Rush Enterprises Inc (RUSHA) 2005 Q2 法說會逐字稿

Thank you for joining the Q2 2005 Rush Enterprises Inc. earnings conference call. As a reminder, all lines will be on listen-only mode. We will conduct a Q&A session at the end of the call. At this time I'd like to turn the call over to Marvin Rush, Chairman and CEO.

Good afternoon, folks. Welcome to our second-quarter earnings release conference call. On the call today are Rusty Rush, President and COO; Marty Naegelin, Senior Vice President and CFO; John Hiltabiddle, Controller, Rush Enterprises; Steve Keller, Director of Finance; Jay Hazelwood (ph), Controller, Rush Equipment Centers; and Derrek Weaver, Chief Compliance Officer. Now Marty 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 risks and uncertainties, our actual results may differ materially from those expressed or implied by such forward-looking statements. The factors that could cause our 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 ended December 31, 2004, and in our other filings with the Securities and Exchange Commission.

Now we would like to give you an update on our progress. Let's talk about the second-quarter results. Our second-quarter results demonstrate the momentum that our business has achieved. Revenues for the second quarter increased 72.8% to 461.8 million, versus 267.2 million last year. Net income for the quarter was 11.2 million or $0.45 per diluted share, compared with 4.1 million or $0.26 per diluted share for the last year's second quarter.

As the numbers demonstrate, the trend of increasing demand for heavy-duty trucks and execution of our quality of earnings process continued in the second quarter. We will give you some second-quarter business segment results.

Truck segment. The Company's truck segment recorded revenues of 442.5 million in the second quarter of 2005, compared to 253.3 million in the second quarter of 2004. Rush delivered 2,469 new heavy-duty trucks during the second quarter of '05, compared to 1,283 new heavy-duty trucks in the same period of '04. As a result, revenue from heavy-duty truck sales was approximately 262.2 million in the second quarter of '05, compared with approximately 131.1 million in the second quarter of '04.

Our focus on growing the medium-duty truck business continues. During the second quarter of '05 unit sales from new medium-duty trucks was 681 units, compared to 433 units in the second quarter of '04. Revenues generated from the new medium-duty truck sales increased to 39.8 million in the second quarter of '05, from 22.7 million during the second quarter of '04. To further penetrate the medium-duty market, we plan to add new franchises that complement our existing Peterbilt medium-duty line. Currently 14 Rush Truck Centers already offer medium-duty trucks, manufactured by GMC, Hino, UD Nissan, or Isuzu, which are supported with parts and service operations. Our current projections calls for sales of medium-duty trucks to become a greater part of our business, with our goal to sell 2,500 new medium-duty units in 2005.

Rush delivered 874 used trucks during the second quarter of '05, compared to 647 used trucks in the same period of '04. As a result, revenue from used truck sales was approximately 40.1 million in the second quarter of '05, compared to 43.2 million in the second quarter of '04.

Truck segment parts, service, and body shop sales increased 28.2%, from 67.3 million in the second quarter of '04 to 86.3 million in the second quarter of '05. Additionally, gross profit margins increased more than 4% this quarter versus the same period last year.

The Company's absorption rate increased from 98.52 in the second quarter of '04 to 104.42 in the second quarter of '05. The Company's same-store absorption rate was 108.84 during the second quarter of '05. Absorption rate is calculated by dividing the gross profit from parts, service, and body shop departments by the overhead expenses of all the dealerships' departments, except for selling expense of the new and used truck departments. While our year-to-date absorption rate is 100.5 through June, we have an internal goal of attaining an absorption rate of 110 over the next several years.

We will talk about the Construction Equipment business a little. The Construction Equipment segment recorded revenues of 16.3 million in the second quarter of '05, compared to 11.5 million in the second quarter of '04. Revenues generated from the sale of new construction equipment units increased from 7.1 million in the second quarter of '04 to 11.3 million in the second quarter of '05. Parts and service sales increased from 3.4 million in the second quarter of '04 to 3.9 million in the second quarter of '05.

Let's look ahead for the second half of '05. In the second half of '05 we expect strong financial performance, as demand for new trucks remains strong. Our parts and service business continues to perform well as reflected in both our revenue and margin growth. Expense management will remain a focus as we expect to contribute to widening operating income margins.

