Rush Enterprises Inc (RUSHA) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Rush Enterprises second-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 turn the call over to your host, Marvin Rush, Chairman of the Board.

Welcome to our second-quarter earnings release conference call. On the call with me today are Rusty Rush, President and Chief Executive Officer; Marty Naegelin, Executive Vice President; Steve Keller, Vice President and CFO; Jay Haselwood, 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 update you on 2010. We were pleased to report the Company has continued to perform, delivering another quarter of widening profits. Our truck dealerships, parts, service, and body shop revenues increased 21% compared to the second quarter of 2009.

This resulted in our absorption rate increasing from 95.2% to 104.3% for the same time period. We expect our backend business to remain strong throughout the year as more trucks are being put into operation with improving freight conditions.

However, retail sales of new heavy and medium duty trucks remained sluggish throughout the second quarter. New truck purchases continue to remain at least less than normal replacement cycles due to the general economic conditions and the transition to the 2010 emissions-compliant engines in new trucks. General hesitancy by truck buyers to purchase new trucks did have a positive impact on used truck values.

The Company's used truck sales revenue was up 19%, and the used truck gross margin more than doubled compared to the second quarter of 2009. We expect used truck values to stabilize in the third quarter and our used truck margins to return to their historical levels.

Despite continuing new truck sales conditions we remain profitable and continue to invest in our future. We formed a new Navistar division and completed the acquisition of Lake City Trucks. We also opened our new flagship truck dealership in Oklahoma City and acquired a Ford commercial franchise.

Let's look further into 2010. Industry experts currently estimate US Class 8 truck retail sales for 2010 to be 108,000 units, up from 97,000 units in 2009. Current industry projections are for US Class 4 through 7 vehicle retail sales in 2010 to be 115,000 units, up slightly from the 114,000 or 115,000 units in 2009.

The average age of truck fleets remains one of the oldest on record, and we believe truck capacity is now in balance with freight movement. As a result, trucks are entering back into service and will need maintenance, indicating that parts, service, and body shop revenues should remain at the improved levels seen in the second quarter.

Both higher used truck values and increased backend revenues are strong indicators that an industry recovery is underway. However, we do not anticipate a significant increase in retail truck sales during the third quarter.

Recently most truck manufacturers have reported increases in new truck orders, indicating that confidence is returning, which we believe will lead to a strong truck sales market in 2011, '12 and '13.

Our balance sheet remains strong, and the Company has been able to generate positive cash flow despite market conditions. We are confident in our strategy and our ability to execute it.

Thanks to our employees we remain financially strong and a profitable Company. We are now prepared to answer any questions you may have.

(Operator Instructions) John Barnes, RBC Capital Markets.

Hey, good morning, guys. Rusty, can you talk a little bit about just the used market and the firming of used truck prices?

We are seeing it a little bit on both sides. The truckers are reporting used truck sales but lower gains on sale of that equipment. Kind of seemed from your standpoint that used prices are firming up. So can you just talk about the pricing environment there?

There is no question, John, that used truck values since January have firmed up. Since the end of last year, starting in the beginning of this year, values have obviously firmed and increased.

What leads to our margins being somewhat higher than what they have been historically is the fact that you've got to remember we traded for these tracks roughly in the last quarter or last half of last year. So as you sell out of that inventory in the first and second quarter of this year, you experience -- as market conditions, as market values go up -- you experience obviously higher margins and higher return on your used truck sales.

But we expect our inventory to become -- get more in line with current valuations and our margins to go down from where they were the last two quarters and get more in line with our historical averages.

Okay. Can you talk a little bit about where your used inventories stand now? Do you feel like they are good enough to handle all of the potential sales that are out there? Or do you feel like you are running a little bit light on inventory?

Well, I would tell you used inventory is down. In fact, we are down 7 million from Q1, roughly 25% from Q1. So keeping an ample supply of used trucks is a daily chore.

