Rush Enterprises, Inc.

Good day, and thank you for standing by. Welcome to the Rush Enterprises Incorporated Report's second quarter 2023 Earning Results Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Rusty Rush, President, CEO, and Chairman of the Board. Please go ahead.

Well, good morning, and welcome to our second quarter 2023 Earnings Release Conference call. On the call are Mike McRoberts, Chief Operating Officer, Steve Keller, Chief Financial Officer, Jay Hazelwood, Vice President and Controller, and Michael Goldstone, Senior Vice President, General Counsel, and Corporate Secretariat. 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 into December 31st, 2022, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved second quarter revenues of $2 billion and net income of $98.3 million, or $1.75 per delusion share. We are proud to declare a three-for-two stock split and a post-stock split cash dividend of 17 cents per common share, a 21.4% increase, from our previous quarterly dividend. In the second quarter, we achieved strong financial results due to revenue growth from large national accounts, as well as ongoing pent-up demand from new Class 8 and Class 4 through 7 trucks, caused by limited new truck production over the past few years. Our commitment to our strategic aftermarket initiatives and our continued focus on operational excellence were also significant contributors, and we are proud of our results in the second quarter. In the aftermarket, Our parts service and body shop revenues were $651 million, up 8.9%, and our absorption ratio was a record 139.7%. In the second quarter, there was healthy demand for parts and service, especially from refuse customers and large national accounts. However, over-the-road customers were negatively impacted by several economic factors, including high interest rates, depressed freight volumes, and low freight rates. These difficult industry conditions are particularly tough on small over-the-road carriers, and they limited overall aftermarket growth in the commercial vehicle industry. Though our aftermarket revenue growth slowed compared to prior quarters, the diversity of our customers helped us to mitigate these tough market conditions, and we significantly outpaced the industry this quarter. Looking ahead, we expect aftermarket growth will continue to moderate throughout the remainder of the year. and we are closely monitoring economic factors which could impact demand for parts and service. However, we continue to add service technicians to our workforce, notably mobile technicians, which is a key element in our long-term strategy. With our continued focus on expanding our aftermarket offerings and supporting national accounts, we believe our aftermarket revenues will remain strong. Turning to truck sales, we sold 4,300 Class 8 trucks in the quarter, accounting for 5.7% of the total U.S. market and 1.8% of the Canadian market. Low freight rates are impacting small carriers, but strong widespread demand continues due to limited truck production over the past few years. Although we are still operating within the confines of truck allocation, we are confident we are using our allocation in a way that provides the most long-term benefits for for our business and enables us to effectively navigate the current freight recession. ACT research forecast U.S. Class 8 retail sales to be 272,600 in 2023, up 5.1% compared to 2022. New truck production is improving, but supply issues still exist that may limit truck deliveries in the third quarter. However, due to pent-up demand and customers beginning to seek new commercial vehicles ahead of emissions regulations, and associated price increases, we believe our Class 8 truck sales will remain strong. Our Class 4-7 new truck sales reached 3,477 units in the second quarter, an increase of 25% compared to Q2 of 2022, and accounted for 5.2% of the U.S. market and 2.6% of the Canadian market. We experienced strong demand from a variety of market segments, and truck manufacturers that we represent have increased medium-duty truck production which has enabled us to outperform the market in the first half of the year. ACT Research forecast Class 4-7 retail sales to be 248,150 units in 2023, up 6.2% from 2022. Demand remains strong for medium-duty trucks, and as customers prepare for previously noted emission regulations, we believe our third quarter sales will be fairly consistent with our second quarter results. and our medium-duty growth will outpace the industry in 2023. Our used truck sales reached 1,869 units in the second quarter, up 14.7% year-over-year. Increased new truck production and soft freight rates continue weak demand for used trucks in the second quarter. Used truck values remain low, though it appears pricing has begun to stabilize. With freight rates not expected to substantially improve this year, And with new truck production expected to remain strong, we believe used truck demand and pricing will remain low through 2023. We plan to continue to closely manage inventory levels until demand begins to increase, and we are certain that used truck prices have stabilized. As we look ahead, we expect new truck supply will satisfy the pent-up demand for commercial vehicles by the end of the year. We continue to monitor economic factors which could have an impact on our industry. But due to the diversity of our customer base, combined with our continued focus on operational excellence and supporting large national fleets, we believe our overall financial results will remain strong through the rest of 2023. Before we close, it is important for me to thank our employees for their great work for providing an outstanding experience for our customers while staying focused on our company's long-term strategic initiatives. And with that, I'll take your questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while I compile the Q&A roster. Our first question comes from the line of Jamie Cook from Credit Suisse.