In June we completed construction of a 41 hundred thousand square foot facility on Interstate 10 which is the new home of our Mobile, Alabama, dealership. In an effort to take better advantage of the large Nashville market, in October we will be relocating our Nashville dealership to a 120,000 square foot facility, which will double the size of our existing Nashville dealership.

We continue to strengthen our geographic footprint as we add to our competitive strength through our geography of performance, plan to enhance overall results, sell more heavy-duty and medium-duty trucks, leverage off our existing asset base, and improve our operating margins. We are now prepared to answer any questions you may have. Operator, please review the procedure for asking questions.

(OPERATOR INSTRUCTIONS) Andrew Obin from Merrill Lynch.

I'm not I supposed to say it, but wrong (ph) every quarter. Can you comment a little bit on pricing in the quarter? And also how it relates to gross margins on new truck sales? Because I think gross margins declined sequentially a little bit. I thought that what was going to happen in the quarter is that you guys are going to get more pricing and sort of (technical difficulty) to your customers. But it seems that the pricing got a little bit worse. I'm just trying to figure out what does it mean for industry pricing, and what are you guys seeing for pricing going through the second half of the year?

Andrew, I think year-over-year quarter was at about 4% from average price. But remember there is a lot that goes into that, other than just looking. You can't just take the 4% as a norm. Remember mix. Mix is the most important thing you have to look at, when you look at your vocational markets, your owner operator business, and your fleet business, and how it mixes in there from a pricing perspective. So I would tell you that the 4%, though, is probably actually pretty reflective of the overall increase.

Now as far as margin goes, it was down just a slight tick. But I think that had more to do with probably a little -- just a slightly more fleet business in there than there was in the first quarter. But we are only talking about maybe 2/10s or so right there. So I don't see that it was that big of an issue.

Again, I would relate it back to mix. Because I would look, as we go forward, vocational business remains extremely strong as we look out right now and look into the future. So I feel pretty good about where margins are going to go in the future. But there was maybe a little more fleet business mixed in, in that quarter.

So I should be thinking about margin improving in the second half of the year. But thinking more in terms of mix rather than just pricing.

Correct. You can't just look at the pricing. Because obviously when you are selling a garbage truck that may have a body on it, versus a road tractor, huge differences. You know, 50% differences in pricing. So you have to know the breakout of all that.

The second question is just I guess on parts and services gross margin. Now, that was a very nice surprise. What happened there?

Well, we just --

I am (indiscernible) well then, I guess, kind of keep going on.

Right, exactly. Doing our job. I think you saw that in the first quarter, if you look back on the first quarter over the fourth quarter. I think if you go back over the last year and take it quarter by quarter, you will see margin improving over each quarter. So we feel good.

We had some changes in -- I will tell you -- a year ago in pay plans for parts sales, for our outside parts sales people. We think that is reflective; it's being reflected in some of the margin increases. We are just -- and mix. Service has grown nicely, and service returns a higher margin. So those would probably be two main driving issues right there.

So if I take the unit that generates the most revenue, and if I take the unit that generates the most profit, both of them should have better margins the second half than in the first half.

On parts and service I can't tell you that it is going to continue going up at the kind of rates you saw in the second quarter. I would not look for that to happen. But I would hope that we could maintain in that proximity of where we were in the first and second quarter.

Thank you very much.

Christopher Martin. (ph)

Hey, guys, great quarter.

Thanks, Christopher.

When we look at availability, and it hasn't really affected you guys in the past, but it's certainly the capacity in the industry is strained right now. Were you guys concerned -- not concerned but surprised at the increase in build rates in Q2 versus Q1?

Well, I don't think we were really surprised so much, Christopher. You know, you saw most of it reflected in the last half of Q2, I think, and more reflective. But there was a lot of parts shortages in the first quarter, and I noticed there has been probably even some more build increases starting to transform here in the third quarter in some areas.

I can't speak to all manufacturers. But I can speak to the ones that I know. So I would tell you I wasn't that surprised that it slightly kicked up. You get out of that first quarter, you get through the parts shortages that they were having, and things seem to level out pretty good towards the middle of April, late April, going on.

Just back on the parts and service margins, how much of that is due to ATS, if anything? Also kind of in the same vein, are we starting to see some of the benefit of having medium-duty truck parts and service at the different franchises at this point?

