Rush Enterprises Inc (RUSHA) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Rush Enterprises Fourth Quarter's Earnings Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, the CEO of Rush Enterprise. Mr. Rusty Rush. Go ahead, sir. Have a wonderful conference.

Thank you. Good morning, and welcome to our fourth quarter and year-end 2020 earnings release conference call. On the call today are Mike McRoberts, Chief Operating Officer; Steve Keller, Chief Financial Officer; Derrek Weaver, Executive Vice President; Jay Hazelwood, Vice President and Controller; and Michael Goldstone, Vice President, General Counsel and Corporate Secretary.

Now Steve 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, 2019, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved annual revenues of $4.7 billion and net income of $114.9 million or $2.04 per diluted share. In the fourth quarter, net income was $41 million or $0.72 per diluted share on revenues of $1.3 billion. We also declared a cash dividend of $0.18 per common share, an increase of 29% over the last quarter. We are proud of the team for their hard work this year, given the tremendous challenges they faced.

Even though demand was negatively impacted by the expected downturn in the industry as well as the effects of the COVID-19 pandemic, our disciplined approach to expense management, previous investments and strategic initiatives and gradual economic recovery in the second half of the year enabled us to achieve strong financial results.

Rush Truck Centers have been fully operational across the country throughout the pandemic. While we'll continue to monitor the impact of the pandemic on our industry, including supply chain issues that may affect trucks and parts availability, we will continue to carefully manage expenses and take a disciplined approach to continued investments in our long-term growth strategy.

As we look ahead, we expect the economy to continue to improve. Demand will increase throughout the market segments we support. And we believe our financial results will significantly improve in 2021. In the aftermarket, our annual parts, service and body shop revenues were $1.6 billion, and our annual absorption ratio was 118.7%. Our annual aftermarket revenues decreased by 9.2% compared to 2019.

This decline was driven primarily by weak demand from the energy sector and COVID-19 pandemic-related issues, including production shutdowns and supply chain interruptions. Our previous strategic investments in technologies, including RushCare, Service Connect and Parts Connect, enabled us to continue to serve customers safely throughout the year.

Looking ahead, we believe the nationwide economic recovery will drive healthy activity from a wide variety of customer segments. We expect parts and service revenues to grow gradually throughout the year and approach our 2019 levels.

Turning to truck sales. In 2020, we sold 10,670 new Class 8 trucks, down 28.8% over the previous year, and accounting for 5.5% of the total U.S. Class 8 market. Our truck sales aligned with the market, which was impacted not only by the expected industry downturn, but also pandemic-related production constraints and supply chain issues. In the fourth quarter, new truck demand increased due to healthy customer spending -- consumer spending, excuse me, strong construction activity and strong freight rates throughout the country. ACT Research currently forecasts U.S. Class 8 retail sales 243,000 units in 2021.

While the overall economy continues to grow, particularly in housing, automotive and consumer spending, we are cautiously monitoring component manufacturers' supply chain issues, which may limit truck manufacturers' ability to meet demand through the year. We believe our Class 8 new truck sales in 2021 will be consistent with the industry.

Our Class 4-7 new truck sales reached 11,311 units in 2020, down 21.8% from 2019 and accounting for 4.9% of the U.S. market. Our decline can largely be attributed to the impact of COVID-19, particularly on leasing and rental and commercial food service customers as well as production shutdowns from some of the manufacturers we represent.

Our fourth quarter results were further negatively impacted by the timing of fleet deliveries. ACT Research forecasts U.S. Class 4-7 retail sales to be 249,500 in 2021, up 7.5% from 2020. Looking ahead, while positively impacted by the overall economy, some challenges will remain for medium-duty truck sales, particularly production lead times. However, with our nationwide inventory ready-to-roll trucks, supporting a wide variety of customers, we believe our Class 4-7 new truck sales will achieve healthy growth in 2021, consistent with the industry.

Our used truck sales reached 7,400 units in 2020, down 4.4% from 2019, due to production breaks of new trucks, used trucks were in high demand in the second half of 2020, which helped strengthen used truck values, approximately 15% higher than the lowest point earlier in the year.

