Rush Enterprises Inc (RUSHA) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Rush Enterprises, Inc., first-quarter earnings release conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions)

As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Marvin Rush, Chairman of the Board.

Welcome to our first-quarter earnings release conference call. On the call with me today are Rusty Rush, President and CEO; Marty Naegelin, Executive Vice President; Steve Keller, Vice President and CFO; [Jay Hazelwood], Controller of Rush Enterprises; Derrek Weaver, Vice President and General Counsel. 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, 2009, and our other filings with the Securities and Exchange Commission.

Let's talk about our first-quarter update. We believe 2010 will be another difficult year for truck sales, but we do see encouraging signs of recovery in the general economy and specifically in our industry. Increased freight tonnage, coupled with diminishing excess truck capacity, has resulted in a 10% increase in our Truck Centers' parts, service, and body shop revenues in the first quarter of 2010, compared to the fourth quarter of 2009.

This, combined with continued expense management, resulted in our absorption rate increasing from 92.4% to 97% for the same period. We are optimistic that this increase in our parts and service business is an early indicator that a sustainable recovery has begun and should accelerate throughout the year.

The Construction Equipment market in the territory we serve in Southeast Texas continued to decline. Industrywide, unit deliveries decreased 41% from the first quarter of 2010 from the same quarter a year ago. As a result, our new and used Construction Equipment sales revenue declined $7 million in the first quarter of 2009 to $5.6 million in 2010.

Let's look at an outlook for 2010. While we believe we will continue to see improvement in the back ends of our business, we also believe that 2010 will be another difficult year for truck sales. A majority of new trucks with pre-emission engines have been sold; and the trucks with 2010 emission-compliant engines are now beginning to reach the dealership lots. This new technology comes with a significant price increase, which will limit demand.

As a result, we believe that the new heavy-duty and medium-duty trucks sales will remain sluggish in the second and third quarters of this year. In the meantime, we expect trucks sales with pre-2010 engines to be in high demand.

Looking forward we expect a strong recovery in truck sales in 2011, '12, and '13. Unlike the general economy, we believe that when the Class 8 truck market recovers it will come back fast and strong due to the pent-up demand created by four consecutive years of below-normal replacement cycles.

We recently entered into an agreement to acquire certain assets of Lake City International, a dealer group with 11 locations in Utah, Idaho, and Oregon. This will provide us a significant entry into three Western states and expand our network to 60 Truck Centers. More importantly, it provides us an excellent platform for Rush to build its Navistar Division. We have had the pleasure of meeting with many of the employees of Lake City International, and we look forward to welcoming them to our organization.

Finally, our balance sheet is strong and the Company is well positioned to take advantage of acquisition opportunities. We are confident in our strategy and our ability to execute. Thanks to our employees, we remain a financially strong and profitable Company.

We are now prepared to answer any questions you may have.

(Operator Instructions) Chaz Jones, Morgan Keegan.

Yes, good morning, everyone. Talking about the second and third quarters, you guys have said here for a couple of quarters that you expected that to probably be weaker than the first quarter. When you talk about -- has that changed, I guess? Then two, are you talking more from a truck delivery standpoint and we could see parts and service get better in the second quarter?

I think, Chaz, you are pretty much right on. We do expect that truck sales will be down in the second quarter slightly. But parts and service, as I have said on our last call, that I expected to start rebounding around this time, and it is showing -- the first quarter shows those signs.

And we believe that to continue in the second quarter, as we have said, as capacity and tonnage have reached an equilibrium out there. And I believe that to be the case.

Truck sales will be down, but parts and service should remain stable and growing.

So we could see the top line be under maybe some pressure, but margin improvement relative to the first quarter?

Overall -- yes, overall margin improvement. They are obviously driven with top line down and your parts and service sales up. As you know, it's obviously a more profitable piece of the business for us.

Okay. Then Rusty, has your outlook changed for 2010 just in terms of the overall heavy-duty market? I think last time I recall you had mentioned a number around 105,000 for retail sales for the US.

Right. Yes, Chaz. I mean I looked at the first quarter. First-quarter deliveries were in the, I think, 24,700 range. So obviously if you annualize that it's a little under 100,000. So.

And I expect second and third quarter to be down. So if it changes any, just slightly. I (multiple speakers) take it up slightly, but again towards the back half of the year. Towards that last quarter of the year, the last three to four months of the year would be where you would see it.

Okay, and then last one and I will get back in line, not to hog the call. When we think about the recovery in '11, '12, and '13 -- and I know this is kind of a tricky question. But are you guys kind of thinking that any one of those years it is back to an '06 level on the heavy-duty front? That we could approach retail sales of 300,000? Or are we talking about more traditional replacement demand that is more along the lines of maybe 200,000?

