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spk03: Good day, and thank you for standing by. Welcome to Rush Enterprises Incorporated's third quarter 2023 earnings results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll 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, Chairman, President, and Chief Executive Officer. Please go ahead, sir.
spk05: Good morning, and welcome to our third 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 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 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, 2022, and in our other filings with the Securities and Exchange Commission.
spk05: As indicated in our news release, we achieved third quarter revenues of $2 billion and net income of $80.3 million, or $0.96 per diluted share. We are proud to declare a cash dividend of $0.17 per common share. In the third quarter, we achieved strong financial results due to revenue growth from our expanded service technician workforce, our support of large national accounts, and ongoing pent-up demand for new Class 8 and Class 4-7 trucks, following the limited new truck production of the past few years. Though our largest customer segment, the over-the-road customers, are being negatively affected by high interest rates, low freight rates, and other economic factors, ongoing focus on our strategic initiatives help us partially offset these challenges and achieve strong financial results in the third quarter. In the aftermarket, our parts, service, and body shop revenues were $643.6 million, up 3.5%, and our absorption rate was 132.8%. Though our aftermarket revenue has slowed, growth has slowed compared to previous quarters, the diversity of our customer base, our technician workforce, and focus on large national accounts fueled our strong aftermarket results this quarter. Looking ahead, we believe aftermarket growth will continue to moderate through the rest of this year, and we are closely monitoring consumer spending and other economic conditions. which could impact parts and service demand. In the fourth quarter, we believe customer demand for aftermarket services will remain steady, and that our aftermarket results will be similar to the third quarter, with slight adjustments caused by normal seasonal softness and fewer working days in the quarter. Turning to truck sales, we sold 4,326 new Class A trucks in the quarter, accounting for 6.1% of the total U.S. market and 2.1% of the Canadian market. Low freight rates continue to affect smaller operators, but strong pent-up demand continues to limit truck production over the past few years. While there are still new truck supply issues causing us to still be on allocation from our OEMs, new truck production continued to improve in the third quarter, resulting in significantly shorter lead times for new trucks. ACT research Forecast U.S. truck sales, Class 8 truck sales, to be 278,000 in 2023, up 7.2% compared to 2022. We believe pent-up demand for Class 8 trucks will last through the fourth quarter, and that our fourth quarter Class 8 truck performance will align with our third quarter results. Our Class 4-7 new truck sales reached 3,244 units in the third quarter, accounting for 4.8% of the U.S. market and 2.3% of the Canadian market. We experienced solid demand from a variety of market segments, and though truck manufacturers are devoting more resources to medium-duty trucks, production remains limited and unmet demand in the market remains. ACT research for U.S. Class 4-7 for retail sales to be 253,000 units in 2023, up 8.5% from 2022. We are closely watching consumer spending and other economic factors, which could impact our new Class 4-7 vehicles. But continued pent-up demand, we expect our fourth quarter results will align with our third quarter results. Our used truck sales reached 1,797 units in the third quarter, up 1.9% year-over-year. New truck production, soft freight rates, tight credit conditions led to continued weak demand in our industry in the third quarter. Used truck values continued to decline at an accelerated rate. Though the rate of decline is slow, and values appear to be normalizing. With new truck production continuing to increase, with freight rates not expected to improve significantly in the fourth quarter, we expect used truck demand will remain low to the end of this year. We plan to maintain our inventory at lower than normal levels and believe we are well positioned to navigate these challenging market conditions. We expect that our fourth quarter used truck results will be consistent again with our As we look ahead, we believe pent-up demand for Class A trucks will substantially be satisfied by the end of the fourth quarter, and that new truck production has continued to improve. We will continue to monitor economic factors which are impacting our customers, especially over-the-road carriers. While we expect typical seasonal softness in the fourth quarter, we believe our financial results will align with the third quarter results, and we will close the year strong. As always, it is important for me to thank our employees for their great work every day and for staying focused on our company's long-term strategic initiatives while providing superior service to our customers. With that, I'll take your questions.
