Rush Enterprises, Inc.

Hello, and thank you for standing by. Welcome to Rush Enterprises, Inc. Report's fourth quarter 2023 earnings results. 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 the question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the conference over to Russie Rush, President, CEO, and Chairman of the Board. Sir, you may begin.

Well, good morning, and welcome to our fourth quarter year-end 2023 earnings release 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.

Certain statements we can 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. expressed or implied by such forward-looking statements include, but are not limited to, those discussed in our annual report on Form 10-K for the year ended December 31, 2022, and in our other filings for the Securities and Exchange Commission.

As indicated in our news release, we achieved annual revenues of $7.9 billion and net income of $347 million, or $4.15 per diluted share. In the fourth quarter, we achieved revenues of $2 billion and net income of $78 million, or $0.95 per diluted share. In addition, we are pleased to declare a cash dividend of 17 cents per common share. Throughout 2023, there was pent-up demand for new commercial vehicles due to limited truck production over the past few years. With respect to new Class A trucks, that pent-up demand was largely fulfilled by the end of 2023. With respect to new Class 4-7 commercial vehicles, demand remains solid. The manufacturers we represent were able to increase production throughout the year, which led us to significantly The leadership is significantly outpacing the industry with respect to new Class 4-7 commercial vehicle sales. Despite a challenging operating environment in 2023 caused by low freight rates and high interest rates, which led to great general softness in parts and service sales industry-wide, we were able to achieve healthy growth in the aftermarket revenues. The growth was due primarily to our ability to support large fleets in strong demand from the diverse range of market segments we support, including our refuse, public sector, wholesale, and energy customers. In addition, our aftermarket revenues also increased due to the addition of 215 service technicians to our network. Expanding our service technician workforce is a key aspect in a certain of our strategic initiatives. Overall, we are very proud of both our operational and financial performance in 2023. In the aftermarket, our annual parts service and body shop revenues were $2.6 billion, up 8% over 2022 aftermarket results. And our annual absorption rate was $135.3. As I previously mentioned, we added 215 service to technicians to our network last year, which enhanced our ability to execute on certain of our strategic initiatives, including express services, contract maintenance, and mobile service offerings. We also experienced healthy parts sales growth from our energy, refuse, and leasing customers. Looking ahead, we expect the challenging freight conditions and high interest rates will continue to impact our customers, and the aftermarket demand in the first half of 2024 will be similar to the second half of 2023. However, we are cautiously optimistic that the current freight recession may begin to ease in summer. In addition, we believe that our diverse customer base, our ability to support large national fleets, and our ongoing focus on our strategic aftermarket initiatives will allow us to outpace the aftermarket industry and to achieve flat to modest aftermarket growth in 2024. Turning to truck sales, we sold 17,457 new Class A trucks in 2023. accounting for 6.2% of the total U.S. Class 8 market and 2% of the Class 8 market in Canada. As previously stated, we experienced healthy demand from a variety of market segments. However, the pent-up demand from the Class 8 market has been satisfied. ACT Research forecast Class 8 retail sales to be 214,300 units in 2024, down roughly 22% from 2023. Though the industry is expecting new Class A truck sales to be down significantly in 2024 due to challenging economic and industry conditions, we are confident that we'll be able to navigate a down year and outpace the industry in 2024 due to our strategic decisions we made in prior years to diversify our customer base and focus on vocational customers. Our Class 4-7 new truck sales reached 13,624 units in 2023, or 5.1% of the U.S. market, and 2.9% of the Canadian market. In addition to pent-up demand due to limited new medium-duty commercial vehicle production over the last few years, the manufacturers that we represent were able to increase production throughout the year. Those factors, along with our ongoing efforts to diversify our customer base and support large national accounts, allowed us to significantly outperform the industry in 2023. We are still experiencing delays from truck body companies, And these delays impacted deliveries during the fourth quarter, which limited our growth somewhat. ACT research forecast class of four through seven retail sales to be 254,250 units in 2023, up slightly from 2022. As we look ahead, we expect they will continue to see improvements in the medium-duty commercial vehicle production for the manufacturers we represent. and we expect customer demand to remain strong. If both of these things occur, we believe our Class 4-7 commercial vehicle sales will remain strong in 2024. Our used truck sales reached 7,117 units in 2023, relatively flat compared to 2022. Due to high interest rates and soft freight rates, demand for used trucks was weak, and used truck values declined throughout 2023. In 2024, we expect that demand for used trucks will remain flat, but that the rate at which used trucks are depreciating will continue to decrease and that used truck values will stabilize somewhat over the course of the year. We are confident our diverse product mix and ability to move inventory throughout our network will help us to continue to effectively navigate the used truck market in 2024. Looking ahead, we expect demand for Class A trucks to be soft. while demand for Class 4-7 commercial vehicles remains healthy. It should be noted that delays from body companies may continue to impact deliveries of new Class 4-7 commercial vehicles. We will continue to monitor freight rates, interest rates, consumer spending, and other economic factors that impact both commercial vehicle sales and after-the-market demand in our industry. Despite challenging market conditions, we are confident that the strategic decisions we've made in the past several years to diversify our customer base, on supporting large national accounts and to add technicians to our workforce has us well positioned to perform in 2024. As always, it is important that I take a moment to thank our employees for their incredible work during 2023 and providing world-class service to our customers while staying focused on our company's long-term goals. With that, I'll take your question.