Well, I'll tell you the truth, Chaz; I would have to go somewhere in the middle there.

Okay.

Obviously you're not going to have the emissions issues to deal with, with new technology. And there is no government interference here; it will just be driven by industry and by market demand.

So I would look for a peak in 2012 myself somewhere in the mid 2s would be my thoughts. Somewhere in the mid 2s. It's a little far out for me to forecast exactly where I think it will be in 2012.

Sure.

I would expect something in the mid 2s.

Okay, great. I will get back in line.

Tim Denoyer, Wolfe Trahan.

Good morning, guys. Can you discuss roughly how much of the new and used truck margin improvement came from used truck pricing picking up? Or was some of that from new?

A majority of it was from used truck pricing, Tim. As the used trucks -- as used truck margins or used truck pricing has firmed, especially in the last 60 or 90 days, there is no question that we -- you have got an inventory that you have traded for over the last half of last year. But pricing has firmed here in the first quarter of this year. So by nature, you're going to get a natural pickup in margin.

It is not something that is probably sustainable over the long term; but a couple quarters it's sustainable, because you are dealing from an inventory that you traded for prior, in the prior six months.

Got you. Can you just talk about which parts of the used truck market you are seeing strength in? Is it mostly the one- to two-year-old aerodynamic kind of trucks? Or are the older trucks gaining that same kind of price increase?

Well, you know, it depends on what you define older trucks as. Right now, most trucks that are not over, say, 650,000 and under 600,000 miles and within four or five years of age, anything 2006 and up are holding fairly steady. You're seeing it across the board.

Okay.

Some areas -- the one- to two-year truck is commanding a nice -- but it's across the board. Maybe a little more on those, but it's across the board.

Okay, great. Jumping to parts and service, can you discuss the seasonality that you would normally see coming through the spring season on parts and service business, and how this year has compared to those? And perhaps just how it has gone into April?

Well, it's continuing. What we saw in the first quarter is continuing into April, I would tell you. Last year is not historical, obviously. 2009 was a whole different year, so our comps for 2009 are going to be down. Okay?

It was not a typical year. If you go back in history with us say over the last six years, it did not look like that.

But typically our parts and service business rises through the summer months. As temperatures heat up -- and we are mainly across the southern part of the United States -- it tends to lead to more parts and service business for us. Opportunities for us.

Yes, and the increase you have seen this here, is that normal? Not -- excluding last year, but relative to prior years. Or do you think that's a little bit better?

This is the signs of a recovery, a sustainable recovery. It's what you see -- whenever you start seeing equalization from tonnage and capacity, excess capacity being pulled back into the market to haul freight, obviously you have to spend more maintenance. Maintenance (multiple speakers) get it ready to go run. So it's typical of what you see. It's the beginning signs of a recovery.

Okay. One other kind of one-off question, just wondering if you can confirm. I just heard that there might be some municipalities out there who may not be allowed to buy engines that aren't certified to the 0.2 NOx standard, that are certified with credits. Have you encountered that in any of your sales?

Well, the only thing I'm aware of is out in California, okay? In dealing with the Port of LA out there we've had significant activity out there over the last half of the year or better -- really over the last three quarters of that going on in California. I am not really aware of it anywhere else.

Okay, great. Thanks very much for the time, guys.

Jamie Cook, Credit Suisse.

Hi, good morning. A couple questions. One, Rusty, what are you hearing from -- I know we are not really ordering 2010 trucks yet, but what are you hearing from customers on the preference on the 13 versus the 15-liter truck?

And when do you expect to take orders for the new PACCAR MX engine?

Then in terms of deliveries that you are seeing today with the '09 truck, what percentage is the Caterpillar engine versus Cummin versus like six months ago or three months ago?

You are talking about for the 2010 year model on the Cat question, Jamie?

Well, no -- well yes. But it's like for the transition engines, what are you seeing? I'm hearing that there is a lot more -- the older CAT engines that are out there. So I'm just trying to see if you have seen that change too in your deliveries.

Well, we've seen -- our inventory mix has been such that it's really what you have. When you get down to this point in a changeover, if you have more Caterpillar engines you are going to sell more.

Basically we have been out of pre-2010 Cummins engines, where there was still some availability of pre-2010 CAT engines. So naturally you're going to see a shift when you are comparing those two. Okay?

As you talk about the MX engine, we are selling them right now. We are speccing them and selling them as we speak.

For delivery when?

For delivery starting in second-quarter delivery. Really at the end in June. More or less June delivery I would tell you.