Hey, good morning.

Your line is now open.

Hi, good morning, nice quarter.

Good, thank you, Jamie. Good morning to you.

Good morning. So, Rusty, a couple questions. One, you know, I was interested in your thoughts. You talked about people buying ahead of price increases for 2024 and, you know, ahead of emissions standards. I'm presuming you're assuming the 2027 emissions, but can you just elaborate on what you're hearing about pricing in 2024 and the ability to get price just because pricing's been so strong? And just your view on the upcoming emission standards, what it means for the cost of the truck, et cetera. And then my second question, my second question, your margins for new and used truck sales were exceptional, you know, at 10.1%. And if you look at, you know, gross profit per truck sold, you're just at sort of, you know, record level. So I'm wondering, you know, how much do you have in backlog of trucks that sort of, you know, this margin level and how do we think about normalized margins, you know, you know, as over the, you know, next sort of 12 to 18 months. Thank you.

Sure, Debbie. Well, when we, when I, when I talk about truck pricing increasing and you talk about emissions, they sort of go hand in hand. Understand that, you know, the whole country is not on the same, running down the same highway here. You've got CARB, right, in California. And we happen to have quite a few stores here. and Southern California. So, you know, that's where you're really, I think, from a pricing perspective, you're going to see the biggest hits is in the CARB-compliant states as they roll in. As I look from a pricing perspective across the rest of the country, if they're not running in California or a CARB-affected state, I don't look for it to be anything like it has been. I do think pricing will, you know, flatten somewhat, maybe slight increases, but you know, the real increases will be in the CARB-compliant states for now, you know, until we get out to 2027. And, you know, as we all know, you know, we, you know, everybody, you know, ACT for sure, we look at next year and expect possibly down, you know, up to 15% from the Class 8 perspective. But 25 and 26, barring unforeseen, you know, overall economic issues in this country, should be, you know, 26 should be the biggest year ever, okay? Given, you know, with all the new technologies rolling in, the cost of them, the lack, I think, of what, you know, I just don't, I think we're a little ahead of ourselves with some of these laws. Myself, from a technology perspective, I don't think we're going to be really ready for it. I'm not going to get into all that right now, but from an infrastructure, et cetera, et cetera. So I do believe you know, outside of any economic, you know, overall general economic issues in the country, you're going to see a pull forward like you've probably never seen. As people, you know, especially when folks get to watch what goes on in California and the rest of the country, because I really don't believe we're prepared for this change quite as quickly. As you know, they just settled, EPA did, and just settled with CARB on some timeline stuff, and they're going to be aligned. Both of them will be aligned once we get to 27, but they won't be in the interim. So a lot of that comment by me was really around, you know, the CARB states, not necessarily around the rest of the country when it comes to pricing. Just the ones that have to be clean, idle, approved, et cetera. I'm not going to – probably going to sound too technical for me even, but that's where the pricing, the real price increases are going to come. in those states more than I do believe the rest, especially next year, with the overall market possibly being down as what most people think. And not bad. You know, this is no different than what we've talked about for the last two years. But, you know, there'll be a little bit of a breather until