spk03: Good morning, and welcome to our first quarter 2021 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 forward-looking statements.
spk02: 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 risks 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, 2020 and and in our other filings with the Securities and Exchange Commission.
spk03: As indicated in our news release, in the first quarter we achieved revenues of $1.2 billion and an income of $45.3 million for $0.79 per diluted share. We are also very proud to declare a cash dividend of $0.18 per common share. Our results were driven by the nationwide economic recovery and healthy activity for most market segments we support, gradual increases in parts and service activity, and healthy demand for new Class A trucks. and rising used truck values contributed to our strong quarter, along with our continued focus on expense management, which helped significantly increase our net income when compared to the first quarter of 2020. As we look ahead, supply constraints will likely affect the availability of parts and new trucks in the next few quarters. However, we expect supply chain constraints to begin to subside late in the third quarter, and for demand for trucks and aftermarket services to remain strong throughout the year. We believe our financial results will be strong in 2021 as the economy continues to recover and businesses reopen throughout the country. In the aftermarket, our first quarter parts and service and body shop revenues were $415.7 million, and our absorption ratio was 122.6%. Our aftermarket revenues decreased by 2.9% compared to the first quarter of 2020, but we are seeing some pockets of strength, particularly when it comes to part sales and activity from refuse construction and public sector customers. Service revenues are recovering at a slower pace than parts, but we continue to add technicians to our dealership network in the first quarter in anticipation of increased demand later in the year. As we look ahead, we expect supply constraints to impact parts availability in the industry for the next few quarters. but we are leveraging our nationwide inventory to lessen any impact that may have. We continue to focus on expanding our technician workforce and service offerings, especially contract maintenance and preventive maintenance. We believe this will contribute to increasing aftermarket demand as the national economy continues to recover through the rest of the year. Turning to truck sales. In the first quarter, we sold 2,995 new Class 8 trucks, accounting for 5.4% of the total U.S. Class 8 market Consumer spending and freight rates continue to be strong, and customer demand was widespread, with particularly strong activity from over-the-road, vocational, and construction customers. ACT Research forecasts U.S. Class 8 retail sales to be 249,000 units in 2021, up 27.2% from 2020. While we expect the country's economic recovery to continue, component manufacturers' supply chain issues will limit the growth in Class 8 truck sales in the next two quarters. However, we do expect the supply constraints and truck production to improve late in the third quarter and for industry demand to remain strong and that the annual industry sales forecast is achievable. Our Class 4-7 new truck sales reached 2,334 in the first quarter, accounting for 3.8% of the U.S. market. Our decline was driven by weak demand our leasing and rental customers, and food service customers, in addition to production shutdowns from some of the manufacturers we represent and component supplier constraints affecting other manufacturers. ACT Research forecasts U.S. Class 4-7 retail sales to be 251,500 units in 2021, up 8.4% from 2020. We expect demand for medium-duty vehicles to remain strong, and for our annual Class 4-7 truck sales in 2021, to be relatively flat compared to 2020. Our used truck sales reached 1,924 units in the first quarter, up 23.5% for the same time period in 2020. Demand for used trucks remained high in the first quarter due to new truck production constraints. Further, used truck values increased approximately 10% over the fourth quarter of 2020. We believe that demand and pricing may decrease somewhat as more new trucks are available, but will still remain strong this year. Further, we are confident the volume and pricing of our inventory will meet the needs of the market. It is important for me to recognize our employees for providing superior service to our customers while remaining focused on protecting the health and safety of those around them. Their hard work has directly contributed to our strong start to the year. With that, I'll take your questions.
spk05: At this time, if you'd like to ask an audio question, please press star followed by the number one on your cell phone keypad. That is star one to ask an audio question. Your first question comes from Jamie Cook.
spk06: Hi, good morning. Hope you're well. A nice quarter. I guess a few questions, Rusty. First, the margins in the first quarter on truck, the 9.4%. Would that use truck pricing or mix? So if you can help me there. My second question relates to on the supply chain side, where are the shortages outside of semi? And I'm trying to balance how I think about the cadence of your sales. As you're saying, the second and third quarter will be impacted by supply chain, but you're also talking about market share gains for us. So I'm just trying to, you know, balance those two? So I guess why don't we start there? Thank you.