In 2021, we expect demand of values of used trucks to remain strong. It should be noted that due to normal seasonal increases in employee benefits and payroll taxes, we expect general and administrative expenses to be sequentially higher in the first quarter of 2021. Our employees face some tremendous obstacles like this year, and I'm truly grateful to them for their unending dedication to our company, while protecting the health and safety of our customers, co-workers and communities.

With that, I'll take your questions.

(Operator Instructions) Our first question comes from the line of Justin Long.

Congrats on the quarter. So maybe to start with parts and service. Rusty, can you share what you're seeing in January from a revenue perspective? And then just thinking about the quarterly growth of parts and service this year, it's probably going to be all over the place given the comp. So can you give a little bit more color about what you're expecting throughout 2021?

Right. Sure. You bet. I'll be happy to speak about January very well. The acceleration in growth in parts and service has continued, as it was in the back half of the year in January, okay? That said, it's still less than January of 2020. As you look back over -- as you said you want me to look at that quarterly, as you look back over last year, we know it was a little bit lumpy, to say the least. I would expect the first quarter to be maybe not quite back all the way with last year's first quarter, a little bit shy of it.

At the same time, we know -- you think about it, I always told everybody that last year was like a 13-month year, right, because it was about 2 weeks of really March that COVID really took effect, right? So the first quarter had a little COVID effect last year. But -- so it was a -- it will be a fairly difficult, but I believe we'll get fairly close. We started out a little late in January, but we're continuing to see acceleration in our business, pretty much across the board, right?

And I am happy later to go through geographically what it looks like. But at the same time, we are seeing continued growth and acceleration. Again, our comp back last year is going to be a little tough because we hadn't hit COVID yet. Then we get into Q2. And obviously, Q2 is going to be up if all remained the same and we continue down the path we're going. It's going to be up quite dramatically over the last year, right? So you would average that out and think that you would probably -- if you were slightly flat to down in Q1 in Europe, high teens over Q2 of last year, something like that, mid-to-high teens, say that in Q2, you could average the 2 to see where you'd be here at albeit mid-year.

And then hopefully, as we roll through mid-year, we will continue to accelerate, as I said, gradual acceleration. It will look like a lot of Q2, but it's really not. We just take this year -- a snapshot of this year. We expect to continue to see nice gradual acceleration, which is the way I want it to go. I want a nice consistent growth throughout the year back where we're back operating like we do in normal times, where we can see the work of the investments that we've made in the past will come to fruition.

And so hopefully, as we get towards the end of the year, we'll look for something close to a 10% blended growth rate, but they won't be in flat line because of the way last year was when you're comping year-over-year. But we feel pretty good about where we're at, where we're headed in the overall marketplace, pretty much across the board.

That's helpful. And thinking about parts and service gross margins, do you feel like 36% to 37% is the right range to be thinking about for 2021 as well?

I'd like to say 36% when you blend it. You got to remember, I know everybody is going to say, well, sequentially you were up. We had a couple of tougher quarters in the 35s in Q2 and Q3. And obviously, Q4 was up to 36.8% if I'm not mistaken, right? So blended let's say -- I'm sorry. Yes, we had one, well, that was above the 37% during the middle of the year. If yes, if you want to take it and blend it in average it, a lot of it has to do sometimes with timing of rebates and other issues. And also, as we know, it depends on the mix, right?

Obviously, service margins are quite a bit higher than parts margins. So -- but to give you just a flat line broad answer, yes, I think we can maintain 36% blended throughout the year. And we'll try to do a little better as we go. Hopefully, we might have a little higher service growth rate next year. Parts seem to hold in better throughout the pandemic than service did, especially in the middle of it. So -- and I feel good that we're -- from a technician perspective, we had gone down quite a few during the pandemic and also a little bit of evaluation on our part. And we're going to try to steadily add back technicians at a nice, steady pace to support the market as we go forward into this year. And we've seen that over the last 4 months or so. That's what we've been doing. So hopefully, we'll be able to continue that throughout the year. Bring back a little service a little faster, which has a little higher margin. So that will support the numbers that you're talking about.

Great. And last quick one for me. You mentioned in the first quarter, and I know seasonally we always see some sequential pressure in the first quarter. But is there any more color around the step-up in G&A that we should be expecting in 1Q?