everybody really gets after it, I think, in replacing, you know, accelerating their purchases again before we get to the largest increases we've ever seen. I know you asked me, well, how much? I think it's a little early for me to tell because I'm getting different numbers across the board from people, but upwards of $20,000 or more for a diesel truck when you get out in 26, 27. And a lot has to do with where you're at. As far as margins and where we're at, I think you asked me that question. Yeah, you got to remember, our used truck margins got back in line. In fact, our used truck margins were pretty good. I think they were 11%. We haven't seen that since Q2 of last year. So as you know, as we had been fighting the used issue, but as you know, if you go back, remember we attacked the used truck market immediately when we saw it go down in Q3 of last year. If you look back then, our margins were 1% that quarter. But as we always do, we make sure we manage our inventory properly. We market to market every quarter. really every day. And so we're back in line and keeping up a better pace with the decline in values. Now, the decline in values, as I said on used, is still more than what I would think would be normal, normal depreciation, but it has slowed slightly from the big drops it was taking, okay? But the demand is not real good either. I mean, we had a nice demand quarter, but we, we also had a lot of trucks, you know, we're keeping everything churning, but we were still able to make margin because we have gotten our inventory and keeping it in line and still being able to sell a lot of new trucks, trade for trucks. And so, you know, we felt, we felt good about that. So I don't, you said, well, how long can you hold it? I mean, only time tells. I don't see, even with the market going down next year, I don't see any big declines. Could it decline slightly? You bet, okay? But, you know, I don't see – there's not some 20% decline or anything out there for sure. So, you know, that'll be – it'll be a little more – we'll have to go back to selling trucks again for a while, I think, during next year. And by the time we get into Q2, Q3, I mentioned that, you know, I think most of the pent-up demand will be taken care of. But there's other – I mean, I'm going to talk a while, and I'll just – I ramble a lot, but there's good things on the horizon, right? We haven't, you know, we haven't spent any of that money has not been invested in the, all the act and all the infrastructure rebuild yet. I mean, that money is still to be spent when that means there's going to be trucks being bought too in different sectors. You know, as I said, you know, the over the road sector has been hammered. Just go read all the public reports. So whenever you read there, you can multiply it. When you start with small carriers, you don't see. So, You know, we'll be back to selling trucks again, but, you know, may create a little bit more competition out there. But I don't see any big, you know, big heavy decline across the board because I don't see used getting. I don't think we're going to go back to a 1% used margin, which blends into all of it anyway.

Okay. All right. Thank you so much. I appreciate it. Nice quarter.

As always, Jamie. Thank you, Jamie.

Thank you.

Our next question comes from Andrew Obin from Bank of America.

Hey, Rusty, Steve. Good morning. Good morning. Hey, just a question. I think in this cycle, you guys have talked how SG&A is a big focus for the company. And as you think about volumes into 24th, you know, how do you think about controlling SG&A, right? Because I think your message was that historically, you guys have done a fantastic job on controlling SG&A right out of the downturn. But in the prior cycles, you know, what happened, you sort of let it go. I know you've changed how you control SG&A in this cycle. What kind of implications does it have going into 24? Thank you.