Thank you. Ladies and gentlemen, as a reminder to ask the question that's star 11. Please stand by while we compile the Q&A roster. Our first question comes from the line of Justin Long with Stevens. Your line is open.

Thanks and good morning.

Good morning, Justin.

Morning, Rusty. So I guess to start with the parts and service business, you've talked about the divergence in the trends between national accounts and the smaller customers. I'm curious how those two buckets performed in the fourth quarter and just your general level of confidence on a net basis that the parts and service business is bottomed.

well i i'm pretty confident like i said in my notes we expect to remain at least as good as where we are i didn't want to i didn't want to push up i think i think there's room for growth and parts and service in 2024. as i said at the works we would just be pacing along where we were in the second half of the year in 2023. when you look at if you take you know what i always love to do is take it into parts and pieces right at the end of the day you look at the small accounts right we talked about this before the last six months last couple calls The fact that for the year, they were down almost 12%. Now, quarter-wise, I don't have that in front of me, but I know it started only off about 7% to 8% in Q1 and ramped up throughout the year. So I've got to believe that Q4 was probably down somewhere in the 13% or 14% range. And what we call those are unassigned accounts. But what you don't realize is sometimes those accounts still make up 32% of our business. So when you look at what we did, And you talk about being down like that, really, you know, continuing to decline over the year. You know, you got to feel good about where you're at. Like I've said before, you know, maybe our margins were a hair sopper because some of the shift, what were the business we are doing over to more national accounts, which obviously, you know, demand, you know, a better pricing along with the national accounts. Right. So we were able to make up that, you know, that's 32 to a third of our business. Was down probably, like I said, I don't have that fourth quarter right in front of me, but it was pushing 12 for the year. And I know it can climb more as the year goes on. So I've got to believe it's in the 14% to 15% range in Q4, right? So, you know, you've got to feel good about where we're at. The focus that we've had, and it's not just over-the-road customers, right? When I talk about the diversity of our customer base, I'm very proud of what we've done by putting a focus individually on each of these sectors, assigning people at the highest corporate level through the mid-level to assign. We have over 300-plus outside parts and service salespeople. While they focus on some of their local mid-size accounts, we have really put the push on to the national accounts. When you do that, you have to form relationships at both the high end of a corporation all the way down to the street level in the individual areas that they have terminals or they have or shops or whatever they have, whatever business they're in across the network. So, you know, with that, that allowed us to achieve an 8% growth rate with it being down 12% on a third of your business. So you can see, you know, you can extrapolate what, you know, how good, what that meant to the company, right? That's why it was a little softer because, you know, the unassigned accounts are your small accounts and they're a little higher margin accounts, right? But we were able to overcome them. with, I'd like to say, overcome a third of your business being off 12% by the focus that we had. We don't see that changing. When the small guy does come back, you've got to feel real good about where you're going to be when it pivots back the other direction, which you've got to believe. We've been in a freight recession for, what, a year and a half, two years almost, it seems like. While the country's been doing decently well, the freight market, as you know, all you got to do is read all the reports, has been under a lot of stress here this last year.

That's helpful. And the national accounts, do you have a number on how much they were up for the full year, just to compare that to what you're seeing with the unassigned accounts?

Yeah, they were up in the high teens. to around 20, somewhere between 18 and 20. Again, I don't have the total number. It depends on which of the stores we're talking about, but they were up somewhere in that. We break it into so many different segments, too, because we've still got a lot of mid-sized customers, too. National Accounts, while they're the largest growing thing we have going on, we still have a lot of mid-sized customers. We forget about them. They're a piece of it also. You've got roughly 32% In the small, you've got about 28%, we would call it national accounts. of our business. So the other 40% is really that middle bucket, which is the largest bucket we touch, right? So that diversity of customers is really what's allowed us to navigate what has been a rough, rough time for a lot of our customer bases. And that focus on vocational, right? When I talk about refuse being up and I talk about oil and gas being up, and our wholesale business still being up, the municipal being up. All these other areas are up. Regardless of whether they're national accounts or mid-level accounts, we break it into a lot of different buckets. But those are the areas that have allowed us to overcome when 32% of your customers are off 12% and still post out a positive year.

Got it. And I was wondering, too, if you could share anything on expectations for the first quarter, maybe truck sales, parts and service. And Steve, I know typically you see an uptick in GNA, so maybe some thoughts there as well.

