Rush Enterprises Inc (RUSHA) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Rush Enterprises second-quarter earnings results conference call. Just as a reminder, today's call is being recorded. At this time for opening remarks and introductions I would like to turn the conference over to Mr. Rusty Rush, President and Chief Executive Officer. Please go ahead, Mr. Rush.

Good morning, and welcome to our second-quarter 2009 earnings release conference call. On the call today with me are Marty Naeglin, Chief Executive Officer -- I'm sorry, Executive Vice President; Steve Keller, Vice President and CFO; [Jay Hazelwood], Controller of Rush Enterprises; and Derrek Weaver, our Chief Compliance Officer. Now Steve Keller 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. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in our annual report on Form 10-K for the year ended December 31, 2008 and in our other filings with the Securities and Exchange Commission.

Now let's review our second-quarter results. The second quarter proved to be another tough period for the trucking industry and the overall economy. Class 8 retail truck sales in the US were down 40% from the second quarter of 2008 and are on pace to be at the lowest level since 1983. Medium-duty truck sales in the US were also down 50%. Aftermarket parts and service and sales and gross profit at our truck centers declined more than 16% and 21% respectively compared to the same quarter last year.

Decreased freight tonnage and overall weakness continued into almost every market we serve. The freight intensive automotive, construction and oil and gas industries remained particularly depressed during the second quarter. As a result our customers continue to have excess capacity which allows them to delay maintenance on the trucks they already own and delay purchases of new trucks.

In addition, the construction equipment market in Southeast Texas, a territory we serve, also declined by 54% compared to the second quarter of 2008. General Motors' decision to terminate its GMC medium-duty truck production forced us to take a $4.9 million pretax asset impairment charge related to winding down our GMC medium-duty franchises. This action reduced net income by $0.08 per share in the second quarter.

Excluding the GM charge we remain profitable despite dismal market conditions. Our profitability is primarily attributed to our continued expense management that helped us achieve an absorption rate of 95.2% during the second quarter despite a sharp decline in aftermarket gross profit.

Federal income tax credits earned on the sale of alternative fuel vehicles to tax-exempt entities contributed approximately $900,000 or $0.02 to earnings per share in the quarter. A significant portion of these tax credits are passed back to the tax exempt customer and are reflected as selling expense to the Company in the quarter in which the units are delivered.

Since these fuel tax credits and the amount passed back to customers are directly attributable to the sale of a truck they should be considered operating items when analyzing the financial performance of the Company. Our balance sheet remains strong. The Company currently has $121 million in cash and we expect positive [collect] cash flows from operations during the second half of 2009.

Now for our outlook. As expected the second quarter of 2009 was one of the weakest quarters for the Class 8 trucks sales since the downturn began and we anticipate truck sales to continue at a slow pace throughout the remainder of the year. Currently industry analysts forecast 2009 US retail sales of Class 8 trucks to be 93,000 units, down 34% over 2008. Industry analysts also predict US retail sales of medium-duty trucks to be down 35% compared to 2008.

We believe we are at or near the bottom of this cycle, but we cannot predict with confidence when this cycle will end. We have experienced a slight increase in new truck orders scheduled for delivery later in the year, primarily from large fleets looking to replace aged inventory prior to the impending 2010 diesel emissions regulations. But we expect overall new and used truck sales, as well as aftermarket operations, to remain sluggish throughout the remainder of the year.

I remain very confident in our people and their ability to weather this extended downturn. Their continued execution will keep us well positioned for growth when the economy rebounds. We are now prepared to answer any questions you may have. Operator, if you'll please review the procedures.

(Operator Instructions). John Barnes, RBC Capital Markets.

Good morning, guys. Rusty, when I was kind of comparing your actual numbers to my model last night, and obviously there's no great science in my model, but your used truck sales were much better than I was expecting and looked to be up sequentially. Can you just talk to what's going on in the used equipment market?

Right. Our unit sales were up I think about 200 units overall. Even with sales prices, if you look year over year, sales prices are depressed about 20%. But as I look forward, obviously the credit market has had a lot to do with used truck sales, but we have been able to push volumes up. I think as we have managed -- as you know, last year we had some adjustments in inventory valuations. So I believe that's indicative of our inventory being valued properly as we go forward. I would expect used truck sales to continue at basically the same pace they were in the second quarter as we move into the third.

Okay. And when you say credit markets had a lot to do with it, are you talking about the credit markets hampering the sales of used equipment?