We have a few buyers in the field as we look to acquire and to trade -- obviously, to trade. And that will be the key piece. As new truck sales pick up and people trade out of their inventory I would expect our inventories to rise some. But we look forward to that given the demand that we see in the used truck market.

All right. In terms of the backend operations, can you just talk a little bit about -- have you seen a major uptick in the type of service? Are you starting to see more heavy maintenance on the equipment now? Is that average kind of dollar per bill beginning to tick up pretty substantially?

John, I don't have the exact numbers in front of me, but the answer is yes. Obviously as the equipment is put back in play, not just on over the road, but we have had certain vocations that have picked up also in our vocational business. We always purported to be very strong. We have always represented we are very strong in certain vocational markets, and we are seeing a couple such as oil and gas strong.

But also oil and gas and I would say just the over the road truckload side have picked up more than other sectors. We have not seen that type of pickup, say, in the construction market. Okay?

So we look forward to the day that that comes, at the same time.

So it's been fairly broad as I said across a couple vocations and across just basically your over the road carriers. So the average ticket obviously has picked up.

Okay. Then lastly on the backend, in terms of the new acquisition, the Lake Charles acquisition, can you talk a little bit about where they stand in terms of their backend operations versus kind of Rush as an average?

Then how long and what does it take to get those dealerships up to where -- the Rush standard in terms of the backend operation?

I know you are referring to the Lake City, not Lake Charles.

Lake City, I'm sorry. Yes.

No, I would tell you historically they run slightly less than us. But we even see a lot of -- we see a lot of upside. As I toured all their facilities before the acquisition I saw a lot of potential for increased absorption rate as we get them up to our standards.

Now, I will say that in their first month they were up over where they had been running in the prior year to us purchasing them. So maybe we already -- I don't think we had much of an influence on that. You would like to think so.

But in the first five weeks that are in the second quarter of earnings, we were -- they definitely met our expectations of what we anticipated in the acquisition. But we're excited about the possibilities of where we go with Lake City -- and with Navistar in general from there.

All right, very good. Nice quarter, guys. Thanks for your time.

Tim Denoyer, Wolfe Trahan.

Good morning, guys. Can you talk about some of the -- you went into some of the parts and service business. But you said a bunch of it was with trucks being brought back into service at the same time capacity feels more balanced. Do you think that presents any risk of maybe some of that business not continuing? I mean certainly there is an uptick from parts and services as the economy continues to recover.

But do you think there is any downside risk as fewer trucks are brought off the fence?

No, I don't believe that at all, because obviously the trucks are older. They are not going to stop running them once they put them in play. So the more miles they run, the more maintenance they require. So it is not a one-shot deal.

Our mix of business has changed immensely from the last two years. In fact, we don't -- our warranty sales are way off. Obviously because there have not been new truck sales the last couple years. So you see the upside is over in the customer service side.

But no, I don't see -- do I see it flattening? Yes. You're not going to get the continued acceleration that we got in the second quarter going into the third. But I don't see it deteriorating, no.

Okay. Could you talk a little bit about the internal work that you do in the parts and service department when new sales pick up? The benefit you see there?

Yes, historically anywhere from somewhere around 12% or so of our gross profit comes from off the sale of new trucks, okay? On the work that we do on trucks, rigging them, preparing them, putting bodies on, whatever it might be depending on the vocation they are going into. So we look forward to seeing that pick up.

It does offset. If you look historically, even when truck sales have accelerated our absorption rate accelerates also. It does not go backwards. It stays. It remains the same or accelerates slightly even when new truck markets are up.

Got you. And that was 12% of your parts and service gross?

That is correct, typically. It is not right now, but that will be a piece that would help offset the lack of the fleet age coming down as new trucks go into play. So as the fleet age comes down when truck sales do pick up, it's somewhat offset by the work that we perform on new trucks.

Got you. Then last question on the acquisition environment, what are you seeing out there these days? Is there an increase in willing sellers?

Well, I would say that -- I don't really get into a lot of detail about that, Tim. But obviously we are active in the marketplace and looking. And we would hope there would be some more activity down the road.

Okay. Thanks very much.