Yeah, well, first quarter is always good. You know, G&A goes up. We didn't put it in the releases here. We put it for the last 25 years, but nothing's changed, right? You know, all the equity comp and taxes and all that ramp back up and get expensed out in the first quarter. And that is natural for our business. You can go back and model it every year. So we definitely expect that from a truck sales perspective. We are going to start declining. Okay. There's no question that, you know, everyone knows, we've known it for a couple of years, that 2024 was going to be a little bit soft due to, and no one expected 23 to be as big as it was, you know, with all the demand, the pent-up demand. But the key thing in the truck sale side is this is nothing that we didn't expect. We're not expecting. ACT has it down about 22%. And I'm going to agree with that. I don't expect it to be down 22% in Q1, but I do expect it to be softer. And we expect to do better, by the way, given the diversity in our customer base, right? I can tell you that the over-the-road business is going to be down more like 30-plus for the whole year, I believe. But the key thing is we've got 25 and 26 coming. With EPA regulations of January 1 to 27, there will be, I'm guessing as we get to the back half of this year, Folks are going to wake up and realize that they are probably going to free buy at the 25 and 26, given Not just the new technology, but I won't get into pricing, what the engines are going to cost and go up by January 1 of 27 with all the new aftermarket, excuse me, aftertreatment systems that are going into play to meet the new EPA regulations. So as we believe the freight market will come back, the oil and road business is still the biggest piece of volume out there. It's not in rush. We're 50-50 right between vocational and that. But in the real market, it's still the biggest piece. So, you know, those folks is they could just get, get their feet underneath them here. It's been a long year and a half or two. Like I said, they get their feet under. Uh, I would expect some, you know, a pre-buy to start possibly in the back quarter from the back half of this year is folks realize what the cost and stuff will be around that equipment from an aftermarket perspective. Yeah. I said the first half would be flat. And what I went through in a minute ago, I have hopes that we're up slightly. But I don't want to put that out there. I think some of the initiatives we have are still, we keep rolling them out, and we still haven't come to fruition on a lot of the ones that we have rolled out over the last couple of years. So, you know, I got to believe that we're still extremely focused on, you know, remember, we're also battling less inflation, okay, regardless of the report yesterday. Overall, obviously, inflation is not what it was two years ago, or even the first half of last year. so we're, you know, it'll be real growth. It'll be taking share. That's what we focus on every day. We get up in the barter service business just to take share. So, you know, I've got to believe that we're going to be, like I said, I wrote, I said flat. I have hopes to do way better or a little better. You know, I'd love to say I can be, you know, low to mid singles, uh, up for the year, but you know, it's, it's, it's, uh, It's not as easy to look at as it was the last couple years, right? It's day-to-day, hand-to-hand combat-type work. But I have all the confidence in the world, as I always do, and I think the results bear that out for the organization and our strategic initiatives that we've laid out there and what we're focused on as a group so that we can execute on those, right? I like to believe we've executed it in the past and will continue to execute as we go forward, regardless – of what the truck sales market is. I can't make a truck market, but I expect to do better. I don't want to, I'm not going to guarantee, but I expect to do better than 22%. I can promise you that. But, you know, that's going to be, we're working that every day. You don't have the leaps times. You don't have allocation like you had. That's not out there anymore. So it's not like I've got a year-long backlog of trucks. So, you know, I'll still sell you most of it. I can still sell you trucks. And if you want some in Q2, I'll get you some. So, you know, that's just where we're at. We're back to normal times. Okay, let's just say that when it comes to truck sales. I do think we'll be back on allocation this time almost next year. That I can, you know, I do believe that will come to pass, whether it's February, whether it's, You know, April of next year, I can't tell you, but there's no doubt in my mind that we'll be going back to an allocation market in 25.

Got it. And last one for me, Rusty, you've talked about earnings expectations and free cash flow expectations in the trough in 2024. Any change to your outlook there?

None whatsoever.

I don't take back anything I've said in the last couple of years. Okay. And as usual, We're focused on – I like to over-deliver. How about that?

I like it. I'll leave it there. Thanks, Rusty. Thanks, Steve.

Please stand by for our next question. Our next question comes from the line of Andrew Obin with Bank of America. Your line is open.

Hey, Rusty. How are you? Good morning.

Well, good morning, Mr. Obin.

Are you calling the bottom of the cycle? Because that's what you're, you know, and have you called, I don't think you've called the bottom of the cycle before. It seems that you're basically saying cycle will bottom sometime around this summer.

Yeah, I think so. I think we're, you know, you're going to have a little carryover. You know, when it comes, we're talking about truck sales, okay? I'm not talking about aftermarket business. Aftermarket business is totally different. But when it comes to class eight truck sales, I think that, you know, the summer is going to be, A little more difficult than what we've experienced. You know, there was some carryover in the Q1 from finishing up the year. Remember, we're at the end of the train. We don't manufacture them, we deliver them. A lot of times trucks take bodies and things like that, and it can be up to 60 to 90 days for those trucks to get delivered to our customer base, especially on the vocational side. So, yes, I would tell you that, you know, the little trough for us in Class A deliveries will probably be sometime this summer. But again, like I said, you know, I do expect, you know, the freight market cannot continue, I don't believe, to be as rough as it's been the last couple of years. So, you know, I would expect that to pick up. And along with what the, you know, EPA emission laws of 27, January 1 of 27, I do firmly believe will be a pre-buy without question. You know, most people expect 2026 to be the biggest year in history, you know, given the decent economic conditions overall in the country, right? So, yeah, I mean, I would tell you that truck sales will be, you know, softer in the summer in the Q2 and Q3 than what we have seen. But again, you know, we believe, you know, when I say 22%, I think the majority of it will be in the summer, yes. But, you know, I expect to start bouncing back by the end of the year.