Yes, there's no question that there continues to be tightness in the small owner operator and small fleet on the credit side. But we have been able to manage our way through that obviously, as you can tell from the results. But it does hamper that side of the business.

Okay, that was another question I had for you. Can you just elaborate a little bit? Have you seen credit fall at all or is it still very difficult for the smaller fleets and the owner operators to find outside financing?

It's basically about the same as it was in the first quarter of the year. I mean, it hasn't moved a lot. After things loosened up in February or so and March it's basically maintained. It's about as tight as it was then, it hasn't loosened up any, but it probably hasn't gotten any tighter either.

Okay. CapEx, you mentioned in the first-quarter call that your target for the year is $24 million to $27 million. Any change in that target?

John, on CapEx, no. We're doing a good job on routine maintenance CapEx. We're running roughly $500,000 a month on that. That is a moving target, we're sitting here talking about some upcoming dealership expansion projects that we have queued up to go and whether we start those in the third or fourth quarter, or really the fourth quarter at this point, may move that a little bit. But for now we should stay pretty close to that number.

So the $24 million to $27 million?

Yes.

Okay, all right.

And I think -- you know I can talk. If you're talking about cash, CapEx versus -- we have the leasing fleet which will probably be $25 million to $30 million on its own and that's cash neutral. And then I believe the $24 million to $27 million you're speaking of includes routine and construction type CapEx including SAP. If that's what you're defining as $24 million to $27 million, you're in the ballpark.

Okay, very good. D&A was up in the quarter, can you just -- is this the run rate going forward (multiple speakers) depreciation?

No, D&A, John, about $850,000 of that D&A was directory applicable to the GMC charge. We wrote down goodwill related to our GMC franchise of about $850,000 and it showed up in that line item.

Okay, that's where the charge was?

Yes.

All right. When do you start getting the payments? And I guess GM has emerged from bankruptcy so you should be getting what, 25% --?

We received that yesterday, John, just for your information.

So it was 25% of what, $1.8 million?

Correct.

Okay. And the rest is due when you sell the equipment?

Right. There are a few different items that we have to complete and a closure of those which selling of all the equipment is one of them and winding down the business, and when the business is wound down we will receive the remainder.

Rusty, can you talk a little bit about where you are in the process of finding a replacement vendor for the type of equipment that GM was providing?

John, we're evaluating all options at this moment and I really don't want to get that specific on this call at this moment.

Okay. And then lastly, can you talk a little bit either about -- either provide selling price or gross profit margin or something on heavy-duty, medium-duty?

Well, I can tell you from a heavy-duty perspective our margin was down about one-third, okay, of quarter year over year from second quarter of '08 to second quarter now. As far as average sales price, pretty flat for Class 8, but margin was off one-third, obviously reflective of the conditions in the marketplace at the moment, the competitiveness that's out there with volumes so low. And from a medium-duty perspective, that has a lot to do with bodies a lot of time. Sales price is up say 5% or so, but at the same time, sometimes you really have to look at the mix on that to understand that.

Is that being influenced by buses again or --?

No, I wouldn't say it's influenced that much by buses, but there's a slight -- slight.

Okay.

Buses are slightly more expensive than typical medium-duty. As I said earlier, used truck sales prices are down 20% year over year and obviously that's reflective of the valuation of all used equipment coming down year over year.

Okay. All right. One last thing, with the absorption rate coming down the way it did and you guys, I know miles are down and all of that, we're seeing that across the board with -- I think Ryder had the same kind of comments earlier today. But I'm curious, is there anything further you think you can do on the G&A side of the equation, the actual cost side or is this the run rate we're going to see going forward?

John, I guess I want to attack that in two ways. First you got to understand how far we're down. From a G&A perspective we're down over 16% year over year. There's only so much you can take out eventually or you start to ruin your model, the way you go to market, the way you service your marketplace.

So I don't what to say implicitly that there is no way I can take more G&A out of here, but right now we're running at the rate we're running at and I would anticipate that to continue because I believe we've pretty much -- not guaranteeing -- but over the last 90 to 120 days seen a flattening from a gross -- from a sales site. We stopped sliding down that slippery slope over the last 90 to 120 days. So we are where we are from both perspectives.

Could I take out more G&A if I had to? No question. But I mean, it would really get dicey if you did. So we're just going to continue to manage tight like we have. And we'll keep our eyes on the ball as far as the sales side -- or the revenue side of the business goes.