Chaz Jones, Morgan Keegan.

Yes, good morning, guys. Nice quarter.

Thanks, Chaz.

Wanted to focus a little bit on the gross margin, Rusty, in new and used. 8.6%, that's pretty stout from a historical perspective. Obviously, mix drives that.

Sure.

Should we expect it to get a whole lot better than that moving forward?

No, no, I wouldn't at all, Chaz. I mean it was driven mainly by used margins, okay? New truck margins were slightly up. But as we said, used truck margins were dramatically up as we moved out old inventory prior to the firming of used truck pricing.

Right.

So, you know, I would not expect -- I would tell you -- not expect that to continue. It was mainly driven by used truck pricing, which was market-driven as we sold out of the old inventory that we had traded for prior to the increase in value.

So I'd tell you it was a couple cents driven in the earnings -- that was driven by margin.

Right, right. Okay, so 8.6% -- we're probably not going to see anything really about that.

No.

As fleet sales at some point start to accelerate, that is going to start come back down?

As you know, Chaz, you have followed us a long time, it all has to do with mix. You can look back historically and you have never seen a quarter where used truck -- actual numbers of used trucks sold was higher than new trucks. Okay?

Right, right.

This was, from that perspective, somewhat of an anomaly. But again it contributed to a very nice quarter. But the quarter was mainly driven by parts and service operations obviously.

As I have always told you guys, that would always be the driver that would be the indicator that tells you new truck sales are following right behind as the economy recovers and as the industry recovers as a whole.

Help me think about the heavy-duty market in terms of -- the forecast really hasn't changed here, but yet maybe to some extent -- tell me if I am wrong in sensing in your tone that the second half of the year maybe not be as strong in terms of heavy-duty truck sales as you were anticipating at the beginning of the year?

No, I think it's going to be in line with what we thought. You know, you're looking at about -- you have got to remember the first -- if you look at US retail sales, through the first six months they were still less than 50,000. I think they were 49,800 units. That is only tracking to 100.

So as you get an 18%, 20% increase over the first half, you're only up to 110, right?

Right.

So you are not at any big margin. So percentages, you can't get caught up in percentages.

So if you build and if you put into play an extra 9,000, 10,000 units -- which is pretty substantial on a 49,000 first-half number -- it is really not an absolute number.

So we still look for the number to be somewhere in that range, Chaz. I really believe it is mainly going to be '11, '12, and '13 loaded. I really think when you get into 2011 you're going to see quite an acceleration, I know, in new truck retail sales in the US.

I know order intake has been somewhat strong in the last three months, stronger than any of us would have anticipated. But I am going to tell you not all that was being built right away. Okay? I have a feeling that it's going to be pushed out into fourth quarter, as we have said all along.

Do you still think -- I mean, 4,300 to 4,700 heavy-duty units I think, which was in your first-quarter Q?

Yes, if you're talking about for us, I don't know that we are going to get there.

Okay. I guess that is what I was getting more towards.

That will be a very difficult task for us to get there. It is possible; but it's going to take a big fourth-quarter push to get there.

I don't see the third quarter going up much more over the second quarter, being much more in line delivery-wise. But again, I do believe that the backends of the business will be stable as we go forward.

Does Lake City start to help that some as we move forward, though?

It will help it some. I mean they should be -- from a unit perspective, I would hope that they would drive 250 to 300 units in the second half of the year.

Now that's just -- you are hoping somewhat, and that could be -- that could drag some of it into the first quarter.

But we're very comfortable with what they have on their order board. It's just a matter of getting them delivered, etc., during the second half of the year. We are pleased with the acquisition so far.

Okay. Then last question. Lease and rental seemed to accelerate here. Could you maybe talk about that a little bit?

Well, last year leasing was actually one of the few -- about the only division that was up year-over-year from a growth perspective, from a top-line perspective. So we expect that to continue.

And actually the earnings side of leasing is a lot better this year as some of the growth that we had last year and continuing into this year has gained hold and pushed margins also.