Excellent. And can you just remind us when is used pricing bottoming?

Well, Andrew, if I could tell you that, you may even give me a raise, okay, which I would gladly take. I think you're doing fine, Rusty.

I think you're doing fine as it is.

I would agree with that. I'm probably overpaid. Did I say that? Okay.

Yeah, don't say that either.

No, Andrew, I'll tell you. I will say this. The decline in used truck pricing has continued. While it is not as dramatic as what it was a year and a half ago, it is still declining more than normal. I think our average used truck price was like $53,000, I see. And when you look at average, and if you go back to... 19 or something like that, 47, 48. So you got to believe with the inflationary of what trucks cost now, that spread has gotten, it's only so far it could go. But the problem is that pricing is one thing, demand is the other, right? And when you've got spot markets, which are the main driver of used truck values in such rough shape and down so much, it's still And it'll happen quick when it happens. You watch. I can't tell you when, though. That means I guess they don't get my raise. But exactly when. But I would tell you, I got to believe sometime before the year's out. But I don't look forward to the next. You know, it'll continue to decline at a faster rate, but not as fast as it was declining. There are still trucks being put on the market. I've heard of a couple batches this week, you know, in big numbers. People are trying to unload, which puts pressure. on it, you know, puts pressure on the market. But the most important thing is to create demand, which means you've got to get the spot market back. You've got to have some of these others, you know, this over-the-road business spot market back to really stabilize it and make it come, you know, and to make your stock values go up again, you know. But it's still decelerating faster than what I would say normal percentages are.

Just a question. In terms of macro, and I always, I love asking this question just because you have great systems. Can you just take us around the country and just by region, how is the economy holding up relative to your expectations maybe six weeks ago? And I know that it's only six weeks, but you do have some of the best systems of anybody I cover. Just maybe you can take us around the country and tell us what's Rusty Russia's 30,000-foot view of the U.S. economy.

Well, obviously, the biggest concentration we have would be in Texas, right? And Texas is doing just fine. Okay, our Texas stores are still, you know, the state's still growing. You know, one of the highest-growing states in the nation. And from both population and a business, you know, perspective for business is still coming in here. Florida is doing great. Where are we going to go? We're getting through, I would tell you, a little softer maybe lately in Ohio, I think. But I think Illinois is decent and doing well. You know, we go out west. California is still in good shape. I worry about California with the new 24 car blows that came in. By the time we get to the back half of the year, they may be suffering on the truck sale side. Right now they're doing fairly well. but we made sure to have some inventory and things like that to carry over into the markets out there. Oklahoma is still going strong. Arizona is decent. So pretty decent across the border. Like I said, a little softness in a state or so, and really probably in Ohio for whatever reason. I've noticed that it's a little softer up there recently, but I don't expect that to hold up. I expect that to come back. So I hope I gave you some. I mean, go ahead. I like looking at markets. Not just geographic markets, but other markets, you know, breaking it out into good markets. You know, construction is better. You know, that's what we hope will happen. help keep the order board better with the hits that we're seeing on the road business, both for the large customer and for the small person, which we know are pretty much out right now, out of our mix. But, you know, refuse is really going strong. Construction is doing extremely well. Municipal business is holding in strong, you know, moderate growth rates, as I said earlier, and we expect that to continue. You know, it's like I said, the hardest thing we've got going is the small customer, right? That's why when the small customer does come back in the railroad business, we're going to be in really good shape because we haven't overcome that one-third of our business being off double digits. So, you know, that will bring back. And I expect vocational to continue to be strong given, you know, the government monies that are out there that are being spent right now. So, you know, look, 24 is not going to be what 23 was. But at the same time, it's going to be – I'll stick to my guns, as I was asked earlier by Justin about what I've said in the past, is we'll still execute. You know, the truck market, I can't make the truck market. But I doggone sure can take share and grow in the aftermarket, and that's the goal of the organization. That's the highest profitable business we do.

So if I were to summarize it, truck market is bottoming. Economy is solid. Rush Enterprises is executing. Is that a fair summary?

That's what we like to think. You know, I guess the proof of it is being in the numbers. But, you know, I think we've had a, you know, even going back to COVID year, right, in 20 and what we did in 21, what we did in 22, what we did in 23, we're going to execute really well, I believe, inside of what the 24 market with a 20 plus percent class eight decline. Maybe not by us, though. You know, maybe we're better than that. I don't want to guarantee anything, but I'd like to see us only be half of that. But I can't guarantee that because I still can build you something. You know, it's still a moving target, right? We're back to normalized times. We got to get out of this allocation world we lived in. And so, you know, everybody's got to sharpen up their tools and go to work and get out there and take some shares because the company is a little more competitive in the environment. But, you know, we've always been able to do that.

You know my view. You guys have built a high-quality organization.

Thanks a lot. Thank you, Andrea. I appreciate that, buddy.

Thank you. Ladies and gentlemen, I'm sure no further questions in the queue. I would now like to turn the call back over to Rusty for closing remarks.