spk03: Thank you. As a reminder, to ask a question, you'll need to press star 1-1 on your telephone. To withdraw your question, please press star 1-1 again. Please wait for your name to be announced. One moment while we compile the Q&A roster. One moment for our first question. Our first question comes from the line of Andrew Obin with Bank of America. Your line is now open.
spk04: Hey, Rusty. How are you? Rusty, Steve, team, how are you?
spk05: Very good. Thank you, Andrew.
spk04: So first question is, I think Trayton was saying today that they think they're starting to start sales of the new S13 engine and expect to ship on portable Navistar units in 24. So does this have any impact on your sort of profitability in the Navistar franchise going forward. And can you also remind us how you positioned on the Cummins engines, you know, outside of your vertically integrated model on PACCAR? Thank you.
spk05: You bet. Well, you know, the S13, we're excited about it. We know that Volkswagen is excited about it and Navistar is excited about it. We're going to start it a little slower than what we anticipated with the engine getting in here. We were hoping to get a few more this year than what we've gotten, but we're excited that we'll be showing up in 2024. That said, when it comes to profitability, remember, typically the most important thing that you derive We're excited with what we believe will be a great performance of it. It's the long-term parts profitability that goes with it because it makes parts become more profitable. We would expect that over time to definitely have an effect in the profitability of the overall of our Napa Star franchises. I'm thinking about trying to understand your comments question.
spk04: Yeah, just what's happening with Cummins and what's your position, what's your relationship with Cummins? Just remind us.
spk05: Sure. Our Cummins relationship is great. From an engine perspective, we're the largest distributor of Cummins engines. Considering they're two largest customers, they're PACCAR and Navistar, and we're the largest Peterbilt dealer and we're the largest Navistar dealer, right? So we're probably their largest retail dealer in the world, I would guess, when it comes to retail delivery. We also have a very strong relationship across the board. It's much deeper than just that. Remember, we've got our JV, our joint venture, which is, we call it CCFD, because it's Cummins Clean Fuel Technologies, as with them on the natural gas fuel system side, because we both believe they bought 50% share in that here January 1 of 22, and we have accelerated our investments is what we prepare for what we believe a big opportunity for that market share to increase from where it's always stayed around 2%. We think that, you know, over the next two to three years that that share can increase to 7, 8, 9% as the, especially the truckload side, the over the road long haul side has to, you know, wrestle with all the pressures, the environmental pressures that we're dealing with as, you know, right now fuel sales still weighs away. uh hydrogen's a ways away and i don't believe electric is a ways away when it comes to meeting the needs of you know a four or five hundred mile haul on a daily basis none of those are set up for that right now so we believe they're bringing over their new 15 liter engine and we do believe that together that partnership is going to do really well for us really as we get into 25 26 starting to accelerate 24 but at 25 26 and getting to 27 We believe we've got a lot of opportunity around that from a fuel system side. So, you know, as I said, it's a very broad relationship with them. And, you know, we're excited to have that relationship and look forward to continuing to work with them like we have always had.
spk04: Thank you. And just a follow-up question on sort of you sort of saying that Q4 is roughly going to be in line with Q3 and, you know, sort of I hate to be asking a question about next year, but how sustainable is this sort of quarterly pace, right? We know that you're sort of telegraphing that new unit sales are going to be down, but you have your own dynamic and then the aftermarket. How sustainable is this sort of earnings power, you know, I don't know, let's call it around 90 cents going forward? Thank you.