spk03: Sure, Jamie. No problem. Yes, you hit it on the head. From a margin perspective in the first quarter, that was the largest, highest used truck margin that I can ever remember that we've had, right? So decent volume in high used truck margins. I expect going forward that used truck margins will still remain high, maybe not quite that high, Supply side is probably the biggest issue. While I feel we've got a decent inventory, you know, supply of used trucks is across the, I mean, just across the whole nation is somewhat limited. So, obviously, you know, supply and demand, that's what's driven, you know, prices up. I mean, if you go back to COVID time, I mean, they're up 30 to 30, 35 percent from last year, April of a year ago. So, a lot of respect, as I said, those still remain high. It might be difficult to keep the volume right there, but that's what drove the margins to be that high for sure. When you talk about things outside semiconductors, it's just a myriad of things, Jamie. One day it could be wire harnesses. One day it could be clusters, dash clusters. I've heard seats. I think it's just across the board with your Tier 2 and Tier 3 suppliers. And, you know, the manufacturers are managing it the best they can, but I think they keep getting hit with different, you know, different issues with different suppliers. So, you know, I mean, when you had the, you know, the freeze and the stuff down, you know, you got hurt with stuff coming out of Mexico and, you know, and even just keeping up with it. You know, I think everybody ramping up after all that COVID has been very difficult for tier two and tier three suppliers, not just on the semiconductor piece or the chip piece, but But, you know, it's just from a parts perspective, when you look at our parts cementories, we've got more parts backordered right now. That's one of the issues you run into in there. So you can see the trickles not just through trucks. It actually trickles through parts of service, too. So, you know, I do believe that those things will iron themselves out. They typically do. You know, the chip piece could last longer. From some stuff I've read, I'm not an expert on it. But I would look for most everything else. I think we're in the worst part of it right now from what I can see here in April and May. But I do think that everybody's known about it here for a couple months. You can see it coming back in February. And I think you'll see it really getting better as we get later into the summer, which will be into the third quarter, obviously. And hopefully we'll catch up with it. And it won't be an issue for all that. Now, the chip piece, different people say it'll last longer. I'm not the expert on it, but that's what I see basically from the other. As far as market share gains, well, if they're building less because of that or not as much, we're going to get our share. We're going to get our share of product, but I do believe our deliveries for the year are going to be more back-end loaded. Given these issues that we're having right now, we're going to sell drugs. Don't worry about that. But I think any big gains, which I expect to have, more units will be more into 3 and 4 than Q2. I expect Q2 to still flap slightly up from Q1. Slightly, not a lot. And a lot has to do with these shortages, okay? I don't have my finger on the pulse of it, but you never know how it's going to affect you from day to day or week to week or month to month. But I do expect it to get cleared out. I do expect to deliver quite a few more trucks in the back half of the year, especially on the eight side, and also in the medium side, for sure. I don't expect to have the issues we had. We had some big leasing deliveries last year in the first quarter, and then we didn't have any this quarter. production right now until we get to later in the year. But that's one of the reasons I think deliveries overall will ramp up as we go through the year, just not as dramatically here in Q2 as you would have expected given the shortages, but it will continue to ramp throughout the year.
spk06: Thank you. I'll let someone else get in queue.
spk05: Okay. Your next question comes from Joel Tiss.
spk07: I wonder if you can do your presentation over again. I couldn't understand you with your mask on.
spk03: That's my voice, Joe. You knew it.
spk07: So I wonder if you can talk a little bit about your ability to, like structurally, what you've done to change your cost structure and the ability to keep the costs below where they've been historically.
spk03: Well, you learn a lot in COVID, Joe. You learn a lot in 2020. Understand that we're trying to take some of the lessons we've learned and take them forward with us into the future. Doing more with less. At the same time, we will have, if it continues to ramp at the pace it is, we will have some expense increase. You don't sell parts and service and trucks and things without paying somebody to do it, turning wrenches, picking up parts, delivering parts, stocking parts, doing all the things you have to do. But we have goals internally in the company that we're going to spend less as we grow than we have in the past. We feel we've learned a lot and we'll be able to do that. Expenses will ramp, but they're not going to ramp as steep as they have in past cycles. So we believe we can manage it that way. We've learned a lot. And we put some controls in place. I'm not going to get into those things. At the same time, you've still got to be able to grow. You've still got to have people to take care of it. But it's just a balancing act. And we like to believe that we learned a lot last year during that process and having tighter controls and making sure to make more thorough decisions on investments and things that we make. Those are all a part of it. It's not just one senior. It is aligned with only growing expenses a certain amount depending on growth rates of the organization.
spk07: Is there anything like maybe not concrete, maybe too strong of a word, but anything you could share with us? You know, maybe like peak to peak, we think, you know, SG&A will be 100 basis points lower or anything like that that we could just sort of like ballpark think about?