Okay, sure. Well, first off, remember, we break it in two pieces. There's this, And there's G and A. S is nothing more than a derivative directly correlated to truck sales. So, you know, those percentages remain pretty constant of what the S percentage is of truck sales. So if truck sales go down, S is going to go down. Okay. If they go up, it's going to go up. So, you know, there's a very distinct correlation between those two. G and A. Well, let's go back and let's think about this. There's one thing I think we, a lot of businesses, I know we have, you know, COVID was an interesting time, 2020, right? We learned a lot. And I think we've managed to carry some of that discipline over into the last couple years. And we believe we'll be able to continue to carry that discipline from an expense perspective. Uh, where this year would normally be a year where what I would call quality of earnings would be getting worse than what, what it is. We have become a lot better, you know, uh, expense managers, not just here at corporate, but our people in the field have become a very distant, much more disciplined in our approach. Um, and you know, the technology we have allows us with our systems to really measure and monitor stuff, I believe, unlike and better than anybody else. You know, we have our own SAP system that we continually invest in and gives us all the real-time stuff. And then we've, you know, just sort of like some sports teams. You know, we've got a salary cap, okay? And our people know it. And it sometimes can be a little difficult, especially in the heat of summer. But, you know, the expense spend is tied directly to the gross profits. So going up, you know, there's a certain percentage we can spend. Going back, there's a certain percentage that needs to be cut. So, you know, I think we're, I know we are in better shape to manage any cyclicality that comes at us, you know, in a softer market. And I think the most important thing is not just the G&A piece, but I said it in the call or on the press releases, The diversity of our customer base, you know, and I know I'm not going to jump off GNA here, but when you look at how, just read all the carriers reports. All right. They're getting hammered. Okay. You know, their, their contract spot rates down 20 plus percent. Well, that's the used truck guy. That's the small carrier, the owner operator. Those guys have been getting crushed. And even the big truck load guys and the big LTL guys, I was reading reports this morning. They've had a – and it didn't just start three months ago. This has been going on for a year. You know, we're hoping – and that's still the biggest sector. Did you realize that the small carriers are still almost a third of our business, the unforeseen thing? So, you know, that's why I was especially proud of the results that we made. You know, we were slightly back in G&A in Q2 from Q1. So, obviously, you know, we made some adjustments, and I would expect us to continue to make those adjustments. as dictated by the market. So, you know, with that diversity of customer base, I'm telling you, there is, and our continued focus, and you say, well, you talk about big fleets. Well, I talk about national accounts. Okay, let's just call it national accounts. Our continued drive of national accounts while leveraging off the largest map of any dealer group in the country and going to market as one is going to carry us through, you know, whatever happens. Well, we don't know. We can't make a market, but we doggone sure manage it better than we ever have historically.

Excellent. Just maybe a follow-up question that I usually ask. You know, you talked about over-the-road fleets, but can you just talk about, you know, you always have fantastic leads in the economy. Maybe what are you seeing in off-road vocational? What are you seeing in construction in California, Texas, Florida, Midwest? What are you seeing on waste? You know, what are you seeing from guys like FedEx, UPS? Just would love to get your take on what's happening in the underlying economy. Sure.

Well, you know, phrase down, you know, I mean, if you really, but I don't, I don't, but the recession we've seen in freight, I don't think it's fully indicative. It's really congruent of what's going on that I see across the board. You know, I think, you know, it's still pretty strong in a lot of areas we are. It's just the over the road got really crushed because inventory levels got too high. You know, we couldn't get inventory. Then everybody just took too much inventory in 22 on the retail, from retail, right? And so, you know, and then the supply and demand around trucks. And so that's why all of the rates have come down for all the carriers, as you can read. And they've had to slug it out through there. I don't think it's been terrible to them. The small guy has been terrible, too. But the larger guys with the stronger balance sheets have been able to manage through the interest rates and contract rates up, contract rates down, et cetera, et cetera. But the overall local economy, I think, is hanging in there. At least that's what we see. We see that. It's just that But inventory levels, I think, are coming down. I like to think that the over-the-road business is bobbling along the bottom. And then I still, as I mentioned, believe the vocational markets will remain strong. With the Infrastructure Act, they haven't spent that money yet. That money is still to be poured into the economy. And so with all that going on in front of us, I've got to believe that the overall underlying piece will, you know, the overall underlying economy will be okay. You'll have issues like they had with too much inventory, Frank's down and go back. But I make their bobbling along, you know, fairly well. It's just, as I said, it's been really incongruent for the over-the-road guys that normally that follows an economic recession. Okay, you see the freight recession tagging with an economic recession, but we really haven't had that. And, you know, as everyone knows, we've been predicting it for a year, haven't we? But really didn't have it. Well, they've had it in the freight market, but I do think we're on the bottom. So, but I can't tell you we're coming out next month, next quarter or whatever, but I've got to believe, you know, I am 65 years old. Doesn't necessarily make me smarter, but I've lived through enough of us that, you know, we're going to get into, you know, it's got to start picking back up somewhat into next year. And then, as I said, then you get into all the, what we'll have to deal with as a, as a, as an industry with all the technology and stuff. And unlike automobiles, trucks are not as far along on the technology path. I hate to tell you, but we're going to be driven to do stuff. And I think we're a little ahead of schedule on which is going to create you know, opportunities in my mind for us as we go forward. But like I said, I know it's a long-winded answer, but you know me, and you got my opinion.