Yes, I want to thank everybody for joining us this morning, and we will see you in mid-April. You and your loved ones have a happy Valentine's Day. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. you Thank you. Hello, and thank you for standing by. Welcome to Rush Enterprises, Inc. Report's fourth quarter 2023 earnings results. 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 the question during this session, you will need to press Star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press Star 11 again. I would now like to hand the conference over to Russie Rush, President, CEO, and Chairman of the Board. Sir, you may begin.

Well, good morning, and welcome to our fourth quarter year-end 2023 earnings release 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.

Certain statements we can 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. from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in our annual report on Form 10-K for the year ended December 31, 2022, and in our other filings for the Securities and Exchange Commission.

As indicated in our news release, we achieved annual revenues of $7.9 billion and net income of $347 million, or $4.15 per diluted share. In the fourth quarter, we achieved revenues of $2 billion and net income of $78 million, or 95 cents per dollar share. In addition, we are pleased to declare a cash dividend of 17 cents per common share. Throughout 2023, there was pent-up demand for new commercial vehicles due to limited truck production over the past few years. With respect to new Class A trucks, that pent-up demand was largely fulfilled by the end of 2023. With respect to the new Class 4-7 commercial vehicles, demand remains solid. The manufacturers we represent were able to increase production throughout the year, which led us to significantly outpacing the industry with respect to new Class 4-7 commercial vehicle sales. Despite a challenging operating environment in 2023 caused by low freight rates and high interest rates, which led to great general softness in parts and service sales industry-wide, we were able to achieve healthy growth in the aftermarket revenues. The growth was due primarily to our ability to support large fleets in strong demand from the diverse range of market segments we support, including our refuse, public sector, wholesale, and energy customers. In addition, our aftermarket revenues also increased due to the addition of 215 service technicians to our network. Expanding our service technician workforce is a key aspect in a certain of our strategic initiatives. Overall, we are very proud of both our operational and financial performance in 2023. In the aftermarket, our annual parts, service, and body shop revenues were $2.6 billion, up 8% over 2022 aftermarket results. And our annual absorption rate was 135.3, as I previously mentioned. We added 215 service to technicians to our network last year, which enhanced our ability to execute on certain of our strategic initiatives, including express services, contract maintenance, and mobile service offerings. We also experienced healthy parts sales growth from our energy, refuse, and leasing customers. Looking ahead, we expect the challenging break conditions and high interest rates will continue to impact our customers. and that aftermarket demand in the first half of 2024 will be similar to the second half of 2023. However, we are cautiously optimistic that the current freight recession may begin to ease in summer. In addition, we believe that our diverse customer base, our ability to support large national fleets, and our ongoing focus on our strategic aftermarket initiatives will allow us to outpace the aftermarket industry and to achieve flat to modest aftermarket growth in 2024. Turning to truck sales, we sold 17,457 new Class 8 trucks in 2023, accounting for 6.2% of the total U.S. Class 8 market and 2% of the Class 8 market in Canada. As previously stated, we experienced healthy demand from a variety of market segments. However, the pent-up demand in the Class 8 market has been satisfied. ACT Research forecast Class 8 retail sales to be 214,300 units in 2044. down roughly 22% from 2023. Though the industry is expecting new Class A truck sales to be down significantly in 2024 due to challenging economic and industry conditions, we are confident that we'll be able to navigate a down year and outpace the industry in 2024 due to our strategic decisions we made in prior years to diversify our customer base and focus on vocational customers. Our Class 4-7 new truck sales reached 13,624 units in 2023, or 5.1% of the U.S. market, and 2.9% of the Canadian market. In addition to pent-up demand due to limited new medium-duty commercial vehicle production over the last few years, the manufacturers that we represent were able to increase production throughout the year. Those factors, along with our ongoing efforts to diversify our customer base and support large national accounts, allowed us to significantly outperform the industry in 2023. We are still experiencing delays from truck body companies, and these delays impacted deliveries during the fourth quarter, which limited our growth somewhat. ACT research forecast class of four through seven retail sales to be 254,250 units in 2023, up slightly from 2022. As we look to skew in 2023, As we look ahead, we expect they will continue to see improvements in the medium-duty commercial vehicle production for the manufacturers we represent, and we expect customer demand to remain strong. If both of these things occur, we believe our Class 4-7 commercial vehicle sales will remain strong in 2024. Our used truck sales reached 7,117 units in 2023, relatively flat compared to 2022. Due to high interest rates and soft freight rates, Demand for used trucks was weak and used truck values declined throughout 2023. In 2024, we expect that demand for used trucks will remain flat, but that the rate at which used trucks are depreciating will continue to decrease and that used truck values will stabilize somewhat over the course of the year. We are confident our diverse product mix and ability to move inventory throughout our network will help us to continue to effectively navigate the used truck market in 2024. Excuse me. Looking ahead, we expect demand for Class 8 trucks to be soft, while demand for Class 4-7 commercial vehicles remains healthy. It should be noted that delays from body companies may continue to impact deliveries of new Class 4-7 commercial vehicles. We will continue to monitor freight rates, interest rates, consumer spending, and other economic factors that impact both commercial vehicle sales and after-the-market demand in our industry. Despite challenging market conditions, we are confident that the strategic decisions we've made in the past several years to diversify our customer base on supporting large national accounts and to add technicians to our workforce has us well positioned to perform in 2024. As always, it is important that I take a moment to thank our employees for their incredible work during 2023 and providing world-class service to our customers while staying focused on our company's long-term goals. With that, I'll take your question.