But they don't have EPA certification yet, right?

As far as I know they have passed the first EPA --

Okay, so you can still take -- okay.

You can take orders. There is not delivery going on at this time, ma'am, but --

Until they get the actual final approval, correct?

Right, the final approval we are very comfortable that that will be taken care of in a nice timely manner.

Then just how much --? I mean, what is your sense of --? I know there is not a lot of the Cummins pre-'10. I mean, sorry, the Cummins -- yes pre-'10 2000. The Cummins pre-'10 engine out there. What about how much more is left on the Caterpillar side? Do you have any sense?

Jamie, I really -- just it's down. I mean it's going down quickly. So I don't think there is any issue there with any manufacturers' inventory as far as that goes. Old inventory. It is --

But that can't help your second quarter at all? I'm just thinking about you saying the second-quarter deliveries could be weak. I am just wondering if that is an area of opportunity. You know what I mean?

Jamie, it is possibly an area of opportunity. But you know, I'm not going to sit here and write the second quarter into that and pick the whole second quarter up with that. I am really not.

Okay. Then just a final. Rusty, congratulations on buying the Navistar dealers. I mean as you think about it long-term, have you guys thought about what the contribution could be to EPS over time? Or where the market share is for that business versus where you think it can go over the next couple years? Or any public comments you want to make about that acquisition?

Yes, Jamie, I really don't want to talk about market share or EPS. You know I am not going to do that on the call.

We are excited about the new separate division that we are putting together. We do think there is a lot of growth potential for us.

But as far as getting into specifics right now, I am really not prepared to do that. But it is going to be a separate division of Rush Enterprises, run separate from our Peterbilt division. And we're excited about the growth opportunities that are in front of us and our partnership with that division -- with that manufacturer.

All right. Last, why don't we finish up on Construction Equipment? I mean it sounds like that is still pretty weak. I will tell you I am hearing anecdotally in the channel from some of the suppliers and dealer checks that construction in particular in the regions you serve could -- you know what I mean? -- is starting to show modest signs of life.

Just wondering if you are hearing sort of the same thing anecdotally and whether you think we are near a trough here for your Construction business?

Jamie, this is Marty. I think near-trough might be the appropriate way to describe it. We're at a really, really low run rate on a market size for this 20-county area we serve. As far as improvement, I don't see anything on the foreseeable future that gives us a whole lot of insight as to a robust recovery for sure.

So we think we are pretty much bubbling along the bottom as what we have said before. In terms of [using] the truck business, we think that is probably what is going on in that market right now in Houston.

As oil and gas recovers, that market will recover. It is just kind of like -- when will that happen? So that market, especially on the CE side, is still very much tied to oil and gas. So as oil and gas improves, we'd look to see that improve; but I don't see it happening right now.

Okay. Congratulations, guys. Nice quarter.

Hey, thank you, Jamie.

John Barnes, RBC Capital Markets.

Hey, good morning, guys. Rusty, your commentary in talking about '11, '12, and '13, given that we have had some government intervention in determining Class 8 truck sales for I guess the last eight years or so, in trying to decide what is a consistent level of Class 8 deliveries on a go-forward basis, should we be lopping off the top end? That -- anything over like 250,000?

Is there -- do the numbers kind of reset here, given that you are not going to have the government intervention? You're going to take out the highs and lows. Is there some kind of normalized level?

You know, John, I don't think in 30-plus years I have ever seen a normalized level. Okay? For whatever reasons.

But I do believe, in response to your question, that when you do take out the government influence that we shouldn't have at least for the foreseeable future, that yes, you possibly can take off the highs.

But -- and counter to that is my thought that you have never seen the lows that we just saw either. Right? So countering it.

But I think a big market, you're going to be talking the 250,000, 260,000 US retail. I don't believe you see a 300,000 -- pushing a 300,000 US retail again.

But I have never seen a 97,000 low like it was in 2009 either. So sometimes you can get a little pushback from that, given that the EPA or the government is out of it and not influencing it. But the trough was so deep that the peak can go higher than what you would think.

As I said, there is no such thing as a normalized year in the truck business, in the Class 8 truck business. But I do believe that we're going to see extremely strong years that will average -- if you take the three years together, however they run together, they're going to average somewhere in the -- my thoughts -- in the 220,000 to 250,000 range. I really believe that. 220,000 240,000, somewhere in that range. Averaged.

It's not going to run like that, but '11 will probably be a little bit less than 200,000; but I expect '12 to be a strong, strong year and '13 to follow suit.