spk03: Well, I hate to do that. giving you some... We have it internally, but the way I would express it, I really haven't looked at it from your perspective. I can explain it internally to my folks, but it wouldn't make a lot of sense to you from an operating perspective. I haven't really extrapolated it to tell you this many BIPs. Remember, Joe, you've got to strip S away from G&A. S is going to do what truck sales do. S is always going to be a component driven by sales, so Sales go up, sales go down, S will go up, S will go down. It's the G and A piece that we're focused on. You know, we'll spend less of every gross profit dollar that we create. But I don't want folks looking at it in a singular quarter. It's not a quarter thing. At different times of the year, you know, at different times of the year, you know, it's – I would tell you, you know, we'll spend 40% of the gross we create in Q2 probably from last year, Q2 year over year, I think. But Q2 year over year was a tough year. That was the COVID quarter, right? That was the terrible quarter of last year. But we will spend less of every gross profit dollar. And we have internal goals, but I'd rather just keep them to myself right now.
spk07: They're operating numbers, Joel. An easy one for Steve, and then I'll leave it for everyone else. Why is the share count rising, and can you give us your estimate of the tax rate for the full year?
spk02: Yeah, the share count, Joel, especially when you come back to 2020, it's a timing issue as much as anything. We continue to repurchase shares. However, a bulk of the shares we repurchased in 2020 happened in the first quarter when the stock dipped. We were opportunistic and bought heavier then. Since that time, we've continually repurchased, but not at a very high level. And the other big difference is the way you calculate diluted shares. At this time last year, our stock was trading in the low to mid 20s, and now we're trading in the, you know, whatever, upper 45 to 50, and our diluted shares outstanding when the stock price is higher, has contributed to the share count increase. That and options that were exercised last year during the last few quarters because the stock rate went up so much. So exercises of options and the higher price drove more diluted shares. Going forward, it should flatten out because we expect to continue to repurchase shares And there'll be some exercise of options that'll probably offset that somewhat, but it should be landing in this 57 or so percent range, and 57 million share range that you saw us post this quarter. On the tax, again, the rate was low in Q1. It was 20%. That probably, you know, that boosted Q1 earnings about, you know, three to four cents over what they will normally be throughout the rest of the year. The rest of the year, our tax rate will be in the 24.5% range. Without getting into all the detail, that's also related to some permanent differences between book and tax income that are discrete to the first quarter, mainly, again, around option vesting and share vest, equity award vesting, and stock price. But for the rest of the quarter, you need to forecast about 24.5% for the tax rate for the rest of the year, I'm sorry, each quarter. Awesome. Thank you very much.
spk05: And again, if you'd like to ask a question, please press star 1. Your next question comes from Justin Long.
spk01: Thanks, and good morning. Morning, Justin. So I was wondering, Rusty, if you could give us a sense for how parts and service revenue trended on a month-to-month basis recently. throughout the quarter and maybe an update on April as well, just because weather clearly impacted February. So just wanted to get a better understanding of how the business was trending ex-weather. And then for the full year, I think you talked about parts and service revenue approaching 2019 levels on the last earnings call. Is that still a fair expectation?
spk03: Yeah, I think that's a fair expectation. It has been ramping up. starting with January, except we did have a dip in February weather-related. But prior to the weather week, everything was trending up then, too. So we'll just sort of jump over that week, and it trended up again in March. And so far, two-thirds of the way through April, it's trending up over March. So as I said, it's not dramatic, but it's gradual. It's going the right direction, and we expect it to continue to, especially as we get into these warmer weather months. you know, as we get into these warmer weather months where, you know, you tend to have a lot of other things that you, you know, air conditions, things like air conditioners, things like that, that, you know, that break. So we typically normally have a rise to seasonality just given during the summer months. So, yeah, we do believe that this trend will continue, and especially You know, with all the miles that are being put on trucks out there right now, there's a lot of miles being driven, so equipment's getting, you know, they haven't been able to get as much new equipment in, so there's a lot of equipment being driven and worked. So I don't see any reason why we won't continue, you know, moving forward and get somewhere really close to that 2019 level, right? Remember, we started... We were a little bit off of last year, but really flat if you just took out the weather week. But that was off of the prior year, because really COVID really didn't take effect in the last two weeks of March last year. So in 19, you know, we ramped up all the way through September, and then we had some fall off in the last quarter of the year. I expected to go the other direction and continue that way throughout the year this year. So... You know, we feel very good about that. We feel good about the initiatives that we've still got out there. You know, it's not just happening for us. We believe we have this direct correlation between the investments that we've made over the last four or five years and the results that have carried us through the COVID year and the results that will even carry us through this year and the growth that we'll see in this year and going forward. So we're excited about that, and our folks are doing an outstanding job in the field working and managing through that right now.