I will tell you ATS was really not any piece of the margin increase. We are really just -- that is part of the big upside we have in the future. When you hear us start talking, you know we've talked about doing 100% absorption by '06, and we are comfortable we are going to finish this year out. We have already got over 100 this year, and we are going to be there in '05. That is why we have struck the new goal of 110%.

A lot of the upside in that is the ATS acquisition. You must understand that from an absorption perspective they are running roughly 20 points under the rest of my stores. So as we integrate them into our operating procedures, we look forward to them being a big driver towards driving the overall. As mentioned by my father earlier, we are over 108 on a same-store basis in the second quarter.

To answer your medium-duty piece, no. It's really not a big part of the driver. We're just starting to put that equipment into the marketplace, and then it has to age, so it needs -- and comes back for service work and maintenance and everything else that goes with that. So as we continue to accelerate the deliveries of those medium-duty truck, that parts and service business really follows two and three years later.

So that is where we are very excited about where that is going to put us in '07, '08, and '09 as we continue to put more product out in the field on medium-duty side, and continue to add these franchises that we talked about.

Excellent. Just finally, can you give us some sense as to what the ATS sales were in the quarter? So we know, we can kind of back that out and see what the organic was.

Chris, this is Marty. We don't put out store numbers.

Okay. Thanks.

Suffice to say, we said at the end of the first quarter ATS prior to the transaction was about 25% -- I'm sorry, 30% of us, 33%. So post-transaction we've said that they're somewhere in the 25% (multiple speakers).

And that is a pretty good guideline.

That is a pretty good guideline. But we are trying not to give out specific store by store comparisons.

I appreciate it, guys. Thanks.

Adam Thalhimer, BB&T Capital.

Great quarter. Just a couple quick questions here. You're used inventory, how is that looking right now? What is the average age there?

Average age, I will tell you, is probably not 90 days. Usually on a used truck it is less. I think we are turning our used inventory right now at 60 days. You got to realize that normally a used truck takes about 30 days to get it refurbished and ready to go to the line. So we are in no problems there. We have always had in the past, since the last six years, we have put an internal -- we don't keep a used truck any longer than five months. But we really haven't had to deal with that hardly any over the last couple years.

I tell you the inventory is still -- especially quality, good inventory that we like to sell, that we are known for is hard to come by. We have actually added a couple buyers in the last 90 to 120 days to try to keep supplementing that, because we haven't been able to trade for enough equipment. So I would like to see inventory levels in used a little bit higher. But we are doing the best we can in trying to acquire all the equipment we can to support our sales force that is out there and doing an excellent job.

Great. On the availability of Class 8 trucks, that was a good question. I just wanted to dig into, as you look out into 2006 and people race to fill up those production slots later this year, are you guys going to have a problem getting the trucks that you need to meet your '06 new truck sale goals?

Without getting into -- no. I will just answer it that way. Without getting into detail about that, because that is information I really do not want to get into, but I will tell you, no. So I think to meet our goals and the things, what is out on the street, and everything else, I feel good about what we can do as far as supplying the inventory to the organization.

Okay, thanks for that. Finally on the absorption rate, the 110. It looks like that could be hit perhaps in one quarter in the second half of this year.

Well, historically a lot of times it depends on how it falls. You know, we hit -- that is same-store, though. We're not going to hit it overall this year. It's not going to happen this year.

But as I spoke to earlier, the great upside is that the ATS acquisition from the parts and service business, it takes longer to put in place than selling a truck. Okay? Because it takes infrastructure, it takes a focus, it takes maybe a retraining of people sometimes; and that is a year-long process. So we look for that to be a big driver for us in '06 on driving our absorption levels in '06, along with the medium-duty thing.

We hit -- same-store was 108; I don't have the exact decimal points, 108.8; and overall we were over 104 and 104.5 in the second quarter. I don't want to speak to the third quarter, but you know I would expect that it would continue along historical lines.

How about full year SX (ph)? Could that be a 110%? Because you guys just continue to blow away your internal projections for absorption rate, medium-duty truck sales, all over the place.

The 110 for when?

For potentially full year 2006.