Rusty, thanks for your time as always.

Chaz Jones, Morgan Keegan.

Good morning, guys. I wanted to ask quickly maybe a question for Marty. The SAP transition, where you are in that process, how it's progressing, when that's scheduled to be completed?

Chaz, we, as you know, put it in the leasing stores April a year ago and had a period of time of stabilizing the leasing operations and then commenced on building out the truck store operation. Our most recent installation was July 6 in Austin, which we chose Austin for proximity purposes and the multi-line nature of their enterprise. They represent a lot of different manufacturers, they have a lot of different complexities that other stores don't have.

So, we put that in on July 6, we're pleased with the operational functionality of the system as it is today. In the next several months, let's say through the fall into the early winter time frame, say November, we will anticipate rolling it out to a big store and a medium-size stored simultaneously.

And then once those are done and the functionality is completed for all of those larger store operations, which we don't anticipate any problems with, we'll aggressively start rolling it out probably in the early part of 2010 with an estimated completion of rollout by the end of 2010 to say late first quarter or early first quarter 2011 at the latest.

So 2010 maybe you start to see some benefits, but really 2011 is when the brunt of it may start to kick in?

When you say benefits, obviously as you put a store on the relational database nature of the information flow begins immediately. Now granted it's not historical, it's go forward. Yes, as you start rolling stores onto it you get that benefit of that information.

Okay. And then, Rusty, I guess you commented on the back half of 2009 and the full year '09 just kind of expectations as it relates to truck sales. I think on the last call you had said early obviously, but maybe 140,000 units in 2010. I don't know if you want to add any color to that estimate for 2010?

Well, if I add color it's going to be one direction and that's probably going backwards a little bit. You know, right now I would have to tell you 130,000. But you know, I can't say that with a lot of confidence given the (multiple speakers) we're in right at this moment. I do believe, like I said earlier, I do believe we're sort of bottling along the bottom right now.

It's just hard to find a catalyst out there as you look forward to see that growth in the market place. So we'll just -- it's really economically driven. It's so much industry driven right at this moment or you would obviously be seeing more of a pre-buy in the fourth quarter and going on right now if that was the case.

Is it fair to say even at 130,000 obviously like you said not a lot of visibility on that, but would you say that that's probably more back end loaded in the second half of 2010?

I'd say it's sort of split. I think you get a little overrun in the first quarter because of the engine emissions. People that buy trucks in the fourth quarter may not be delivered until the first quarter depending on bodies and up fits, applications where they go. I would expect the second quarter to be very difficult next year as new technology is introduced. And then I would look for the economy to help drive a pick up in the second half of the year, yes.

Any -- quickly on the construction equipment side, I think prior in some of the Q's you had made some comments that you expect that construction equipment could be down 25% to 30% in 2009. Certainly it looks like that environment is very tough. I wouldn't probably expect that to change here. Do you think second quarter was a bottom for that market and do you kind of build off of that, or is the second quarter where you see it staying for the near term?

I'd have to tell you right now for the near-term the second quarter is where I would anticipate it staying. Unfortunately the downturn in the market place has exceeded our expectations from a construction equipment perspective. And with oil and gas and housing where it is there's nothing going on in those arenas right now. So I would expect it to stay right where it's at.

And then last question, obviously you don't ever give a whole lot of comments on acquisitions. But just in terms of the environment have we gone long enough in the downturn that you perhaps are seeing a little more willingness on the part of the seller? Or have we passed that and you think that you're seeing some light at the end of the tunnel and maybe there won't be as many opportunities moving forward?

Well, we haven't seen as much as it you would anticipate given historical standards in markets like this. So, I would tell you that we'll just be in a watch and see mode as we go forward and continue to monitor it very closely, but I really don't want to comment much further on that.

No, understood. All right, guys, I appreciate the time.

(Operator Instructions). Bill Armstrong, CL King & Associates.

Good morning. I did want to revisit the used truck area. That was also stronger than what I was looking for. Do you think the unit strength is just because prices are down or are you seeing something that's helping out the owner operators?

I'm not really seeing a whole lot that's helping out the owner operators. Our inventory levels are a little higher right at this moment because we have -- even though our dollar figures roughly were flat year over year, our values because of values being down our inventory levels are a little higher, we've taken a couple of trade packages. But we're very comfortable with where they're at and I think that's reflected in the volume of sales that we're seeing. So like I said earlier, I would anticipate that to continue into the third quarter.