You have just got to look at the age of the fleet that is out there and what is on the road. And look at the miles that I see on a lot of these trucks out there right now. They are piling up quickly, and you can't go with this kind of replacement cycle that we are going to continue on the next couple quarters with, and not have some kind of large, large pent-up demand that has to be satisfied.

Okay. Do the same years apply for medium-duty as well? I mean '11, '12, '13. Or is that pushed out a little bit?

I don't know if it spikes quite as big. But yes, '11, '12, and '13 will have to go up because there is going to be pent-up demand there. There just hasn't been replacement.

I realize that mileage, average miles run per unit have been down in the last couple years. But we are talking about putting four years together like this. So regardless of average miles being down, the total miles are still way up on the equipment that is out there, and the total use is still up.

So even in vocational markets, if you start breaking down vocational markets, there has been nothing going to them either in the last three years. So regardless of underutilization, the actual totals -- because of the length of the downcycle -- they are getting rather large. And the age is also piling up.

You add that together in all those environments and all those markets, and I don't see anything but big years in '11, '12, and '13.

All right, very good. Given your outlook for those years, are you doing anything inventory-wise to prepare for that, either on used, new, medium-duty?

No, I think that would be looking a little far out to be preparing inventories for that right now. Okay? It is not too hard to get a truck still.

Even on the used side?

Well, the used side is sometimes a little more difficult. You are going to have -- remember, the used truck business is normally -- people get -- it's not that difficult. It's really a supply-demand business.

So as you look back at what was sold in prior years, it's pretty much going to tell you a lot about what pricing is going to be. We are finishing working our way through the 2006 year probably right now, which was the '07 model trucks. And we will probably continue doing that the rest of the year.

But once you get through that, we didn't sell anything. Okay? We didn't sell anything in '07, '08, '09, 2010. So your supply-side is going to be low. So just by nature with any kind of demand your used truck pricing is going to be very strong.

Okay. On the parts and service side, two things. One, can you talk to -- I have asked you this a couple of quarters in a row. But have you started to see the turn yet in the average dollar amount per service call in your service division? And is there any chance that, because of the age and the miles on the trucks right now, that you could experience a little bit of a bubble in parts and service just given the required maintenance on it?

Well, I think you are starting to see that. We were up 10% sequentially in revenues quarter-over-quarter. As I mentioned earlier on the call, that is maintaining in the first part of April. We are maintaining that, if not seeing further acceleration.

Of course I don't want to say it's a bubble; that is jumping out too much. But it is continuing down the path that it started down in the first quarter.

Very good. Nice quarter, guys. Thanks for your time.

Bill Armstrong, C.L. King & Associates.

Good morning, Rusty. Most of my questions have been answered. But aside from freight, which we know is showing signs of improvement, can you update us on any trends that may be meaningful going on in any of your major vocational markets?

Oh, I would tell you refuse is still fairly strong. The refuse business we feel real good about. Not just with municipalities and also with -- and private carriers. We are excited at where we really see that market going over the next two years. We think over the next couple years we are going to see a very nice, very nice addition to our business in that sector. We will get a lot out of sales out of that sector.

I would tell you that oil and gas is showing signs of recovery. The one big one that is not that you are waiting for is housing. Housing, of course, is the biggest driver there is, and we still don't see any signs of that.

There has been some pickup. I think there is a lot of capacity has gone out of the marketplace. But I know that some of the flatbed companies have had some pickup in their business. But I don't believe it is driven by housing; being driven more by steel and things like that.

So, you know, that would be the biggest is -- housing and auto as we all know, that is the biggest drivers there are. If they could -- when they do pick up, along with the other vocations, which are going to pick up, that drives a lot of that vocational business. When housing picks up, obviously it drives the ready-mix business. It's a big driver. Besides commercial real estate, obviously housing is the biggest thing there is.

But we haven't seen that yet. But as I said, refuse is strong. Mix of business not so strong yet. Oil and gas picking up.

Okay. These Navistar dealerships that you are about to acquire, do they have any particular strengths or weaknesses in terms of whether it is vocational markets or submarkets within freight, compared with your Peterbilt businesses?

Well, I really -- I don't want to get into that much detail here at this moment. I am very excited about the group. It is a fine group.

If you look at where they are located at, they are in a big truckload market area, okay? Utah itself is a pretty big truckload market. So that would be the strongest suit that you see when you look at the overall market.

We are very excited here. This is going to be a separate division for us, as I have stated over and over. We are excited about the growth that we hope to see inside of that division going forward.

Okay. Then just one housekeeping question. Within the medium-duty trucks, how many buses were sold during the first quarter?

Let me pull that sheet here, hold on one second.

98.

98, Steve says.