I would say it'd be in line with historicals. I really don't want to get into the exact numbers of it. But you can look back, historically, and we have a lot of -- there's a lot of employee benefits, equity comp costs are high in Q1 and all the taxes come back and all your payroll taxes take effect, right? The social security, et cetera, et cetera. People that have maxed out and that you're not paying them later in the year. Those types of things are what we see in Q1, historically, and it's no different this year than the past. So there will be a step up. And then I think you'll see it flattening out and maybe even going down. But I also think at the same time, you'll be seeing a higher -- especially in Q2. I'm counting on your better revenue growth base. We will -- once you get into the middle of the year, our revenue will be far out -- should be far out exceeding our expense growth as we talk about trying to get to -- we've had -- we're basically finishing up, getting everything back to reinstatement when we made the dramatic moves or drastic moves during Q2.

We rolled in most of that in the back half of the year -- back quarter of the year. So we should -- as we get through Q1, I would hopefully see some nice margin retention to the bottom line and the back ends of the business, especially if we can continue to grow them as I think we will.

Our next question comes from the line of Jamie Cook.

A nice quarter. I guess a couple of questions, Rusty, first. In your prepared comments and in the press release, you noted supply chain risk a couple of times. I'm just wondering if you could elaborate where you see that sort of concentrated, to what degree it limits production in 2021 or the forecast out there? And is there potential lengthening the cycle?

And then my second question to you, understanding the energy business is quite depressed for you guys right now. I'm just wondering if that's a potential tailwind in 2021 to your earnings. So if you could comment sort of what you're seeing on that front?

Yes. I'll take it in reverse order. Would we love -- are we counting on energy? No, we're not counting, right. We've sort of changed the company, as you know, over the last 4 years. We used to be quite dependent upon it. We have evolved. At the same time, I don't think we would love to have some energy tailwinds, Jamie. I can tell you that we've seen a better -- obviously, everybody knows the price of oil has been stable and rising a little bit, but that's pretty iffy. The Saudis have held back on supply, and that's allowed the price to my mind to get there.

Are we seeing -- do I see anything? Do we have anything in our numbers? Not really. I would tell you, there's a little bit of activity out there, which is better than 0 that we had, but it is so slight that if I was to sit here and tell you, we weren't even 2% of our parts and -- I am talking no activity on the sales side, okay, on the capital goods side. But slight starting rumblings of a little bit of activity. But if we were less than 2% last year, which we were of our parts and service revenues and gross profit, we're still less than 3%, okay? So -- but it's -- there's a little bit of -- we see a little bit of movement out there, but I am not counting on it. I think it's too fickle.

But to answer your question, if we got it, yes, it probably will be a little bit of a tailwind. So we'll just have to watch it because I just think it's very fickle. Given the price of oil and the reasons why it has risen in my mind. And obviously, consumption is going up, too. As the economies around the world have picked up, consumption has gone up also. So I don't want to dish just on the Saudi's. But at the same time, we'll just have to watch and see if it -- it would be nice if there was, but I'm not going to forecast, okay -- forecast out there right now, but it will be solid. But yes, your basic question, wouldn't it be a tailwind, (inaudible) up.

Now you'll talk about suppliers, okay. We will talk about suppliers, okay. I didn't know any -- the what little I knew about ships a few months ago, probably less than anyone you know, have I had to figure out a lot of yours truck -- trucks used to live in their own world, right? I think I heard very well, I lot hear lately. I have learned more than I ever thought I would. But everything we deal with, I don't care if it's a toaster or an Xbox or TV or whatever, we -- everybody has got chips in it. You only got a few manufacturers. And when they fall down somewhere, you get into some -- I'm concerned that that sub-Tier 3 supplier may be affecting the Tier 2 suppliers to the OEMs in different ways.

I know everybody is scrambling just like you read about the automotive and everywhere else. It's not the same exact chip, but only the same people make them all. So I have concern out there. And it goes around. The ramp-up period is the fastest in 30 years. When you look at the acceleration of what happened with trucks here, we've had big volatile markets that go up, but not that fast, okay? In a lot of the lead times on some of this stuff for 20, 25 or 30 weeks when you get into steel and other things outside of chips. So I've just got concerns. Now this doesn't dampen.