Right, okay. On the medium-duty trucks, you sold 638 units, how many buses would be included in that?

On the bus side, let me see here, 83 buses were in that.

Okay. And the impairment charge -- I think you said before about $850,000 of that was in depreciation. Is the rest of it in cost of goods sold?

Most of it, yes. The majority of all that would-be in cost of goods sold reflective of truck inventories and parts inventories. There's about $140,000 of it that's in G&A and the remainder is in cost of sales.

$140,000 in G&A, okay. And do you anticipate any further charges or should that pretty much take care of everything?

No, I believe that will -- I believe we have properly estimated that, but obviously as we wind it down we will be making adjustments on a quarterly basis. But we believe we're right on with where we're at.

Got it, okay. All right, thank you.

John Barnes, RBC Capital Markets.

Just one follow-up, Rusty. Have you seen -- I'm just kind of curious as to new truck sales during the quarter, heavy-duty truck sales during the quarter and the kind of trade ins. Have you seen anybody growing their fleet or are you in an environment where you're doing more one for one type of deals?

If you know anybody, John, I wish you'd give them my number. So, no, I guess the best answer is no. I mean, I can't say there's not someone that bought 10 trucks or something like that that was new. But to any volumes to hit the radar screen, no. Everything has been pretty much replacement, which is one of the things that's hampering, besides the economy, the valuation of used relative to where it is and relative to where it's been depreciated on people's books obviously it's hampering the sale of new trucks.

Given that everyone understands that we have an engine emission issue to deal with here in 2010 and different technologies and things like that, but it's not there given all the things that I reflected on there.

Okay. And then one follow up, you got the question last quarter a couple different ways on pent up demand for maintenance on equipment. And now that you've had another quarter to reflect on the trends you're seeing on the maintenance side, do you think that some of the weaker carriers or maybe some of your customer base is starting to push so aggressive on maintenance that there's going to be this massive catch up? And could your absorption look a lot better in the second half just as some of these companies have to maintain the equipment?

John, we expect that to happen. Second half of the year I can't say that I see that happening right now. There is still excess capacity whether I look at truckload, whether I look at construction, oil and gas, no matter which market segment I look into. I mean I can break it down to auto haulers, to this and that, there is just excess capacity everywhere you look.

And as long as that remains the case I do not expect maintenance to pick up. But when it does start to pick up, when people start putting trucks back to work and that capacity starts being utilized there's no question in my mind that we will see the pickup in the parts and service operations because as they put that equipment back on the road it should ramp up rather quickly and rather dramatically when it does happen.

Okay. And lastly on the maintenance side, have you seen any kind of material mix shift to -- I would assume the answer is fairly obvious, that a lot of your customer base is probably not spending the kind of money they were on additional parts and that type of thing that aren't absolutely necessary. Have you seen a mix shift towards maybe just the more routine maintenance? And if so, does that carry lower margins than some of the other stuff?

Yes, it definitely carries lower margins, the maintenance does because routine maintenance does. There's no question our mix and our shift, because you can look into average prices, average ticket prices, what it is year over year. I have many metrics that I look at and there's no question that people are just doing what they have to to get by.

It's probably most reflective when you look at the body shop business, the body shop business is off further than the parts and service business. Because I can just talk in simple terms here, if you get a bent bumper or a bent fender trucks still pulls, a truck still pours concrete, runs up and down the highway, we do not need to fix that given the environment that you're in and that's the way a customer views it, just the same way we're managing our business, our customer base is having to manage in this very difficult environment that we deal with.

All right. Can you elaborate on the decline in the average ticket on a same-store basis?

I'd prefer not to get into those metrics, I'm just giving you those metrics. I have many other metrics that I don't get into here that we use to manage our business and I really don't want to start getting into those kinds of metrics.

Okay, thank you, Rusty.

I'm just trying to give you some color on it.

All right, I appreciate it.

Chaz Jones.

Yes, guys, just quickly could you remind us do you have any stand-alone dealerships related to those 15 with GM on the medium-duty front?

No, no, Chaz, not at all.

Okay, great.

(Operator Instructions). At this time there appear to be no further questions in the queue.

Thank you very much, Operator, and we'll look forward to talking to you after our third quarter to give you the results of the third quarter. Thank you very much for participating this morning.

That does conclude our teleconference for today. We'd like to thank you for your participation.