I guess I'll just squeeze one more. You know, you guys have been one of the early adopters of the SAP, I guess, what, 20 years ago, I think, Ulo Software, very, very extensively in your parts and service operation, right? I mean, I think digital is one of your sort of strengths. Anybody who's pitching AI solutions to you, have you looked at anything that's sort of applicable in real world or it's way too early?

Well, we're getting pitched that. I could ask my CIO to know more about it than I do and how it fits with us. And we are looking into it. I don't have anything definitive, obviously, to talk to you about right now. But obviously, it's not like it's one sector or whatever. It will affect everything. And I'm sure something I can talk more offline or they can. They're better than I am at it. I've got 125 people in my department down there and pounding out everything we do. But we have used it in other ways. We already use it in some ways, but I'm going to tell you that's proprietary and I'm not going to get into it. That's why I'm sort of dancing on you, okay? Yeah. So you just have to trust in us. That's all I can tell you. We're usually, you know, I've said it all my life, you know, I want to be on the leading edge, not the bleeding edge. And I think we do a pretty good job of that around here. Look, I put my system up against anybody's, okay, our business system and all the stuff that we've got in it, at least from an industry perspective.

That's exactly how I'm asking that question. That's right.

Yeah, well, I understand, but there's things I don't want to talk about.

Okay? Totally got it.

You'll have to respect that. But, yeah, you better believe it, okay? You see me dancing around here, and I'm not a good dancer. So there's certain things we're working on and doing that are proprietary to us, and so I'm just going to leave it like that, Andrew.

Thanks so much.

You bet.

Yep.

Thank you. Again, as a reminder, to ask a question, you need to press star 1-1 on your telephone. One moment while we call in the next speaker.

Our next question comes from Justin Long from Stevens.

Thanks, and good morning.

Good morning, Justin.

So I wanted to start with the question on parts and service. I think you mentioned that your performance significantly outpaced the market. I was curious if you could give a little bit more context around that comment and how you think the market performed relative to the 9% growth you saw in parts and service.

Yeah, I would tell you that the overall market performance was probably – look, the information that we get on this can be not as good as truck information, where you've got licensed vehicles, et cetera. But we are extremely confident that, you know, we probably doubled the growth rate or better. It's pretty flat. When you think about – when I talk about customers, right, you think about folks that are tied to certain regions that are just tied to over-the-road business. You know, our – The reason we're confident in that statement is the fact that the diversity of our customer base. Go back six years ago, everybody thought we were an oil company. That's no longer the case. We still do a lot of business. We do a lot of business in the mixer and construction business. We do a lot of business, obviously, in the refuse side. We still do a lot of over-the-road business. I would tell you that our small carrier business currently, when you look at, say, what was it, 8.9% growth? realize that the small carrier business, which is 32%, I'd say a third of our business, it was off 6% or 7%. So I got to get that 6% or 7% back on that third before I ever start trying to go to 8.9% on the whole. So, you know, to me, that just, you know, tells you exactly, you know, some of the real hard work that's going on with the field over the years to make sure that we are not tied down. To one thing, we do all of those things and more. Right. So, you know, with the information we have, we're pretty confident that, you know, low singles was what everybody else did to flap, to be honest with you. So, you know, as I said, that's what it ties back to how we go to market. You know, I think everyone will be somewhat flattening. You know, remember this. Inflation's out of everything, right? Inflation's way off from where it was a year ago, too. So inflation was a part of some of those huge growth rates for a lot of companies. So, you know, we're back to really taking share here is what we're talking about. And that's how we do it. We go take share. It's the only way you can grow something. Yeah, you're going to grow with a naturally quant economy. But the way you perform, outperform everyone else is to take share. And that's the goal of 8,400 people every day we get up.