spk05: Yeah. Well, how about if I stay off of a number, Andrew, as always? I'm not going to change that, but let me talk a little more broadly, a little more in depth about what I see in the fourth quarter and how we view next year. As I said in the release in Q4, you know, we expect it to be similar, very similar to Q3. When I say that, there's going to be puts and takes, right? It's different. There's seasonality involved, but there's puts and there's takes. We think when it all washes out from a return perspective, what you see, it won't be exactly the same, but the results should end up around the same. Based on what we've got, we're already into October. We know how October's running and fairly flat, but sequentially. So that gives you some outlook, what you should be delivering from a truck sales perspective. You know, as I said, we said in the release Q4 would be about the same, but there'll be some puts and takes. Looking into next year, well, you've got to remember that, you know, ACT's got the Class 8 market down 22%, okay? Now, we like to believe that we can probably do a little better than that. I'm not going to get, you know, into exacts in the way of EPS. uh with you but we like to believe we can do better than that we don't we do believe the glass state market for us will be down we're hoping not that dramatically but what you've got to understand is they just opened up order books in september you saw the september number it was like 37 000 units right people go oh my goodness you know we've got this big order intake well i think you have to dive a little deeper into it remember last year September was like $54,000 or so, if I remember correctly. And what's happened is typically the manufacturers used to open their order books up earlier in the year, like around July or so. Well, when we had all the run-up and inflation from the commodity side a couple years ago, they got burned pretty bad, right? We had all the surcharges and everything else. So what they've done is push out when they open up their books a couple, three months, okay? I mean, they take orders back in the day. I think in June they place an order, stuff like that, and count it. But now they have pushed that out to September. So what you had was some pent-up demand, I think. Some customers had already ordered for 24, but they were not released by the OEMs because they wanted to get more comfortable with the pricing, with their cost factors. and not get burned like they did a couple years ago, which they got pretty burned, let me tell you. That's why you had to come in with all the surcharges, et cetera. So there really was, it wasn't a September number. It may have been a little bit of a head fake, okay? When I say that, because there was some pent-up demand that maybe orders had been placed back in June and July, but were just not released by the manufacturer because they didn't want to open it up because they were protecting themselves from maybe some sudden, you know, quick rise in commodity costs, et cetera. So when that 37,000 really wasn't as big, I think, as people saw. So again, we've really only been working for the middle of September, four weeks on business for next year. So it's a little bit early to say, but I would have to believe that overall, the market's going to be down a little. It's going to take a breath. But you can remember, though, with the EPA laws coming in at the end of 26 or first of 27, we still expect 25 and 26 to be very robust years. And 24 will be a year that we'll get through it. I don't anticipate us going backwards as far. Why? Because of the diversity of our customer base. If we were tied totally... to the small carrier, over the road, dry freight, river freight, that type of stuff, we would be, I would tell you my number would be closer to that or worse. Again, I don't expect it to be the same. I expect it to be down. But given the diversity, because if you remember all the money that's still got to be pumped into the economy on the vocational side, right, from the infrastructure bill, that's still got to be spent. So, and there's a lot of other market segments that we play in that, you know, should maintain a lot better than just, you know, look, we're in a freight recession. If anybody didn't know that, we've been in a freight recession. Just go check the results, check it all out. We've been in one for a year now. I mean, I was just with a lot of customers, you know, last week at ATA, and it was not all, you know, peaches and cream everywhere. Well, we still expect that market hopefully sometime maybe April, next year. I don't know exactly because I probably already missed the date before to pick back up, but it hasn't yet. It's still bobbling along. I hope it's on the bottom. Let's check out the spot rates, the contract rates. People are anticipating at least not taking their, people are still taking hits on their contract rates in that side of the business. The small guy is still getting pushed out with the rise in fuel prices that we had, you know, the 90, 120 days there. There's just a lot, we've had a little bit too much supply on the long over the road trucks. We just have. So we're trying to, it's trying to be pushed out, which it will get pushed out. It always does. But that is still the largest piece of the Class A truck business. Okay. So I'll try to reflect. I could go on and on, but I think you can get the gist of what I'm saying. And, and, and, yep. Parts and service, you asked about that also. As I said, I would look. you know, growth rates will slow down. Understand if you look at where we're at now and you go, well, you're only three and a half percent. Well, you got to dive in there a little deeper to really understand it. We were fairly flat at the revenue line. Okay. Well, the problem is 30% of our business roughly is still what we call unassigned accounts. The small folks, the ones that you don't have dedicated account salesmen to. or the cash customer, those types. It's still 30% of our business. That business was off almost 10%. That is caused by the freight recession. That's the flex piece inside of everything that's out there. The big guys are still good. They're not making as much money, but they have great cash positions to ride it out. You're big public carriers. But those folks are also a higher margin piece of our business. Fortunately for us, You know, we've had some real, done some really nice stuff around going after, you know, dedicated people going after national account business, and that business is up quite dramatically. So that helps offset, but it's at a cost too, okay? It's not as high a margin business as that small business, but we've had a lot of success around it, and we'll continue to focus on that because that should be the steadier piece going forward. So we'll just have to see how next year plays out. It's a little bit early. But we still feel pretty good about our business model. But, you know, it's going to be a tougher year. Anybody that doesn't think it is, you're wrong. Okay? But I think what we've done with the company over the last few years, look at the results in the last few years. That's all I got to tell you. And we believe very strongly in the results going forward, even with, you know, 24 not being as good as 23 and probably not as good as 25 or 26. But it's not going to be terrible.