Thank you. Ladies and gentlemen, as a reminder to ask the question that's star 11. Please stand by while we compile the Q&A roster. Our first question comes from the line of Justin Long with Stevens. Your line is open.

Thanks and good morning.

Good morning, Justin.

Morning, Rusty. So I guess to start with the parts and service business. You've talked about the divergence in the trends between national accounts and the smaller customers. I'm curious how those two buckets performed in the fourth quarter and just your general level of confidence on a net basis that the parts and service business is bottom.

Well, I'm pretty confident, like I said in my notes, we expect to remain at least as good as where we are. I didn't want to I didn't want to push up. I think there's room for growth in parts and services in 2024. As I said, if it works, we would just be pacing along where we were in the second half of the year in 2023. What I always love to do is take it to parts and pieces. At the end of the day, you look at the small accounts. We talked about this before the last six months, the last couple of calls. The fact that for the year, they were down almost 12%. Quarter-wise, I don't have that in front of me. But I know it started only off about seven to eight percent in Q1 and ramped up throughout the year. So I've got to believe that Q4 was probably down somewhere in the 13 or 14 percent range. And what we call those are unassigned accounts. But what you don't realize is sometimes those accounts still make up 32 percent of our business. So when you look at what we did, And you talk about being down like that, really, you know, continuing to decline over the year. You know, you got to feel good about where you're at. Like I've said before, you know, maybe our margins were a hair sopper because some of the shift, what were the business we are doing over to more national accounts, which obviously, you know, demand, you know, a better pricing along with the national accounts. Right. So we were able to make up that, you know, that's 32, a third of our business. Was down probably, like I said, I don't have that in fourth quarter right in front of me, but it was pushing 12 for the year. And I know it can climb more as the year goes on. So I got to believe it's in the 14 to 15% range in Q4, right? So, you know, it's, you got to feel good about where we're at. The focus that we've had, and it's not just over the road customers, right? When I talk about the diversity of our customer base, I'm very proud of what we've done by putting a focus individually on each of these sectors, assigning people at the highest corporate level through the mid-level to assign. We have over 300-plus outside parts and service salespeople. And while they focus on some of their local midsize accounts, we have really put the push on to the national accounts. And when you do that, you've got to, you know, you have to form relationships at both the high end of a corporation all the way down to the street level in the individual areas that, you know, they have terminals or they have, or shops or whatever they have, whatever business they're in across the network. So, you know, with that, that allowed us to achieve an 8% growth rate with it being down 12% on a third of your business. So you can see, you know, you can extrapolate what, you know, how good, what that meant to the company, right? That's why it was a little softer because, you know, the unassigned accounts are your small accounts and they're a little higher margin accounts, right? But we were able to overcome them. with, you know, I'd like to say overcome a third of your business being off 12% by the focus that we had. So, you know, we don't see that changing. So, you know, when the small guy does come back, you know, you got to feel real good about where you're going to be when that does, when that, you know, when it pivots back the other direction, which you've got to believe. We've been in a freight recession for, what, a year and a half, two years almost, it seems like. While the country's been doing decently well, the freight market, as you know, all you got to do is read all the reports, has been under a lot of stress here this last year.

That's helpful. And the national accounts, do you have a number on how much they were up for the full year, just to compare that to what you're seeing with the unassigned accounts?

Yeah, they were up in the high teens. to around 20, somewhere between 18 and 20. Again, I don't have the total number. It depends on which of the stores we're talking about, but they were up somewhere in that. We break it into so many different segments, too, because we've still got a lot of mid-sized customers, too. National Accounts, while they're the largest growing thing we have going on, we still have a lot of mid-sized customers. We forget about them. They're a piece of it also. You've got roughly 32% In the small, you've got about 28% we would call national accounts, okay, of our business. So the other 40% is really that middle bucket, which is the largest bucket we touch, right? So that diversity of customers is really what's allowed us to navigate what has been a rough, rough time for a lot of our customer bases. And that focus on vocational, right? When I talk about refuse being up, and I talk about oil and gas being up, and our wholesale business still being up, and municipal being up, all these other areas are up. And regardless of whether they're national accounts or mid-level accounts, we break it into a lot of different buckets. But those are the areas that have allowed us to overcome when 32% of your customers are off 12% and still post out a positive year.

Got it. And I was wondering, too, if you could share anything on expectations for the first quarter, maybe truck sales, parts and service. And Steve, I know typically you see an uptick in G&A, so maybe some thoughts there as well.