Do you think those margins are sustainable in the mid teens?

Yes.

Okay.

I mean, at peak we've seen then over 20%; but I wouldn't look to tell you that's the way it's going to be.

We expect -- one thing about leasing is you got to remember we run a very conservative leasing fleet. So when used truck values pick up, our gain on sale picks up. Okay? So you must keep that in mind as we go forward. So as we roll out of other inventory, you see it pickup.

One of the other indicators that we see inside of leasing, it tells you how the truck business really is. The truck sales should be.

As our rental utilization has been at historical highs really. The tops of where we are at for the whole first half of this year and especially in the second quarter. So that tells you when your rental -- when you've got a heavy rental demand that capacity is being used up from a truck perspective. And demand is there, and truck sales will follow in line.

Okay. Let me sneak in one more. Could you maybe just talk about the financing end? Has there been any dramatic shift on the finance side just in the overall market?

No. In one quick answer, no.

Okay. That suffices for me.

It's basically status quo as to where we have been. I mean it is not where it was; it is much better.

As I have said, it stabilized here last year, late last year in the third, fourth quarter of last year. But it's pretty much been constant, stagnant from there.

Okay, great. Thanks, Rusty.

Tom Albrecht, BB&T.

Hey, Rusty and everybody. You know, I just wanted to get a feel. I think a lot of the '04 and '05 tractors -- and maybe this is a marketplace question, not just Rush -- have been largely sold. The '06 supply of used trucks being bought.

Where do you see I guess the greatest supply? Is it '06 through '08? Can you just talk about that dynamic a little bit? Because we blew out of so many used trucks so quickly the last six months.

Well, I would tell you that probably what is left is mainly '07. Because remember '07s were built in '06.

Yes.

So they are four-year-old trucks, so what we're going to be working through mainly -- and there are still some '06s out there. Most of your -- you are right in your analysis that '04s and '05s have mainly all move out. Okay?

What you are moving through -- from a first-time buyer perspective. What you are moving through is the remaining '06s and the '07 trucks. Obviously '07 year model was the biggest in history. So we will continue to move through that.

When you start talking about '08 and '09 you start getting into some leaner years. I think it was about 157,000 units retail sold in '07, which were the '08 models.

If you look at some of the things going on with CARB on the West Coast over the last year, a lot of the '08 and '09 models that may have fallen into the marketplace, whether it was through failures or whatever or purchases, have been swallowed up, a lot in California, to be honest with you, and other areas.

So your supply of '08 year model and '09 year models, which were 2007 technology, is going to be even leaner than it would have historically been due to some demand that was created out on the West Coast especially for that technology. So I think you are going to be -- when you get through the '07 year models, you're not going to have -- you're going to have even less than you have historically had off of 157 and a 133 I think it was in '08 retail sales in the US.

So I hope that gives you some flavor of it. But really what we're looking at trading for right now is the remaining '06s and the '07s. Some '08s, but not a lot.

Yes, that will probably be next year, '08s.

Right. And there is not going to be a whole lot. There should not. I doubt there will be a lot of them, Tom.

So is used truck pricing stabilizing or having an issue with used truck pricing? As I look forward, I don't see there being much downside risk to used truck values, to be honest with you.

Yes, I don't need either. What about parts and services growth? You were up about 21% year-over-year. Are we okay to think about 20% to 25% growth based upon what we know with the economy today for the second half of the year?

Sure, if you're going to comp it to last year, year-over-year. What we're doing I believe is sustainable. Okay?

You're not going to see the acceleration as I said earlier that you saw. I mean it's not going to continue to accelerate at that rate. We have already seen that.

But stabilized? Yes, as I'm three and a half weeks into this month, it is pretty stabilized.

Right. Then two other quick things. Have you articulated an AR goal for this cycle? I think you may have, but it gets lost in the shuffle.

And then what about the third quarter? It's natural when a recovery starts to think about taking the numbers up. But it feels like maybe your earnings performance will be more comparable to what we just had, not necessarily a big ramp-up, given the used dynamics you have already discussed.