98? Okay, thank you.

Brian Sponheimer, Gabelli & Company.

Hi, good morning, Rusty. Just on the acquisition, I know you can't speak too specifically, but purchasing 11 Navistar dealerships is clearly a positive signal for their engine technology.

Just from a customer standpoint, can you maybe directionally give some idea as to what your customers are saying about the EGR technology and where you see that fitting into the marketplace?

Well, I think it's a little early for me to say. We haven't even finished the purchase yet.

But as I have stated in the past, that I believe all manufacturers, whatever technology they pick, that they will figure it out. At the end of the day, all engines usually always work. They always have if you look back at history, no matter what technology has been chosen.

So I am comfortable, obviously very comfortable, with the PACCAR [SCR] technology. And I am sure -- and I know Navistar and I am very comfortable that they will figure out their technology also. Then all engines will work going forward and service the marketplace as they should.

Okay, thank you.

Basili Alukos, Morningstar.

Hey, guys, good morning. A follow-up on the International acquisition. I understand if you don't want to comment. But I guess I am wondering in your agreement with PACCAR how the acquisition of expanding more on Navistar, if that is butting up against any covenant or any restrictions that you have with that agreement? And you may have to rewrite that or have an amendment, similar to -- I think there was a similar experience, what happened in the purchase of the [American Truck Source] with the Texas and Tennessee operations where you ultimately had to make an amendment.

Right. No. I mean, understand our philosophy going forward. Now this really doesn't have any effect with our Peterbilt and PACCAR representation. We will continue to represent that as strongly as we always have, if not more. The investments will continue to be strong in our Peterbilt business.

The Navistar acquisitions in our mentality and what we are doing, we will not make Navistar acquisitions in territories where we have Peterbilt dealerships. These will be in other areas where we are not located currently.

That is not our intention -- is to represent two manufacturers in the same AORs, or areas of responsibility. So as we go forward, you will not look to see us make any acquisitions in the territories that we already represent Peterbilt. Okay?

We are committed to Peterbilt in those markets. In the markets that we buy Navistar dealerships we will be committed to Navistar in those markets. So that is our thought process as we go forward. So I hope that explains it.

Yes, I mean I am not accusing you at all, that wasn't the intent. I was just curious at what point may PACCAR kind of realize what --?

Well, I don't believe there is a point there. There is nothing -- that is a separate division. There is nothing contractually or anything else that has any say-so on that.

Got you. Thanks for that. Then a follow-up. For anecdotes as far as the quality or the supply of quality used trucks for one to two years is shrinking pretty considerably. I know PACCAR mentioned on their call yesterday how prices for those used trucks are up $2,500 year-over-year.

I am wondering if you can just comment on what you see the supply of quality used trucks is like today.

Well, if you are talking about one- to two-year trucks, it is exactly right. They are shrinking quickly and there won't be any.

Normally you wouldn't have a one-year-old truck unless you reprocessed it anyway, okay? First, think about that. Who trades a truck after a year?

But look at the markets. You're talking about 97,000 and 130,000 or so US retail. So there really were no trucks put into the marketplace in 2008 and 2009. So just by nature you wouldn't have any, very many on the -- but then also when you add in the fact that people have been looking for one- and two-year-old trucks given the cost increase of new technology, given the emissions issues that are being driven out in California right now, those two combined take up whatever is out there. They really do.

So there is no question that those values of those one- and two-year-old trucks are up. As I said, first off you don't get many of them to begin with. Most (multiple speakers) still running them.

That's a good point. Then kind of follow-up to that, I have heard some thoughts that like the third user in a truck's life, maybe the agriculture, that because there's been such a meager level of purchases the last couple years and then now you have the -- so there isn't that big of a supply of used trucks. And now everyone is desperately looking for a used truck to beat the price increases -- that there may not be ample supply for kind of the third user in the lifecycle of a truck. Like agriculture, like I said, and they may be forced now, instead of going after a used truck, to purchase new trucks going forward in the next year or two.

So I am wondering if that kind of thought process makes sense, if that is something you are seeing, or --?

I don't know that they could support the cap cost of a new truck. So I don't know if -- I don't really see that taking place much, simply because those markets do not provide the income stream to pay for a new truck. Okay?

So it would be very difficult for those third markets and fourth-year markets to -- and I don't necessarily believe they all go into agriculture either. I think they go a lot more into localized hauling. More into hauling gravel around town, things like that.

That is where I see most of them going into, not necessarily agriculture.

But there will definitely be a shortage of supply. As we roll forward, like I said, all you got to look at -- what was sold in 2007, '08, and '09, and what's going to be sold in 2010. So as we go forward, all markets, all used markets will be affected because of the lack of supply.