Yeah, well, first quarter is always good. You know, G&A goes up. We didn't put it in releases here. We put it for the last 25 years, but nothing's changed, right? You know, all the equity comp and taxes and all that ramp back up and get expensed out in the first quarter. And that is natural for our business. You can go back and model it every year. So we definitely expect that from a truck sales perspective. We are going to start declining. Okay. There's no question that, you know, everyone knows, we've known it for a couple of years, that 2024 was going to be a little bit soft due to, and no one expected 23 to be as big as it was, you know, with all the demand, the pent-up demand. But the key thing in the truck sale side is this is nothing that we didn't expect. We're not expecting. ACT has it down about 22%. And I'm going to agree with that. I don't expect it to be down 22% in Q1, but I do expect it to be softer. And we expect to do better, by the way, given the diversity in our customer base, right? I can tell you that the over-the-road business is going to be down more like 30-plus for the whole year, I believe. But the key thing is we've got 25 and 26 coming. With EPA regulations of January 1 and 27, there will be, I'm guessing as we get to the back half of this year, folks are going to wake up and realize that they are probably going to free buy at the 25 and 26, given... Not just the new technology, but I won't get into pricing, what the engines are going to cost and go up by January 1 of 27 with all the new aftermarket, excuse me, aftertreatment systems that are going into play to meet the new EPA regulations. So as we believe the freight market will come back, the only real business is still the biggest piece of volume out there. It's not in rush. We're 50-50 right between vocational and that. But in the real market, it's still the biggest piece. So, you know, those folks is they could just get, get their feet underneath them here. It's been a long year and a half or two. Like I said, they get their feet under, uh, I would expect. Some, you know, a pre-buy to start possibly in the back quarter toward the back half of this year is folks realize what the costs and stuff will be around that equipment from an aftermarket perspective. Yeah. I said the first half would be flat. And what I went through in a minute ago, I have hopes that we're up slightly. But I don't want to put that out there. I think some of the initiatives we have are still, we keep rolling them out, and we still haven't come to fruition on a lot of the ones that we have rolled out over the last couple of years. So, you know, I got to believe that we're still extremely focused on, you know, remember, we're also battling less inflation, okay, regardless of the report yesterday. Overall, obviously, inflation is not what it was two years ago, or even the first half of last year. So, you know, it'll be real growth. It'll be taking share. That's what we focus on every day. We get up in the bartender service business just to take share. So, you know, I've got to believe that we're going to be, like I said, I said flat. I have hopes to do way better or a little better. You know, I'd love to say I could be, you know, low to mid singles up for the year. But, you know, it's not as easy to look at as it was the last couple of years, right? It's day-to-day, hand-to-hand, world combat type work. but I have all the confidence in the world, as I always do, and I think the results bear that out for the organization and our strategic initiatives that we've laid out there and what we're focused on as a group so that we can execute on those. I like to believe we've executed in the past and will continue to execute as we go forward, regardless of what the truck sales market is. I can't make a truck market, but I expect to do better. I don't want to I'm not going to guarantee, but I expect to do better than 22%. I can promise you that. But, you know, that's going to be, we're working that every day. You don't have the lease times. You don't have allocation like you had. That's not out there anymore. So it's not like I've got a year-long backlog of trucks. So, you know, I'll still sell you, I can still sell you trucks. And if you want some in Q2, I'll get you some. So, you know, that's just where we're at. We're back to normal times. Okay, let's just say that when it comes to truck sales. I do think we'll be back on allocation this time almost next year. I do believe that will come to pass, whether it's February, whether it's April of next year, I can't tell you. But there's no doubt in my mind that we'll be going back to an allocation market in 2025.

Got it. And last one for me, Rusty, you've talked about earnings expectations and free cash flow expectations and the trough. in 2024, any change to your outlook there?

None whatsoever.

I don't take back anything I've said in the last couple of years. Okay. And as usual, you know, we're focused on, uh, I like to over deliver. How about that?

I like it. I'll leave it there. Thanks Rusty. Thanks Steve.

Please stand by for our next question. Our next question comes from the line of Andrew Obin with Bank of America. Your line is open.

Hey, Rusty. How are you? Good morning.

Well, good morning, Mr. Obin.

Are you calling the bottom of the cycle? Because that's what you're, you know, it's, and have you called, I don't think you've called the bottom of the cycle before. It seems that you're basically saying cycle will bottom sometime around this summer.

Yeah, I think so. I think we're, you know, you're going to have a little carryover. You know, when it comes, we're talking about truck sales, okay? I'm not talking about aftermarket business. Aftermarket business is totally different. But when it comes to Class 8 truck sales, I think that, you know, the summer is going to be a little more difficult than what we've experienced. You know, there's some carryover in the Q1 from finishing up the year. Remember, we're at the end of the year. train we don't manufacture them we deliver them a lot of times trucks take bodies and things like that and it can be up to 60 to 90 days for those trucks to get delivered to our customer base especially on the vocational side so yes i would tell you that you know the little trough for us and class a deliveries will probably be sometime this summer but again like i said you know i do expect you know the freight market cannot continue i don't believe to be as rough as it's been the last couple years so You know, I would expect that to pick up, and along with what the EPA emission laws of 27, January 1 of 27, I do firmly believe will be a pre-buy without question. You know, most people expect 2026 to be the biggest year in history, you know, given decent economic conditions overall in the country, right? So, yeah, I mean, I would tell you that truck sales will be, you know, softer in the summer in the Q2 and Q3. than what we have seen. But again, you know, we believe, you know, when I say 22%, I think the majority of it will be in the summer, yes. But, you know, I expect to start bouncing back by the end of the year.

Excellent. And when, can you just remind us when is used pricing bottoming?