Tom, you are right on target. Okay? I am not into giving EPS, you know that.

Right.

You can't look for the acceleration from the second to the third that you saw from the first and the second. I mean we've got headwinds and things such as used truck margins not being as good. I mean those were -- we caught the one piece of the seven-year cycle in the first half of this year. You see it once every seven years, Tom, where that happens. (multiple speakers) while.

But we would hope that towards the fourth quarter new truck sales would pick up. But stabilized. But don't look for that type of acceleration.

But we're right where we are supposed to be. We are right where we have talked about '11, '12, and '13, talked about it for the last year. It is progressing as we anticipated it would, and we are very, very excited about '11, '12, and '13.

2010 is working its way just like it is supposed to. I have told you before, parts and service picks up; used trucks come in play; new truck sales follow; and when you got all the drivers that are out there, the oldest fleet on record -- I don't care about miles. People get into not as many miles were driven. Yes, but age is far surpassing miles.

Right.

(multiple speakers) are, so I mean if you look at the trucks we are trading for, they're a lot higher mile trucks than what I have typically traded for in the last four or five years. So it will come. It will come.

And the medium duty strength was a little surprising at least from our end. Was that one-time in nature? Or was that just reflecting the stability of that market not being dominated by for-hire fleets but by general corporations?

Well, I would tell you that, Tom, it was up some, maybe over what your expectations were. But we would expect -- we don't expect it to be up in the third quarter. Some of the OEMs that we represent are trailing with their new engine products. Okay? They are not even out yet.

Right.

So some from overseas are not even out yet and we are only going to be releasing in August, in mid-August on out. So I would tell you it's going to be a little tough on absolute unit deliveries in the medium-duty business for a couple of the OEMs that we represent, because they don't have product right now. Okay?

What happened is we sold -- we had purchased product fortunately. Probably more than we should have, given the anticipation of having that gap. And we are basically about sold out of it, okay? Waiting on new product and for some (technical difficulty) OEMs.

That's helpful. Thank you very much, guys.

Peter Chang, Credit Suisse.

Hi, guys. Congratulations on the nice quarter.

Hey, thanks, Peter.

I'm just trying to dig in a little bit on your Q3 expectations for your Truck Segment. It sounds like with used truck inventories coming down and maybe less unit sales next quarter, are we expecting new trucks to pick up the slack? It sounds like you are thinking that those aren't really going to start accelerating until the turn of the year.

Right. No, I don't think new truck deliveries are going to pick up much, to pick up the used truck slack.

But we're comfortable that our backend, our parts and service businesses, the main driver of what you are seeing right there. When you start running 104% absorption, that number is pretty reflective of that.

When you look at -- that is the lowest new truck sales that we have had since the acquisition of ATS back on January 1 of 2005. Yet we were able to produce a quarter that we are fairly proud of, given the amount of what truck deliveries were, that we believe was pretty decent.

So to answer your question, as I said earlier, things are going to stay about the same we believe throughout the rest of the year until truck sales start accelerating we believe late in the year. Not necessarily in the third quarter, but late in the year.

So we believe we can -- I don't get into earnings per share, but similar numbers to where we're at right now.

Got you. As far as building up your sales force to gear up for the turn here later in the year, when should we expect to see that reflect in your SG&A line as a percentage of sales? Will you start picking that up next quarter?

Well, remember, when you take this -- we break it into two pieces. There is an S and there is a G and an A. Remember, sales are pretty much variable, okay? That is a commissionable, variable component cost of yours. So yes, obviously if truck sales start picking up the S part will go up, because that is a commission-driven expense.

G&A, as I said from a parts and service perspective, I don't mind -- you cannot raise parts and service without increasing your G&A somewhat. When you are handling parts, delivering parts, putting parts on, doing all the things it takes inside of our business, G&A goes up. That is the one, the denominator part of absorption.

And there is also commissions driven to the backends to our parts and service salespeople. Because we have a large, large parts sales organization out there, well over 100 parts salesman throughout -- outside salesman throughout the country that are commission based also that help drive this.