I think that is a little strong. I really do think -- you have got to remember, though, fourth quarter being the seasonal issue of the fourth quarter. You have less working days, you have holidays, you know all that combined fourth quarter is historically our slowest quarter absorption-wise. You can look back over history. It is never going to hit the numbers that we hit in the second and third quarter.

Let me clarify something. We gave out a 108 number; that is on a same-store basis.

That is same-store. That doesn't include ATS. It was 104.5 with ATS in the second quarter, which is historically our second-best quarter. It, second and third, are the strongest absorption quarters. We are very pleased with a 10-point increase in same-store, and 6 points including the ATS which -- because ATS drug us down over last quarter (ph) when you put everything inclusive. But if you take it in a positive light, that gives you the growth in the future, when you bring ATS even halfway up to the levels that our other stores are at next year.

So just from a numbers standpoint, right now year to date we're sitting at about 100%, just north of 100%. So what we are trying to say is, combined all stores, we would like to have a goal of getting to 110, which would be a pretty significant increase of 10%.

That is a tough job.

So what we are trying to say is that is not going to be a six-month job. (multiple speakers) 18.

(multiple speakers) '06 issue. But can it be an '07 or '08? Hey, we thought we'd be at 100 by '06, and we believe we will be able to finish the year in '05 over that, so we are ahead of projections. So without taking an exact year, we just feel real good about where we are at, the initiatives, the long-term initiatives that we have in place to meet these goals, and we will take it from there.

great. Just one last thing. Just some numbers for average truck prices. Could you break that out for new Class 8, heavy-duty price, average price, medium-duty average price, and then average used truck price? I think you do that in the Q. But can you break out on the call?

I'll give it to you real quick here. Class 8, you want year to date or quarter?

Just for the second quarter.

Quarter was 106,190 for Class 8; medium was 58,499; and used was 45,863.

Thanks a lot, guys.

Peter Nesvold from Bear Stearns.

I have Chip Miller here too. You made a comment that ATS is tracking about 20 percentage points less than your other stores in terms of the absorption rate. Can ATS close that delta completely? And over what time frame do you think that is possible?

I don't think there is any question that they can. If we did it with the 30 stores we had in place before we took those five on, there is no question in my mind that we can do that.

Time frame-wise? I don't want to sit here and give you a hard commitment. But we have not made any strides really in the first half (inaudible). It's integration issues. You don't just snap your fingers and integrate these. But if you look at what we have done in other acquisitions that we've taken on, such as Florida and other things comes to mind, Oklahoma and things like that over the years, it is a two-year process, a two to three-year overall process. But I would expect in the second half of the year, especially the fourth quarter, third and fourth quarters, we should start seeing trends and their absorption numbers rising.

Remember though, you know, we're going to go into Nashville in October. We are going to have this grand opening of this huge place. You don't walk into a double-size facility and snap your fingers and get the huge absorption increase anyway. That is a six-month process also. But I would tell you in '06 that will be one of the key drivers behind our absorption rate increase.

Historically if you take a five, six year -- if you go back to the year 2000 and track it for six years, we probably have averaged about 3 points a year on average -- not every year is it the same -- but on average about 3 points a year absorption rate growth. So I'll let you take it from there.

But you are always looking for initiatives such as taking ATS up to the levels of our other stores, plus the medium-duty truck business catching hold from the parts and service perspective starting in '06 and accelerating into '07 and '08. So right now those are the long-term initiatives that we have to continue driving it. Plus continue to do a better job operating our existing stores. That is what we are all about, is focusing on operating and going after that nonproprietary business.

Remember, I know I talked to you, Chip, when you were down here, that unlike the car dealership business the truck dealership business, because of the nonproprietary piece, gives us a much wider picture or larger customer base to go after. Just because a gentleman doesn't buy or a business doesn't buy a Peterbilt truck does not mean he's not a parts and service customer of Rush Enterprises. So always keep that in the back at your mind.

Thanks. I guess on the lines of dealership acquisitions, given the integration of ATS, which was a pretty big deal, are you out of the market for a period in terms of acquisitions? Or are you still looking at things?

I don't know. As my father and I look at each other right here and shake our heads, the answer to that is a capital N never.

Never out. Do you think you are more likely to go on the medium-duty side, like a Hino? Or do you end up going into more nameplates, or stay with Peterbilt, or what is the nameplate strategy there going forward?