Great. Those were all my questions. Thanks a lot.

Chaz Jones, Morgan Keegan.

Yes, Rusty, I had one quick follow-up. You guys have done an outstanding job in the downturn of scrubbing the cost structure. I think SG&A is down about 17% from the peak; and if memory serves me right I think headcount is down about 15%.

The first part of the question is, how quickly once business starts to pick up do you have to start adding people and expenses to the cost structure?

Then the second part is, if we look back at '05 to '07, net margins sort of peaked at 2.5% on the business. I am just kind of -- the second part of the question is, should we be thinking of net margins any differently this cycle?

No. I will answer them reverse order, Chaz. Net margins I think are sustainable back to the peaks of the cycle.

Okay.

Okay? I believe we are sustainable in achieving those again, no question. We hope to try to do better, but I'm not going to sit here and guarantee it to you right now. But I do know that we can get back to those peak margins.

G&A, as we go forward, good question. We look to get some leverage obviously as the market accelerates. Now obviously we're not in a -- we're in a business where you are handling parts and turning wrenches and things like that, so it does take manpower to do this. When you strip what we have as we have over the last couple, three years out of the organization, you will have to gradually add back some. No question.

But we are going to do our best to manage that and get as much leverage as we can out of it as we go forward. So I am not going to specifically answer this along some certain timeline for you, Chaz. But we will be managing diligently. Just like we did in the downturn, we are going to make sure that we continue to use the same things we used in managing going down; we will do the same going up. And not get caught up in an environment that is rising on the revenue side. It is up to us to maintain somewhat of a lid on expenses.

Last question and I will drop off again. Is the financing of equipment an issue at all anymore as we look at the near-term? Is that still any type of issue in getting new equipment?

Well, in my mind it is not that big of an issue for the buyer that is in the marketplace right now. If you look at what happens in the peak of the cycle, that other buyer that shows up -- who hasn't showed up yet -- I would tell you that would still be an issue. That second-tier buyer.

Right now the only people really buying are the first-tier buyers, your A and B paper. It's when you get into that other paper that you really don't have any players out there.

But typically, I will tell you, there do start to be finance companies that show up a year or two from now, when the market gets hot, that want to participate, that will buy a little deeper. And I wouldn't expect this to be any different than any other cycle as we go forward.

If you really look at it, you have got to remember, GE just reinvested in the truck retail finance business with their taking over the running the Navistar finance business. So there still are strong players out there that will stay, even though GE has its -- obviously how they have been handling their whole finance division, they are invested in the transportation industry.

Okay, great. Nice quarter, guys.

You bet, thanks, Chaz.

Robert Kosowsky, Sidoti & Company.

Good morning, gentlemen. Just curious, coming out of this downturn and with the more expensive engines coming down the pike, do you anticipate any shifts in buying behaviors amongst your different customer segments?

Like do you think you might see some smaller fleets, or have you seen smaller fleets and owner-operators loading up on used trucks? Or anything to make you scratch your head on that?

No, there is no question. That has been going on. That is why used truck pricing has firmed up pretty good here recently. That has just been a last 60-day phenomenon.

(multiple speakers) like the smaller fleet owner-operator customer segment?

I'm sorry?

Has it been more on like the smaller fleet owner-operator customer segment?

No, not owner-operator. It's been small to midsized.

Your large companies are still going to buy new equipment. Your big truckload carriers, your large vocational companies, they are still going to buy new equipment.

But your small to midsized fleets have looked at packages of 30 here, packages of 70 here I know of. Things like that. There is no question that that is going on.

So that has helped. And like I said along with what's happened on the West Coast with them replacing all those engines has been a big driver for used truck pricing firming up.

I am not going to sit here and tell you it is through the roof or anything like that. But it has firmed up and as we roll forward I would expect it to continue to stay that way. I wouldn't look for any more hits in the used truck market like we had a couple different times over the last three years.

Okay, very good. Then on the parts and service side, have you seen any uptick in what you guys would deem more discretionary I guess services you guys are doing? Like maybe a dent, a fender that you wouldn't have fixed last year but might have fixed back in '06?

No, not really. I don't think I've seen as much on the discretionary side. I think it's been more driven by putting excess capacity and real work and getting maintenance done on a truck. Maybe if it was cannibalized or something during -- when they had excess capacity when they were putting other trucks back into work, they are fixing it and getting it back on the road.

Because they have freight to haul with it. And they are going to take that asset and they are going to haul freight.