spk04: Okay? So the last question for me, and I think you set it up for me, and I bet you know the question I'm going to ask. You keep delivering earnings well ahead of consensus, even as things are slowing, I think. If you look at the fourth quarter, your message seems you're coming out versus consensus. Excellent SG&A control. You're doing everything you're supposed to do. You know that the next year is not going to be good. You also know what 25 and 26 are going to look like. You know what the company is going to deliver. What's the board's thinking about sort of stepping up share buyback in this environment, particularly on a day like today when stock is down 8% on very solid numbers?
spk05: Good question, right? I just finished a board meeting yesterday afternoon, in fact, Andrew. you know, we look at it as a great value or we wouldn't have been doing what we've been doing. We stepped it up 50% this year. You know, we're going to return, you know, we've got, you know, we've got a pretty detailed what we want to do. And we would typically want, we've said and stated, we want to return 35%, you know, the 40% in shareholder return between a combination of dividend and stock buyback. And that's then a free cashflow, excuse me, That said, we're going to return 55% this year. I don't see us returning whatever that FCS is next year. I don't see us returning much more than 55%. You like to build in a cushion. I want to make sure I've got some money in case an M&A comes along. You know, I don't have any great M&A right now, but I have a feeling with the downturn, typically some M&A might show up, right? And so we want to be positioned to, you know, be able to do everything. We're not going backwards, okay? We're going to spend the whole $150 million this year, and I would anticipate us, we'll make that decision. We have a call by November the 28th. A board call, if you want to know the truth, to make that determination as we get a little further along. You know, another few weeks never helps if you're trying to look into crystal ball. So we've got a board call set up yesterday afternoon when they left for November 28th to announce for our December 1st, because that's when we announce every year is December 1 is what our buyback will be. So stay tuned about that.
spk04: Well, you know what I feel about it. Great quarter. Thanks a lot.
spk05: You bet. I know, Andrew. There's a balancing act, as I said. Possibly some M&A might show up, and I want to make sure I'm prepared. I don't want to take debt, and we don't have to. We just want to be able to take care of everything we need to while still we believe it is the best investment we can make. I'm totally in agreement with you.
spk03: Thank you. One moment for our next question. As a reminder, to ask a question, that's star 11 on your telephone. Our next question comes from the line of Justin Long with Stevens. Your line is now open.
spk01: Thanks, and good morning.
spk05: Well, good morning, Justin.
spk01: Good morning, Rusty. Well, I wanted to start with a question on customer mix, going back to some things you were saying earlier. Do you feel like the small customers that are unassigned, do you feel like the activity there has bottomed at, you know, down 10% this quarter? And then can you share on the other side of the coin how your national accounts are performing right now, just so we understand the relative trends?