Without getting specific, those acquisitions or talks with those acquisitions on the medium-duty side are always ongoing. We don't mind telling you about them after they are done. We're not going to pre-talk about them. But there's always talks going on. There currently is.

From a heavy-duty perspective, that is more opportunistic. when the opportunity arises we will do our best to seize the opportunity.

Fair enough. Maybe switching gears for a quick minute. Build rates in the second half of this year, the industry tracked at about 340,000 annualized for the first half of this year. Seasonally, I mean normally we see some plant shutdowns in the August time frame. How do you think that plays out this year? Are we going to do 340 for the year? Or do you think we are down in the second half?

You know, you have got more holidays, remember, in the last half of the year. Count your working days up on a calendar, and you'll find that there's fewer in the last half of year than there is the first half of the year, given the Christmas holidays and just given the seasonality in November with the Thanksgiving holidays, etc. So I think 340 is a stretch, Chip. I mean I'm not a -- you guys are probably better at judging that than I am; but I think that is pretty strong stretch.

I feel I still feel good about the underlying fundamentals. I know everybody was very concerned with the dip in order intake in April and May. You saw some bounce-back in June, and I must let you know that a lot of -- most of your large fleets have still not been placed. Okay? From my knowledge anyway. So I feel good that the underlying fundamentals are still very strong for '06. I think 340 is too strong a number for '05?

But given the underlying fundamentals -- and as we learn more about these engines. Remember, these test engines are running late, guys. I told you they should be out in early summer. I don't expect to have a very good feel out there. There is a scattered, real few. But I don't look for certain (ph) engine till later in September now, because some of them got pushed back just due to normal introduction issues for the '07 engines. So I think that sort of pushed back some of your '06 buying until the customer base, especially from the truckload side, gets a better feel for what is going on with the '07 engines.

But I can tell you the vocational business is extremely strong and continues to be. We have tried to change our mix of inventory to be more vocationally oriented here in the middle of this year. We feel good about everything I just talked about.

Last question and I will hand it off. Are the OEMs accepting orders officially yet for 2006?

Finally, yes.

They are? Okay.

But I don't think you have seen it yet. Okay? Accepting and still finding -- did you say after or for '06?

For '06.

I thought so, Marty was -- okay. Yes, no, yes. No question there is some? They're accepting orders for '06, no question. I think there is becoming some firm pricing. Has it hit all of the customer base? No, because there's the -- you work through that. Just because you give a price doesn't mean it doesn't take another 30, 60 days to get an order booked and everybody find a comfort level with the pricing.

Got you. Okay. Thanks for the time.

Chaz Jones, Morgan Keegan.

Congratulations on a nice quarter here. A lot of my questions have been asked or answered. But maybe if I could just switch gears and ask you maybe another line of questions, in terms of your performance over the last 12 months has been very strong; and earnings estimates continue to go higher on the Street. But the stock really hasn't done a whole lot the last, call it, three or four months. Have you guys given any discussion to a share repurchase program?

Chas, this is Marty. No. I don't mean to be just that quick about it, but actually we're wanting to use the cash that we have to invest in a return that can generate shareholder value and shareholder return. That is why we went out and raised the capital in the offering. For us to go into a share repurchase at this time, we don't think makes a whole lot of sense.

I think the stock, if you look at the performance of it, people have asked us why we feel like the performance has done what it has done over the last, say, quarter to six months or whatever the time frame has been. I think a lot of it is anticipation of what the order board has done. I think people have, in our opinion, misinterpreted what the order board has done. Because I think fleet orders have stretched out from their '06 ordering, as we have talked about in the past.

So what we believe is a blip in the order board has resulted or translated into poor stock performance in spite of what we believe to be good results. So over the long term we think the better use of the cash, rather than repurchasing stock, is to go out and invest it in the business.

I would like to follow up with one thing, Chaz. I think everybody gets caught up in all these macro things, and that is why we continue to try to let people understand the earnings stream of the Company and how the earnings are made. That is why we talk about the back ends and the absorption business. It is not tied directly to the new truck sales.

So as we continue to focus on that sector of the business, and the public and analysts understand how we derive the earnings for a truck dealership, I think we hope to get better recognition for the earnings that we do make. That they are not tied -- we are not a manufacturer. We are not tied as directly to order intake as people perceive sometimes. So, I think we get caught up in the issues, as Marty said.