spk01: Great. And what she said at the end was actually my next question on the parts and service initiatives. I know last year with the pandemic it was probably all hands on deck just dealing with the challenges of that. Can you just update us on where you sit in terms of implementing parts and service initiatives? What inning are we in in that process? And now that we're hopefully reopening the economy across the country, should we expect to see more of a benefit from those initiatives in 2021 and 2022? No question.
spk03: And without getting into specific customers, I have specific customers in my mind that we've been able to capture with those initiatives, even during the COVID year. And, you know, I was out this week myself and last week. We were doing presentations with folks and myself out there, and there seemed to be a thirst for for some of the things that we can supply or we can give the market, given the network. We've got the most expansive network out there, and with the investments that we made in these initiatives, to answer your question, we might be top half of the fourth, if you want to ask what inning. We might be through the first third, but we're not even through the second third of the baseball game. We're just getting into it. I really, really believe that, and I think our numbers will bear that out going forward. And I believe it will be over the next couple of years. I think we've got an outstanding next couple of years given regulations that will be coming into play in the truck business and with the growth in the economy that everybody expects to see over the next couple of years. I think we're going to be in great shape with the investments we've made moving forward. I think customers are going to desire the things that we can provide that differentiate us from other folks. Great. I'll leave it at that. Congrats on the quarter.
spk01: Thanks.
spk05: And your next question comes from Andrew Oben.
spk04: Hey, Rusty. How are you?
spk03: Very good, Mr. Oben. Very good.
spk04: Congratulations to you and the team on a great quarter.
spk03: That's more about the team than it is me, but thanks, Andrew.
spk04: Just a question. A lot of questions have been answered. Can you just talk a little bit more about the end markets? How is the pace of recovery is proceeding? And, you know, just maybe you can look at the biography and tell us which regions look stronger and which end markets look stronger. And specifically also would love to hear your views, you know, historically within partner services. Flacking has been a big meaningful component. It's been dead for a while. If there are any signs of life there, so sort of two-part questions.
spk03: Well, he sent me to go geographically. The coasts are both doing well. California, surprisingly, even though it's shut down more than other states, it's surprising how well it's done. Florida is doing outstanding. Texas, West Texas, having a difficult time, and I'll reference that back. Not difficult. They're still very successful, just not to the levels that we were. Oklahoma is doing well. We're seeing as we move up through the – Midwest is coming back a little slower, but it is coming back. Chicago and that area around in Illinois seems to be picking up. Our Ohio stores seem to be picking up also. Well, they may not all be in the same inning, but they are as states reopen and get back to work. We're seeing it across the board. Just probably the coast has been the strongest. Florida and California seem to – Dallas has done real well in the North Texas area. So those areas may be a little better than the others, but every region seems to be picking up. We don't have one that's really lagging. Just some are in different innings that are picking up. In markets, again, we're seeing construction and refuse continues, but the over-the-road business is extremely. That's what was driving all these sales. It's the over-the-road market, but it's pretty broad-based. Construction and refuse for us has continued to do well. I will tell you that. You asked about fracking. Fracking what? It's maybe up slightly. As we see consumption going up, I realize we're going to be zero carbon one day. But for now, we're not going to get there today. So as we see that continued rise in oil consumption go up, it'll be interesting to watch the back half of the year. We haven't seen it. We're not forecasting any big rise in the oil, a big jump in rigs and stuff like that working. But it wouldn't surprise me if this economy continues to heat up and the global economy follows. somewhat better than consumption goes up. It wouldn't surprise me to see that happen, but I don't know if it's this year. Maybe next year in 22, not here in 21. But, you know, that's not in our numbers now. The numbers you're seeing, that's one thing that I'm most proud of. If you look back at the organization five years ago and you compare it to now, it's how we were driven so much by ONG and how little of our – results are driven by oil and gas and how much more diversified we are across the whole organization. So if it did, it would just be bonuses. I can tell you that. We'd be very happy to take it if we could pick up some oil and gas. But so far we haven't seen it. Not projected in our future right now. But if it does happen, just consider it a bonus.
spk04: And just another question. So I think looking back, you know, even beyond a decade, you know, I think your systems and, you know, your sort of focus on software and things like telematics has always been sort of part of your secret sauce operationally and sort of enabled you to take advantage of the scale that you have. You know, there's been a lot of talk about people accelerating their digital efforts, their software efforts as part of COVID-19. Can you just talk about, you know, how have your systems delivered during COVID and what lessons you've learned about sort of systems and software and sort of driving the digital backbone of the organization going forward? Thank you.