spk05: Sure. No, you bet. I'll get the numbers, like I said, down 10%. I don't have that answer, but the comps are going to get easier. So I got to tell you, if you're going to year over year comp, yes, they're probably right there, okay? Sequentially, I don't know if there might be another couple, three points left in there, buddy. I don't know that we've – the market's not totally been cleansed yet, okay? There's still folks out there that are hauling freight for – basically barely break even and can pay my fuel. I heard some numbers that people were all afraid for last week when I was up there. I met with a lot of customers at ATA. I heard some of the slashing that was going on out there. It's liable to continue for another six months here. That means you're going to keep flushing some out. I would expect the year-over-year comps with that market to be around the same. Sequentially, it may have a little bit more, knowing that it wasn't as bad at Q1 and Q2 last year. It depends on how you want me to talk about it. I would suggest that it will stay similar on a year-over-year basis, I guess would be what I would tell you, because it got worse as the year went along. When it comes to the national account business, we're really proud of the efforts because we put in a lot of dedicated people and spent some money on that. That's all inside our G&A. and focused on it because, you know, our ability to grow that piece of our business is directly tied with the second most valuable piece of this company. My people are always first, first and foremost. But the second piece is my map. My map is bigger, our map is bigger than anybody else's map. And when you can provide consistency of service, and I can take you to interview many people, many large companies that we can do that with. When you can provide that consistency, your opportunities, to me, are endless. I mean, you know, they're not endless, but they sure feel like it for us. We've got plenty of conquests out there that we don't do business with or a large national account. So consolidation has continued around this industry for years and will continue. And that ability to go out and capture some folks, and I'm not going to get into the name of names on an earning call, But we know there's still plenty of opportunity. I sat in meetings with folks last week, almost begging us to come over to do business with them in some way, regardless of whether their business is up or down. I can't change the environment. But what I can do is provide a different solution. Understanding your competition and differentiating yourself is what it's all about. And we know that with that kind of growth, we grew 19%. all right i'm talking about being down 10 but it's a little you know it's in a lower margin but it's still really good business right and and that and the other piece you've got to keep into account is you know our service business we expect our service business to be you know up next year we may take a hit of some parts business but we expect our service business to grow why because we brought 150 technicians this year many of them mobile We have a goal to get to. If you asked me a year ago, we were 500 and something. We're 650 now. We've got a goal to get to 1,000. And the demand for that type of thing is out there. Plus, it's just providing an array of services on a consistent basis on a larger map. That doesn't mean our competition is great. I'm sure we're all listening right now. But at the same time, they'll listen to the replay. And that's good. But there's, you know, we try to differentiate by having a larger map and being able to tie it all together regardless of brand. There's still a lot of non-proprietary. It's not all vertical. It's not all proprietary. And we're able to take care of folks. So that's really the best definition I can give you. You know, we got a lot of runway left in there. Whether the market goes up or the market goes down, we think we can grow it consistently consistently.
spk01: on a year over year quarterly basis we don't look for that to change either okay as we go forward got it that's helpful and you mentioned earlier the act numbers for next year have continued to trend lower and now they're expecting a 22 decline in class 8 truck sales if that plays out if reality is pretty close to that How should we think about your ability to grow parts and service? Do you feel like you can still grow it? And if so, any thoughts on the order of magnitude?
spk05: Sure. You know, I think, you know, our year-over-year comps will start to get a little better because when we get into Q2 and Q3, because it's flattened out some this year, right? Remember when I was speaking earlier about You know, that shift in the small guy who's got more margin in him towards that national account. Yeah. You know, that made it a little tougher. You can see it. You know, you can see it in the numbers and parts of service profit. We expected that. We do expect it to be a little better next quarter. We think Q3 was like a trough, we hope. But, you know, I would tell you it would have some effect. There's no question. But we think we can overcome that. uh or at least maintain you know we're not going to have like like first quarter this year we had 17 growth rate we're not going to do that next year we were three and a half in q3 and we're probably going to bobble around that um and i would expect that probably to continue q1 with the same dynamics that we're dealing right now q3 will probably have the same type of dynamics i do not see hoping i do not have my brain and i'm not i don't i can't guarantee the future because it's a can be pretty volatile at times out there but i don't see us you know any big huge market decline based on what i'm watching right now um you know we think we can overcome what obstacles are out there with you know as you know less truck sales get a little less internal work got it but we really believe in our in our growth strategy uh around our service arena and around our dedication to the larger customers. Will it have an effect? Yeah, but we think we can keep it where we've got it by picking up in other areas that are available to us, I think. So, you know, I mean, is it somewhat of a headwind? Of course it is. I can't sit here and lie to you and tell you, nah, it's great, we're going to sell less trucks. Because we do a lot of internal work, too, on trucks, getting them ready. But we believe that probably, I'm thinking Q3 was indicative outside of truck sales. But I'm thinking, you know, that parts and service side, we'll keep pounding it out, even if we're having to shift into the little, you know, some up, some down, puts and takes. But giving, remember, our diversification is not just the over the road I talk about. Remember, we're so embedded in so many other market segments that we're committed to, and that's Look, if we were just – I'd be getting crushed like a lot of my customers are if I was just in the over-the-road business. If we were just tied to that, we'd look just like them when it comes to comps year over year from 22 to 23. But we're not, and our numbers speak for themselves, because we are diversified into so many other market segments.