From a stock repurchase, a year ago, 18 months ago all the complaints we had were about liquidity. So, (technical difficulty) it makes much sense.

Understood. I just thought I would throw that out there. I know you guys don't give guidance. But I'm kind of looking at a feed-the-last-cycle (ph) in '99 and no (ph) absorption rate I believe was about 80%, operating margins were around 4.2%. And kind of fast forward to today, you know, absorption rates now over 100%, the operating margin came in at 4.7% in the second quarter. It doesn't appear that we are at peak yet. It kind of begs the question, how much higher can operating margins go this time around?

You know, Chaz, it is hard for us to throw out an absolute number in that regard. That is why we try to give a little guidance in showing what operating margin and highlight that in this earnings call. We tried to say, look at what operating margins have done when you get high absorption rates and you get throughput of profitability from the sale of a truck.

If I go throw out a number as a percentage, I'm not going to say it is a stab in the dark. We think, and we tried to say, we think it can improve for where it is today, which is higher than the peak of what it was in '99. The third quarter is traditionally our strongest quarter. A lot of it is still impacted by finance. We think that that is going to continue to be strong. So I think our guidance would be we think it can continue to move north, but I'm hesitant to just throw out a number for you.

Understood.

But the operating margin you are looking at now is a much more solid margin than what we had in '92, because it is driven from the parts and service and body shop operations. Back in '99 the margin was more driven by the finance business, which is tied to the truck sales. The solidity of the margin, this operating margin you are seeing right now, is very strong. Okay? It is a very solid margin number.

Last thing here and I will let somebody else have it, there has been a lot of stories out there just in terms of a proposed bill in Congress designed to help fleets or encourage fleets to buy 2007 engine tractors through tax credit and accelerated depreciation. Any thoughts on the likelihood of that happening? And if it were to happen, how that might impact orders looking out here?

I would tell you that if it does pass, or if they come with it, some of the feedback I get is -- of course you are getting some people say, well, I don't want 5%. I heard there is some feedback from some truckload side that says they want 10%, plus the one-year write-off instead of the three-year. So, you know, if it comes out at 5%, and the acceleration and depreciation, there would probably be some impact.

But a lot of it is going to have to do with what the test engines show. Okay? I don't care what the tax implications are; if you're going to keep a truck for four years and the degradation in performance is 6, 7, 8%, you're going to have to give a lot of tax dollars now to make up for all those miles and the degradation of that performance.

Sure. And even if it did get passed, I think a lot of those decisions have already been in place and a lot of prebuying has already started to occur. So it may not change things completely.

No question. I think if you look at some of your public truckloads guys, I think I read yours today actually on one. They said they were taking their average fleet down to 11,115 or something. Is that not correct?

That is correct.

All right. So I think that speaks for the customer base.

Thanks again, guys. I appreciate the time.

Brandon Elliott (ph).

Rusty, congratulations.

Thanks, Brandon, good to talk to you.

The projections on the absorption, I mean how much could ATS -- just getting that to corporate average -- does that alone with just some minor adjustments in other places get you to your 110 goal for -- ?

Let's look at it like this. I am going to -- I don't -- probably talk more than I should. Let's say they are running 80%. I said they are 20 points under. Let's say they are really probably a little more than 20 points under average. But let's use that and be conservative.

If they are 20 points and we make 10 of it back next year, and they are 30% of our business, you can figure there is 3 points or so, 3 to 4 points right there. You tweak some others, maybe you get 4 to 5. Okay? Do you follow me?

Yes.

So, you know, maybe you get to -- these are just -- I don't like to talk about it like that, because sometimes you have got to execute it. But that is the thought process that I have behind it. Then anytime you have got this many operations, there's always some that aren't operating as efficient as others. But that doesn't mean you are going to have others that might drop on you in certain times, and that is what managing the business is all about, and that is why we all have jobs.

But we do believe overall that we can maintain a minimum I talked about of averaging 3 points over six years, 3 or 4 points a year over six years. I would like to believe, with the upside in ATS, that that would be a minimum for us next year. Okay?

You obviously -- I mean when we originally started talking to you, 100% was the goal. Now you have thrown out 110. You have been running ahead of expectations. What has kept you, what has caused you continue to outperform even your goals that you were talking about?