In my mind, it's even not a bad thing, okay? I don't think it dampens demand. Because I think the demand is there, and you start getting 5% GDP and 3% something the next year. I mean, that's going to tell you where your demand is going to come from and the growth in the domestic product. But I think we'll catch it. I think there may be -- I think the supply side will get to it. It's just it ramped so fast, we may be looking later in the summer, okay? The early fall to -- not that -- I think we're good at current levels, but the order intake has been so strong that if folks ramp up across not 1 person or 1 thing in particular, it's just the overall demand because it's not just the truck business, it's the demand for goods across the country.

And so it just stresses the whole supply chain, not just on trucks, I think, from my perspective everywhere. There's going to be stress until the supply side catches up with it. And by the way, it's not just the ramp up. I mean I look around my business. And so just the last few weeks, the shortage of employees from COVID was we had more in November and December, and we have the whole since March. I mean, there's just been a lot of stress points here. And so I just feel that there may be some -- a little bit of stretching out of what the demand -- the order intake demands. I don't know if we can meet them. We'll meet them, it will just stretch it out, which for me is actually a little better thing, okay. I don't think the demand is going away.

Is the supply chain issues, is it just concentrated in chips? Or do you see risk? Or are you seeing, I guess, any other part...

No, I think there's other risks. There's no question. I mean, when you -- and I don't like things I hear. I've heard things as (inaudible) explore, like oxygen in Mexico for acetylene tanks because they said, put it in the hospitals. I don't even know what that means. I've heard other things. I just think I've heard -- I saw the other day about rubber. Okay, you start talking about tires. I think it's going to continue to accelerate and be broader, okay? I do think we'll catch it. I guess -- and I'm not expert on this, but I -- but we need to be cognizant that, that may put some constraints because I know the manufacturers, all manufacturers, not just one. All manufacturers are right raising bill rates. So as they raise bill rates that just continues to put more stress in other parts of the economy, demand, similar type things to build their products. The demand is just huge. It's across the board for all goods. Nobody goes on vacations. They just go buy -- they go buy bicycles (inaudible) and refrigerators or TVs or Xbox'. And it's that way inside of our industry supporting that because freight demand is so strong.

And we just -- it's going to take a bit to catch it. This is my opinion, okay? This is -- I'm not an expert by any stretch. But that's what I see as I look out there and talk to people in other businesses, too, not just in the truck business. We will catch it. But I think it's going to be -- I think you'll see it hit things I haven't thought about today. Clusters, dash, all those types of things are going to be under stress because -- and it's not just us. You've seen what the automotive guys are doing. And I think you're going to find that across the board.

I do believe we'll catch it. But I believe we might be -- and I believe the OEMs will get -- they'll be able to ramp production. I just don't know for sure. They're going to ramp production. Everybody's doing it. Is it enough to meet demand at the levels it should to keep backlogs at a decent level? I don't know about -- that's why I don't know, Jamie. That's why I don't understand. I'm not sure if that makes any sense, what I'm talking about.

Yes. No, that's helpful. Just one more question, and I'll get back in queue. The strength in the margin -- the new and used truck margins in the quarter, the 8.7%. Were that gains on used truck sales? I'm just trying to understand what drove the margin there if that's what it was.

We had a solid new truck margins. But at the same time, record used truck margins, okay? The used truck margins was the best quarter we've ever had, okay? So, everybody says, well, what about sustainability, Rusty? Well, supply side is on the used right now. I got the lowest inventory to used trucks I've had in years. Wish I had more. Normally I don't say that, but I just do, used truck demand. When we shutdown factories for a couple of months and then slowly ramped back up -- let's go back -- when we're starting ramping back up in the summer. Then the odd boom. You had freights blow through the roof, spot freight, spot markets up 30% to 35%. Demand is there, but can't get new trucks. New truck inventory gets taken down on used trucks right behind it.

And so people to meet that freight demand that was out there, well, guess what -- I don't have to explain this topic to you -- it stalled supply/demand, right? So better your margins go up. People are scrambling for product. You're able to get better margins, at least I hope so, is what we get paid to do, my people do. And so that's what happened. So do I -- I'm sure somebody might ask me used truck going forward question. I look for used to remain solid. And as I said that in my -- a minute ago in my notes that I look for used truck to remain solid.

I don't know if the volumes can get there because supply side is a little tight right now, but at least for the foreseeable future, and that won't go forever, as we all know. You used this pretty cyclical. But for now, used should remain fairly strong.