spk03: You bet. There's no question, Andrew. I mean, there's two different – you talked about there's data, right? And that goes back to our SAP system that was so, you know, painstaking to do. years ago, but with that data, we have taken that data and put it with, you know, and extrapolated that data and learned how to use it and turn it into revenue, whether it's through our whole RushCare, all the programs, and I'm not going to get into all those on the call. I'd be happy to if you wanted, but that would take a little bit, a while, but our connectivity with customers showed well throughout produce, I know we couldn't have produced the results that we produced. If we didn't have the tools that we have to connect with customers outside of touch, right, during this last year, we wouldn't have produced the results we have. Parts connect, service connect, all these different things that we have and other things that we have underneath the umbrella of Rush Care. But I'm not going to go through all eight or nine of them here while we're on this earnings call, but You're correct when you say those investments are shining, and you can see it in the numbers. I mean, that's the easiest way for me to tell you is it's in the numbers. It's in the numbers of what we're doing currently, and I'm very proud of the efforts of everyone in the organization over the last decade to implement these tools and then to take those tools and turn them into revenue, right? And that's what we've seen happen. and we're super excited about where we're going, and we're working on other things that I'm not going to get into right now, other investments. That's one of the things when you're in the position we're in right now. You can look at the balance sheet. Everyone can see the cash that the organization has and the lack of debt. We don't have debt outside of leasing and lease trucks and floor plans. So the investments, we're going to continue to make the investments to stay on top of it and try to stay on that leading edge, not bleeding edge, but that leading edge of technology going forward of our business.
spk04: Congratulations. Thanks a lot.
spk03: Thank you, Andrew.
spk05: And you do have a follow-up question from Joel Kiss.
spk07: Hi, everybody. Must be on vacation today. You know, on the last call, you mentioned that you think that this cycle could be more of a three-year upturn, and I wonder if you could update us on that and give us some reasons why you think that.
spk03: Well, first of all, I think so, because let's go back to, you know, the CARB regulations are going to come into play at 24, right? I think you're going to see there's going to be some scrambling around. Personally, I think the regs are coming in too soon. I don't think that we're ready tied up yet could be up to 15 if all the states tagged on that would be 30% of the market there will be customers in those states that will be scrambling to purchase trucks prior to because from what I understand in those states even diesel will go up a very large I don't have the hard number I've had numbers anywhere between twelve and twenty plus thousand dollars okay on diesel engines to meet those restrictions.
spk00: And I don't think people know yet.
spk03: I think it's a little bit, I think it's a little fast. I think these regulations are being put in a little fast. It should be more like 2027, like the EPA's at right now. But I'm sure that could all change. You know, we've had a change in, obviously, in government. So we'll have to see how that all goes. But that was the number one thing that showed truck sales would be there. The other part is the economy. and then part of this year may get tempered a little bit with supply constraints. I don't think a lot. But if the economy stays strong, it's always the best driver there is for truck sales is the economy. So if it stays strong and tied in with the 24 regulations coming on with CARB, et cetera, then I believe that we should be, for the next two and a half years, fairly strong. strong cut markets, and I don't think I'm the only one out there who's projecting that either. So there would be my answers for you, Joe.
spk07: Okay. And then any early things you're hearing about Trayton Navistar that would, you know, like for you to get ready, will they be more aggressive on parts or will they rebrand a product that will help the value of your franchise? Is anything early that you guys are picking up that you can you know, adjust your business strategy?
spk03: No, I don't see anything right now this early. I think that's sort of a wait to see. I know we're excited about it. I think the stability that it brings from a long-term perspective, the ability to get, you know, for technology, you know, the global view, the scale that they'll have from a technology perspective will be great. I don't have anything specific like parts or things like that this early. That'll be something that'll play out, I think, as they take over. I don't see something early. I do believe they have been collaborating for a couple, three years, working on stuff anyway. And I think that's just only going to, has been accelerating behind the scenes. And we're just excited about that new ownership coming on board. and the ability it will give the Navistar group to continue to forge down the path that they've already been headed down, but maybe even accelerated into the future.
spk07: All right. Great. Thank you so much.
spk03: You bet, Joe.
spk05: And there are no further questions at this time.
spk03: All right. Well, thank you, ladies and gentlemen, and we will speak to you in July with the second quarter results. Good night.
spk05: That does conclude today's call you may now disconnect.
Disclaimer