Just a lot of good -- it's our people, okay? A lot of good folks executing a lot of plans that have been in the process. We didn't just start working on this. We might have talked to you all and really put hard numbers on it two years ago. But we have been working on this since '01, 2000 and 2001. We have been working on it.

If you go back to -- we always try to be a little different than the rest of the pack. When the market tanked in 2000, what did we do? We went out and tripled our outside parts sales force while everybody else was laying people off. Then we changed our pay plan. Then we went back and remodified the pay plans last year.

So you know, I mean we run the business the way we see fit. We've got a lot of longevity in a lot of people. We attract quality people. We think we have got the best people in the industry. At the end of the day, we can talk about all these plans and numbers and everything else. But at the end of the day it's people. It's people with good leadership at the local level that are given the freedom of thought and action, that believe in the plans set down by corporate. I'd have to tell you, I know that may sound -- take it for what it is, but it is actual, and that is what works for us.

Great. And your energy business, you guys have talked about having some oil and gas related business. How has that business been? What is your thought there?

Going strong. It continues to be strong. I mean, high oil prices like that continue to drive exploration. So we feel good. We are doing very well in the oil sector. A lot of times in the areas we are in, we are across the Southwest, (ph) you know, in the Texas, Oklahoma areas especially. You don't even -- you can't directly be reflective of one or two particular customers and (inaudible) those small inceder (ph) businesses that you are selling one or two trucks to that we really can't quantify as oil related. But in reality they are driven by that.

So, yes, we get -- so that what happens is when fuel is up, yes, we maybe get hurt on the truckload on our operator side; but from the small guy that is a vocational guy, that is involved in the oilfield business, we get it replaced from a purchase on that side. That is why I talked earlier, as we have tried to -- yes, we have got some pretty strong inventory levels. We believe we have got it price right and we believe in the mix of business, the mix of our inventory. We have tried to change the mix of our inventory more towards vocational business as we've seen fuel prices rise on the truckload side.

So, we're able to support, supplement our owner operator truckload sales with owner operator vocational sales. So, you know, that is the one of the things we have tried to do over the last four months or so as we've watched the fuel prices rise. We have tried to just tweak our mix of our inventory. It doesn't mean the inventories went down, which they obviously didn't. But we tweak the mix to meet the demands of the marketplace.

What are you missing in the business now? What leg either in medium or heavy?

We're always missing something, guy, or we wouldn't be here. I wouldn't have a job if I didn't think we were missing. We just continue to try to get better focus. Right now I'm in here having a conference call with you; I have got three senior VPs and two other VPs that are having conference calls with every (ph) stores that I'm usually involved in for three days. Marty and I are. As soon as we hang up with you all, we are going to get back to that. So we are looking at them individually and I've (multiple speakers) --

How about brands? Anything from a brand standpoint that you feel like you are missing in either medium or heavy?

No, not -- we are pack (ph) our Peterbilt through extremely strong on the Class 8 side; no question. From the medium-duty side it is a different customer base as I explained to people. You have to cover a breadth of product range, and we do that by incorporating, as we mentioned in the statement, Mr. Rush talked about earlier, we incorporate that with the other brands that we represent. We represent them proudly to cover the breadth of that product range. It is different than the Class 8 business.

We are continuing to add. We are working all the time at that right now. Without getting into specifics, we could -- if you asked me, well, what did you do, I might talk about it. But I'm not going to talk about what we have going on until we conclude those various talks and things going on all the time, there.

Keep up the good work.

Dennis Scannell (ph) from Rutabaga Capital.

Hi, Rusty and Marty. Just a couple quick things, and most of my questions have already been answered. Just naively as you look at the slowdown in net orders in the spring, does that translate at all into some softness in unit volumes looking out six to nine months in any way?

I don't think so, because I think the backlog was strong enough to support that. And I think you're going to see a strong influx, if not in July, by August, September, of order intake, simply because you had 195, 200,000 in April or so, I think, 195 of the backlog. Yes, they've dwindled and they've worked that down some, but there was enough solid backlog that you were going through the pricing, you know. Manufacturers wanted -- manufacturers may have wanted 8% and customers wanted to give real commodity increases of 4%, and they are working theirselves out as we speak, and that is what they have been doing since the downtick in order intake.