Okay. Then just on the International acquisition, the Lake City acquisition, could you give some background on how you were talking to Lake City? And if you could describe maybe the additional acquisition environment out there, given the cycle we are coming out of and your appetite for cash?

I'm really not going to sit here and talk about how long we were talking to them, okay? No, I am not going to get into that.

But I will say that we do believe that there will be opportunities for other acquisitions in that division as we go forward as we work with that OEM and talk with that OEM and work with that OEM on future growth. So as I said, it is a separate division. We're going to go forward with growing that division outside of our Peterbilt division in areas that we no longer are.

So we believe there are opportunities that exist for that. You've got to remember it's a fairly fragmented dealership organization so there will be opportunities, I do believe, as we go forward. But first we're going to get this one closed, and we will just take it from there.

Okay. Do you have any idea how long it would take to do the integration of Lake City into Rush? I know it is going to still be kind of an autonomous unit. But --?

It's an autonomous unit. There is an integration. And you say integration, as I said it will be run as a separate business unit. And I don't believe it to be that difficult to integrate it in, because it's not going to integrate in operationally with my Peterbilt division.

So when you are not integrating it operationally, that takes away a lot of the issues that you typically run into when you are integrating an acquisition.

So it will run operationally autonomously. There will be obviously some backroom functions that will cross over.

You must understand that the reason that we chose this group or this was the group that we chose, was this was a very strong group. It had a strong organization. Okay? They already had an organization in place that we believe will allow us to have -- expedite our growth in the future. That we can leverage off of this group, a very successful strong group. We believe one of the top five Navistar dealers around, so -- if not somewhere in that group.

So that is why we are excited that we can leverage off of that to form and base the separate division on.

Okay. Thank you very much and good luck.

Thank you.

Jack Waldo, Stephens Inc.

Hi, Rusty. I have two questions, maybe bigger-picture questions. One, just wondering as it pertains to both your lines of businesses --

I'm sorry, would you --? It was a little muffled. Could you say that again?

Sure, I've got two questions. Kind of bigger-picture questions. One is, as it pertains to both your lines of business, maybe if we look back to 2006 or 2007, how much capacity have you added? Maybe in terms of truck dealerships or in terms of bays for repairs?

Oh, I'm going to be swagging this one for you. I would tell you -- I speak -- basically we've added markets, okay? I have to look at it as markets.

We've added some new stores since that time. We've entered the state of North Carolina. Obviously we've entered Utah, Nevada -- I'm sorry, not Nevada. Utah and Idaho, with a little piece of Oregon. So it's more about markets to me, for me to explain.

As we increase our footprint we increase our breadth of touch. We have added stores in Oklahoma. We are just opened up, taking us to Oklahoma facility and it opens up here shortly, and tripling the size of it. Okay? It opens up the first of June. We have opened up a store in Yuma, Arizona.

I don't know if I can quantify it for you into percentages right now. But since '06 we have added -- I think we added Waco in that time frame. We added one over in -- well, we added Atlanta in late '06.

So I mean you've got to -- you look at -- I would have to sit here and add them all up for you. But sometimes those little bitty singles along the way while add a lot when you get a huge market pickup.

So what do you want to say? 20%, something like that maybe? I don't know. But that is a swag; I don't have a specific answer for you on that question right now.

The main thing I was trying to understand is you said before you thought your margins could get back to historical levels.

Sure, no question.

I was trying to figure out what your revenue could get back to. And I realize that we might not have a (multiple speakers).

That has to do with size of market now, you know? Do I get a 290,000 US Class 8 retail market? I don't think I get that.

But if you get a 250,000 can you generate the same revenue, I guess is the question?

I would see no reason why we couldn't.

Got you.

Okay? Because I think we have also added some other ancillary things and vocational markets that we are going to be much better in. As we get in -- when those vocational markets -- whether it be refuse, whether it be a mixer or crane or towing -- we have added different other market-specific sales forces and focuses inside the organization that I look to take better advantage of those individual markets as we go forward too.

So, yes, I don't think there is any question. I think the revenue is achievable. In fact, my job is to make it go more than that, and that is what we're working on right now.

Sure, sure. Then my second question is, with your acquisition I understand the strategy. I would like to understand maybe a little bit more how you look at it on the financial side.

When you evaluate these acquisitions are you looking to pay a multiple of book value? Or are you looking to pay multiple of EBITDA? Are you looking at accretion? Is there anything that stands out, how you look at that?

Well, I have got an answer for you, but they are all different. When you look at an acquisition you have to understand more than just what you're looking at on a piece of paper. You have got to understand market size.

What is market potential? How is the market being captured at that time? Are they meeting what should be their market standards or the national standards of an organization?