So you know, sales commissions will go up as sales revenues and sales profits go up from a truck perspective, and somewhat on the parts and service side, that follows also.

Great. Well, I will get back in queue. And thanks and congratulations again.

Well, thank you, Peter. Do me a favor. Tell Jamie I said hello and look forward to seeing her when she gets back to work in August.

Definitely. Will do. Thanks.

Congratulations on her new family.

Robert Kosowsky, Sidoti & Company.

Good morning, guys. I was just wondering what would make you bearish on 2011? Like how bad would the economy have to be in order to deliver demand up say 25% versus 2010?

Well, to me, if the economy is bad it is still going to be up 25%. You're getting into percentages again. I don't see any way it is not 135,000, 140,000.

I look for a bigger 2011 from truck retail delivery. So to me that is a bearish economy right there, because industry conditions are such that industry drivers are going to be there. They just are.

I don't see any way, because of the age of the fleet and what is going on out there. But if we only had 130,000 or 140,000 US deliveries I would be highly disappointed next year. When you look out there, projections are out for 170,000, and I am more in line with those kind of numbers.

Okay, thanks. Then do you have any thoughts on the OEMs getting the entire 2010 price increase through? What is the dynamic there between the truck fleets and --?

As I said (multiple speakers) I believe this is unlike in 2007 emissions. This one will have to be passed mainly through. The country was a little more robust, the economy was a little more robust back in 2006 than it currently is. And margins at the manufacturing level last year were driven down to just barely above a breakeven number.

So I do believe that engine pricing will be a pass-through to the customer.

Okay, thank you. Then just one last question. Kind of more broader, what is the difference between a Peterbilt and International dealership from a revenue mix and a margin on new truck sales, used truck sales? Can you just compare and contrast a little bit?

Well, I don't know if I'm -- very similar. I'm going to answer it that way. The differences are not enough for me to get into and drive into all the different revenue streams here on this call right now.

But as far as the model goes, you are driving for absorption, and truck sales at the same time. There may be half a point difference here or half a point difference there, but it's not enough for us to get involved in right now.

All right. Thank you very much and good luck in the second half.

(Operator Instructions) Bill Armstrong, C. L. King & Associates.

Good morning, Rusty. Medium-duty sales were also above what I was looking for. So what was driving that? You had a pretty big increase year over year.

Well, obviously as I said a little bit ago, I think some of the old technology that we had. I would say we had more inventory than our competition. Okay? We did go out and purchase some in the last half of last year in anticipation of what we felt was going to be a gap of product that we have been experiencing, are experiencing as we sit here right now.

So because we had inventory and maybe some of our competition didn't, that helped obviously drive some sales our direction. So that is really the reason if you want to know the truth. It is not so much a demand issue as that we were prepared for it possibly better than others.

Got it. How many buses were included in that medium-duty number?

Buses? Let me get that for you. 101.

101? Could you -- did Lake City have any material impact on either revenues or earnings during the quarter? I know you only had it in there for a month.

I mean it was in there for five weeks. We closed on it May 24.

I wouldn't say material. It was accretive. But I mean when you're in it for only five weeks, how accretive can you really be?

But as I said (multiple speakers) we are pleased with the acquisition. As anticipated, has performed as anticipated and we look forward to be helping the growth of that organization as we go forward. So, yes.

Is their mix between Class 8 and medium and used similar to Rush? Or are there any material differences there?

I would tell you their medium-duty sales might be -- it's similar. I think they may need -- we could do a little better job with some of their medium, but it's similar. What little numbers are in those five weeks are similar to our breakouts, okay?

But I think we see some upside in certain areas, as I mentioned earlier. They do a good job. Do a very nice job. The organization is a fine-run organization. But we do see some upside in certain areas across their geography.

Right. Okay, thank you.

Thank you. I'm showing no further questions at this time.

Well, until our third-quarter earnings release or any other information we have, we look forward to seeing you. Thank you all very much for participating.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference and you may now disconnect.