And I would tell you that order intake will pick back up because the underlying fundamentals -- I'm not going to say it's July for sure, but it started showing obviously in June; it did come up some. July may not jump dramatically from June, but I've got to believe -- this is just our thoughts now, there is no guarantees here -- but our thoughts are for sure by August and September that the order intake will rise enough to more than offset the downtick that we had in April and May.

Got you. Generally speaking, what are your customers saying about their plans for '07? Are they talking about doing -- trying to fill out as much of their longer-term tractor needs in '06? Or smoothing buying in '06 and '07?

As I mentioned to Chaz when we were talking a minute ago, that there are still things out there that will decide that. How the engines perform. As I said, they are late. They were supposed to be out in early summer. There's just a very few out there. We don't have pricing on those engines. You will see more of those '07 engines, real '07 engines running by mid-September or so, I would tell you. Okay? As feedback comes in from that, as you find out about this tax bill that they are talking about, and you -- it is too early to say. Okay?

Every thing is remaining status quo. If you get degradation of performance and a 5, 6, 7, $8,000 price increase or whatever that number is in '07, then you're going to have a huge '06. If you get a little tax bill issue, that may take a little bit out of '06 but it's not going to take a lot. Because as I said, if you have got to drive a truck for four years and you've got 5% degradation of performance, it will take a lot tax dollars to offset that. Then you have to deal with the integration of it.

So I just got to believe that no matter what happens -- and even if you took a little out of '06 and put into '07, is that bad? I can't say that that is bad. So that is all still to be determined, though.

Fair enough. One last thing. Marty, I am not sure I understood. I know you guys don't want to go into details here. But on ATS, did you say that ATS would be 25% of this year's revenues versus 30 to 33% of last year's revenues?

What I was trying to say is when we did the prospectuses and stuff for the offering, when we pro forma-ed ATS in, they were roughly one-third of the size we were prior to completing the transaction. So that post-transaction all-in, if you look at our revenues, they are roughly 25%-ish (multiple speakers).

Got you. That would have been total revenues, not just truck?

That is total, that is all-in.

Terrific, great job.

Sean Nicholson (ph) from Kennedy Capital.

Actually all my questions have been answered. Great quarter.

Thank you.

Andrew Obin from Merrill Lynch.

Just a couple of follow-up questions. Can you by any chance give a breakout on the medium units between Class 4-6 and Peterbilt medium-duty? I believe you do it in your 10-Q, but I don't think you've done it.

I don't have it here in front of me right now, Andrew. If you want to follow-up with a phone call later, I'll be happy to give it to you.

Sure. Just one more. On interest expense in the quarter, I think it was a little bit higher than I was modeling.

What's that again? Start over; I was saying something to Marty.

The interest expense.

Right. Well I think that may be reflective of more interest increases, rate increases, and a little bit more inventory as we thought we had some inventory that we could purchase well, that we have decided to do, to support our stock sales going forward. And with a few more interest increases from our friends at the Fed than we maybe anticipated. But we are comfortable, trust me.

We are very comfortable where we are at from an inventory perspective. Especially with the refocusing in the mix of our inventory, as we try to make sure to be on top of the vocational business that is out there, and not be as tied -- maybe a year ago sleeper truck owner operator, truckload type owner operator sales were a lot maybe stronger than they are now. But vocational business we've seen pick up, so we have tried to fleet (ph) the mix of our inventory.

So is that what I should be modeling for the rest of the year?

I would say inventories will not rise.

I think, Andrew, our expectation is that we had probably the highest level of inventories right now; and that we will be working through those inventories as stock sells for the second half of the year. So the inventory should come down.

From a modeling of interest expense standpoint, this quarter was 3-2 versus a comp last year of 1.5 million. Obviously you've got ATS in there, you have got larger inventories. I would expect that it would come down slightly, but it's not going to be anywhere close to the 1.5 million it was a year ago.

We have to support the type of volume we are doing right at the moment. You have to support them with inventories.

Okay. I will follow-up with you. Thanks a lot.

Mr. Rush, there are no more question at this time.

Think you all for listening in. We will look forward to talking to you later. If you have got any questions, please give us a call.

Thank you. This call is being concluded.