spk01: Got it. And last question for me is on the used truck market. You talked about that. a little bit earlier, but I was wondering if you could give a little bit more color in terms of what you're expecting for the trend and used truck pricing as we move into year end and early 2024. Sure.
spk05: Well, we know that we've probably come down same like for like four or five-year-old trucks year over year, September, October, let's say, and around that timeframe, 35% in value. There may be another 10% to take out or so, I'm guessing. It'd be hard for me to see it go much more. Because what happens is that spread between new and used gets too large. It's all of a sudden, you can go buy three late model trucks for the price of one new. So then eventually, when I say that it does, but whatever, that spread creates a value proposition. on used when it gets so low. The problem is, is that the used truck buyers typically, you know, the small person, right? Well, they're getting crushed, so you got to have demand too, okay? You can take prices cheap as you want. Now, that spread was really, you know, looks really enticing. But if you don't have demand because you don't have any market, you know, to go lease the truck on someplace, it makes it difficult. So eventually, it just takes time. So right now, it's a little higher. Like I said, depreciation is accelerating, not as dramatically as it was, but it's still over what I would call typical depreciation by a percentage on a monthly basis. So typically, you don't see it. Historically, we're not there yet. It's still a little accelerated. it's that demand piece that we're going to have to get back. So I just, you know, I don't see anything changing around that till we get maybe, you know, till we thaw out in the spring. And hopefully we'll do it seasonally. We always do a little better than once we get through wintertime. So that's, you know, I would hope that we would have, by the time we get through, that we would be on a normal depreciation cycle and say four to six months, six months from now, something like that. That's what I'm hoping because it's been so accelerated before. But the reason it was so accelerated, it got way too high when you couldn't get new trucks, right? The money people were paying for used trucks a year and a half and two years ago was crazy. And so we've had to take all that back out as we continue to, now we're meeting the demand with new, so used demand is down and used values go down. It's just, it's a little bit of a vicious cycle uh but it should straighten itself out sometime you know i don't know second quarter next year late for a second second quarter next year to be safe conservatively but we're in good shape we've got his lower used truck inventory without the upside for us is probably a little less because we're carrying less inventory but the downside is okay we're trying to get our turns it's always about turns and your turns have to be in line with what demand is And we feel like we've pretty much got our used truck inventory where we know we do. Our margins were back to typical margins in Q2 and Q3, you know. So, you know, we're just going to stay on top of it and be cognizant of, you know, the demand that's out there. And, you know, we still trade for trucks every day. It's just we just have to make sure that we can turn them fast enough because, you know, they're not like fine wine. They don't get better with age. But we're doing a good job of dealing with it right now. But it comes with a tighter, controlled inventory because demand is not... Sometimes we would have inventories upwards of 2,500 units. Well, I got inventories of 1,300 to 1,500 right now because I don't have the demand to turn a 2,500-unit inventory fast enough. It's just not there. But that allows us to still maintain a decent margin, and we'll monitor the market closely. And as it gets to start picking up, we'll try to increase our used truck inventory. But, again, it goes back to not just pricing, not just valuations. It goes back to demand.
spk01: Makes sense. I'll leave it there. Thanks for the time.
spk03: Thank you for your questions. I would now like to turn the conference back to Mr. Rush for closing remarks.
spk05: Folks, we appreciate it. Thank you very much. I'd like to wish everyone a very happy holidays, and we will speak to you early to mid-February with our Q4 results. So, again, thank you very much.
spk03: This concludes today's conference call. Thank you for your participation. We may now disconnect. Everyone, have a wonderful day.
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