Well, and is it, I wish I, Andrew, if I could tell you that, you may even give me a raise, okay, which I would gladly take. I think you're doing fine, Rusty.

I think you're doing fine as it is.

I would agree with that. I'm probably overplayed. Did I say that? Okay.

Yeah, don't say that either.

No, Andrew, I'll tell you. I will say this. The decline in used truck pricing has continued. While it is not as dramatic as what it was, say, a year and a half ago, it is still declining more than normal. I think our average used truck price was like $53,000, I see. And when you look at average, and if you go back to 19, or I think it was in the high 40s or something like that, 47, 48. So you've got to believe with the inflationary of what trucks cost now, that spread has gotten bigger. It's only so far it could go. But the problem is that pricing is one thing. Demand is the other, right? And when you've got spot markets, which are the main driver of used truck values, in such rough shape and down so much, it's still – and it'll happen quick when it happens. You watch. I can't tell you when, though, because that means I guess they don't get my raise, but exactly when. But I would tell you. I got to believe sometime before the year's out, but I don't look forward to the next. It'll continue to decline at a faster rate, but not as fast as it was declining. There are still trucks being put on the market. I've heard of a couple batches this week in big numbers. People are driving on loads, which puts pressure on it, puts pressure on the market. But the most important thing is to create demand, which means you got to get the spot market back. You've got to have some of these others, you know, this over-the-road business spot market back to really stabilize it and make it come, you know, and to make used drug values go up again, you know. But it's not, it's still decelerating faster than what I would say normal percentages are.

Right. Just a question in terms of macro, and I always, I love asking this question just because you have great systems. Can you just take us around the country and just by region, how is the economy holding up relative to your expectations maybe six weeks ago? And I know that it's only six weeks, but you do have some of the best systems of anybody I cover. Just maybe you can take us around the country and tell us what's Rusty Rush's 30,000-foot view of the U.S. economy.

Well, obviously the biggest concentration we have would be in Texas, right? And Texas is doing just fine. Okay, our Texas stores are still, you know, the state's still growing. One of the highest growing states in the nation. And from both population and a business, you know, perspective for business is still coming in here. Florida is doing great. Where are we going to go? We're getting through, I would tell you, a little softer maybe lately in Ohio, I think. And, but I think Illinois is decent and doing well. Um, you know, we go out West, California is still in good shape. I do, you know, I worry about California with the new 24 car blows that came in. By the time we get to the back half of the year, that they may be suffering on the truck sale side right now, they're doing fairly well, but we, you know, we made sure to have some inventory and things like that to carry over into the markets out there. Um, Well, Oklahoma's still going strong. Arizona's decent. You know, so pretty decent across the border. Like I said, a little softness in a state or so, and really probably in Ohio for whatever reason. I've noticed it's a little softer up there recently, but I don't expect that to hold up. I expect that to come back. So I hope that gives you some. I mean, go ahead. You know, a lot of times I like looking at markets. I mean, not just geographic markets, but other markets, you know, breaking it out into good markets. You know, construction is better. You know, that's what we hope will help keep the order board better with the hits that we're seeing on the road business, both for the large customer and for the small person, which we know are pretty much out right now, out of our mix. But, you know, refuse is really going strong. Construction is doing extremely well. Municipal business is holding in strong with, you know, moderate growth rates, as I said earlier, and we expect that to continue. You know, it's like I said, the hardest thing we've got going is the small customer, right? That's why when the small customer does come back in the old road business, we're going to be in really good shape because we haven't overcome that one-third of our business being off double digits. So, you know, that will bring back, and I don't, I expect vocational to continue to be strong, given the government monies that are out there that are being spent right now. Look, 24 is not going to be what 23 was, but at the same time, I'll stick to my guns, as I was asked earlier by Justin about what I've said in the past, is we'll still execute. The truck market, I can't make the truck market, but I doggone sure could take share and grow in the aftermarket. most profitable business we do.

So if I were to summarize it, truck market is bottoming, economy is solid, Rush Enterprises is executing. Is that a fair summary?

That's what we like to think. You know, I guess the proof of it is being in the numbers. But, you know, I think we've had a You know, even going back to COVID year, right, in 20 and what we did in 21, what we did in 22, what we did in 23, we're going to execute really well, I believe, inside of what the 24 market with a 20 plus percent class eight decline. Maybe not by us, though. You know, maybe we're better than that. I don't want to guarantee anything, but I'd like to see us only be half of that. But I can't guarantee that because I still can build you something. You know, it's still a moving target, right? We're back to normalized times. We got to get out of this allocation world we lived in. And so, you know, everybody's got to sharpen up their tools and go to work and get out there and take some shares because the company needs a little more competitive environment. But, you know, we've always been able to do that.

You know my view. You guys have built a high-quality organization.

Thanks a lot. Thank you, Andrew. I appreciate that, buddy.

Thank you. Ladies and gentlemen, I'm sure no further questions in the queue. I would now like to turn the call back over to Rusty for closing remarks.

yes i want to thank everybody for joining us this morning and we will see you in mid april and you and your loved ones have a happy valentine's day thank you very much ladies and gentlemen this concludes today's conference call thank you for your participation you may now disconnect