We look at it -- there's so many different things that go into it. When you look at it like this Lake City acquisition, what is it providing? It's providing a platform for growth for us. So at this time it is the foundation for future growth.

You take assets basically and then you take a multiple of after-tax earnings is how you typically look at it. That's how we -- because you are dealing normally typically with a private owner, always a private owner, who says we are the only private public truck company out there. So it's providing him -- and usually they are exiting the business. So you are going to look at assets, hard assets. And then you're going to pay some multiple of after-tax earnings on a three- or a five-year stream depending on where you are in the cycle.

Typically, our multiple we look -- typically the EBITDA comes in at about a 5.5% to 6%, okay? But there's different factors that go into determining those prices.

But is it fair to say that you wouldn't do a deal if you didn't think it was accretive in year one?

I don't know if I would go there. If I didn't think it was accretive I wouldn't do it. But you're playing a cycle. You know?

You are buying -- what part of the cycle are you buying? I can look back at acquisitions we did in 1999, okay? We bought the Arizona acquisitions at a peak of a cycle. Were they accretive that first year when the market tanked in 2000/2001? But were they a big piece of the large equation of what we are trying to accomplish over the long term? You bet they were.

So -- and a flip-flop of that is you take a Florida acquisition that we did coming out of 2002/2003, where they weren't making any money. And if you looked at it, we paid this huge multiple of earnings, yet we made all that back in two years or less. You know?

You've got to understand the cycle. And there is more to it than just looking at it black-and-white on a piece of paper living in a steady world. It's not that way. So you've got to understand the industry.

Fair enough. Well, you guys should be commended for the efforts you have put forth during this downturn.

Thank you. We appreciate it. It goes to my employees, not to us here in the corporate. It's a lot of effort on a lot of people out there across the 12 states that we currently represent, and across the 15 we are fixing to.

Well, hopefully we get to see the fruits of that labor here in the upcoming years.

That makes two of us. It hasn't been any fun these last three years. It's been a lot of work, a lot of hard work.

But I think the quality of the organization and the quality of the people has shone through time and time again, as we have managed to keep this thing positive and never -- outside of a GM -- actually in the market. But from an operational perspective, never have a losing quarter.

Well, thank you, guys, for your time. Have a good afternoon.

(Operator Instructions) Gregory Macosko, Lord Abbett.

Yes, thank you. I wondered about natural gas conversions vehicles. Do you see anything in terms of commercial vehicles or some of the long-haul trucks? Is there anything going on that you sense in the marketplace?

From that perspective, no. I would say that we have probably been about the biggest participant in natural gas across the country given our focus in Southern California.

When you look at it from a long-haul perspective, it is still an infrastructure-inhibited technology. If you don't have the infrastructure to support the fueling, you can't have the technology. So that is still going to be the biggest inhibitor to that technology.

Now when you get into more localized, when you get into the refuse market, when you get into say the port, some of the ports that are out there, I think you will see not just where it's happened in California. As you go forward I would anticipate other ports if they get under -- as the EPA clamps down on these ports for their emission issues that a lot of these areas are dealing with, you're going to see natural gas come about in a lot of the port areas, not just where it is has taken off in California.

That will continue to grow, and it will continue to grow within municipalities, from a municipal perspective. Because those trucks don't leave the city, so it's easy to get fueling stations and things done.

We've done a lot of propane stuff in the bus business in Texas. We sold I can't remember how many; I would say 400 propane trucks or so in the last couple years into the state of Texas because you can build the infrastructure to support it.

I think if you look now you've got the New York and the New Jersey Ports are already looking at natural gas. But you are limited on the long-haul until you get the infrastructure in place.

But how many roughly? Did you see 5, 10, 100, whatever in your area? Is it all in LA, I guess, or --?

Are you talking about in the ports?

Yes, or the areas in your areas in the last quarter or the last three months. Have you seen anything in terms of conversions?

As far as converting new trucks, selling new natural gas trucks? Or converting old trucks?

Either.

Well, I don't know anything about converting old trucks. I don't think there is anything out there to do that.

But as far as selling new trucks, you bet. We have sold a couple hundred. How's that? Into the Port of LA or are in the process of selling a couple hundred into the Port of LA right now with natural gas. We have sold a lot of natural gas into refuse over the last couple years. That has been going on. A lot more than that.

But no long-haul?

No long-haul. You don't have the infrastructure.

Right.

And without that it doesn't make any sense.

Thanks.

Sir, I am showing new further questions in the queue.

Okay. Well, we appreciate everybody's time and obviously we will talk to you after the second-quarter earnings release sometime in July. So thank you very much for your patience and time.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.