And when you look at parts and service revenue in the second quarter, it was pretty stable with what you saw in the first quarter. Are you assuming that on a sequential basis, third quarter looks similar to the second as well? And maybe any update you can provide on quarter to day trends there?

Sure. That's what we're hoping for. You know, there could be slight deterioration because these guys are getting hammered. We're supplementing it with all the diversification in our portfolio of what we do. I don't look for, you know, sequential big growth rates for sure. You know, you've had tempered inflation. But remember, as Andrew talked about a minute ago, we have a couple ways. There's called management of G&A at the same time, right? You know, that's the part. That's the difference, right? That's what the difference maker is, you know, how you manage, how you go to market, how you take share, and how you manage when growth slows. you know, and I think we've proven in the past and we'll continue to prove we're pretty decent at it. And, but I don't see, you know, we're not going to see, I don't see double figure growth rates sequentially by any stretch, you know, mid singles, if that, you know, somewhere in those, in that single, I don't want to, it's a little bit early in the quarter. This July was an interesting month because you put July 4th on a Tuesday, which I'd love to have it on a Monday. I'd love to have it on a Friday. I don't like it in the middle of the week. It kind of, Not just message, but I think we're going to have a strong close this month. But, you know, it made it a rough start to July, but I am confident that we will continue, if we have throughout the month, to accelerate back more to normal. That first week was not, I think you can ask a lot of companies, was not good for them having it on a Tuesday. But we're still solid. We still expect great results. just maybe not to the levels of all those double-figure, you know, mid-high, 17% in the first quarter, which, you know, we're finishing up with tagging a little inflation in there, et cetera, et cetera. But that's come out of the mix a lot. So along with – but we are taking share. That's why we were able to at least maintain some growth at 8.9%. And we'll just have to see, you know, year-over-year perspective. probably okay. Sequentially, it's going to flatten a little bit, as I said. I said it'd moderate, and that's what we expect going into the back half of the year. But still very strong results, as I said. There's more than one level.

Got it. That's helpful. And I guess last question from me, when you put together all the puzzle pieces, any thoughts on third quarter EPS relative to what you just put up in the second quarter? It sounds like A lot of the top-line trends are pretty stable. Maybe we see a bit of margin pressure, but would love to just get some high-level thoughts.

Boy, Justin, you know I don't do that.

I have to try. You were talking about dancing earlier, so I thought maybe I could sneak this one in.

I don't dance well, but I can read music. So, you know, I would tell you that no comment, Justin. You can read the press release. You know, I don't give it. The only EPS guidance I told y'all is when it gets to be a big trough, if you remember, I said I'll keep it over four. And if what they've got projected for 2026 plays out, we're going to get it over eight. And I'm going to keep looking to add to the pie. I don't have anything right now. I have to cut me as we go forward. So, you know, we'll continue. And I think the track record speaks for itself. And we don't expect to do anything. but to continue to operate with excellence and outshine the competition, whatever the market holds.

Understood. Thanks for the time, and congrats on the quarter.

Thank you. We were happy to be able to raise the dividend 21% during the quarter, as I said. That's that. Is that it? It looks like on the board, I think.

Thank you. At this time, we've concluded the question and answer session. I would like to turn it back to Rusty Rush for closing remarks.

Well, I just thank everyone for joining us this morning and look forward to getting back with you in October. If you have any other questions, feel free to call Steve or myself. Thank you, guys.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.