Our next question comes from the line of Andrew Obin.

A lot of stuff in the news about sort of new technologies for trucks, batteries, hydrogen. Maybe can you talk about what you're seeing, how this will impact the industry in the next 3 to 5 years maybe? And maybe give us some thoughts about longer-term projections?

You bet. Well, this could -- you think I ramble. You get rid of your fix to get a ramble here, okay? I'm going to -- I've been trying to get my head around this myself. Obviously, this next decade is going to be the biggest disruptor decade I've seen in my career, okay? With everything going on from a political perspective, from a climate perspective, from every -- hit from every angle. Where we had a pretty stoic last decade from 10 to 20 after going through all the stuff we went through from 2000 to 2010, everybody just drove a few miles in 10 to 20 with not a lot of government regulation or hiccups.

As most folks know, Carb has issued a 2024 and then a goal for 2030 also, right? The rest of the EPA has a 2027 initiative out there. So this is where the -- I don't have time to go into all of it, but the political driver is going to be huge from a requirements -- from emission requirements, right? We all know we're hearing about EVs every day, right? Everybody is hearing EV and hearing about hydrogen.

Well, this is not an add water issue. Technology has not arrived at what people believe and want demand to be. That being said, as we go forward, I guess the best way I can describe it, dealing with all the political issues (inaudible) driving of environmental protection stuff where they are coming out of California, which right now has passed to 2024.

Right now, New Jersey is the only state that's aligned with California for their '24 emissions. Their '24 emissions demands are similar. So you got to understand this to understand what's going to happen with -- from a propulsion or from an engine perspective as we go forward. The '27 EPA, right now, even though it's not finalized, is similar to the '24, saying, we got to have -- knocking down the Greenhouse and NOX, right? I would tell you that what will happen, it's going to be driven a lot by market segments, okay? EVs, as we go forward, as it ramps up, we still don't have -- there's only people out testing them right now. Do not get carried away thinking there are big fleets running up and down the highway with full electric fleets. There are not. Remember barriers to entry, infrastructure, technology, battery weight, all these other things. These are going to be wrapped around. EVs are going to be best suited for operations that return to base on a night leader every day and have set mileages, okay, if I was to look at it and as we go forward. There -- our demands put off, it will come. It will be in more of those types. It will be for sure in your Class 4 and 5, right, I got to believe and in your Class 6 and 7.

Class 8, just from -- it's not going to be in the truckload side. Anybody that thinks that we're going to be running in 5 years electric vehicles that are going to be running long-haul has another thought coming, okay -- another thing coming. That's not going to be the case. The technology does not -- is not suited -- electric technology is not suited to run over the road for long distances like that. Too much weight batteries that were just not there. And I don't think long term even looking out 15 years, I don't believe that it will be in the long-haul Class 8.

I don't want to get into all the different percentages. I've talked to a lot of folks, a lot of manufacturers and a lot of -- and I've got to tell you that actually tomorrow, ACT has a report coming out, and it's an independent report. And Canadian ACT have an electric or alternative fuel report coming out tomorrow that if anybody out wants to pick one up subscribe to it. I would suggest you do. It's a well put together. I've talked to the folks. It seems to be well put together without ulterior motives involved.

So from an independent view, he's got coming out tomorrow, actually. I think he is going to give a pretty good overview of it. But talking to multiple folks, electric is going to be there, but it's going to fit in the segments where it belongs and as we get to it. So I don't look for it to take over, right? If I was to look out, say, to 2030 in Class 8, maybe 12%, 13% of the market. In '24, it might be 3% of the market.

Now if you go to Class 4 and 5, you're going to see that by '24 it might be 1/4 of the market, 26%. And these are just from talking to people, everybody's estimates because it takes -- you can wish and want everything you got. But just because you want an electric vehicle, can your grid support it? The grid can't handle it. You got to go in and work with the electric companies. It's like some folks -- as I say, they think it's like a hairdryer, just plug it in. Well, it's not. There are so many other things that are involved. It's not like just pulling up the pump and filling it up with diesel folks, it's not.

Another thing you're probably going to see is, I think, natural gas and especially RNG, renewable natural gas, I think, you're going to see an uptick in that as we get into the mid decade, okay? I think there's going to be an opportunity for RNG. The people really that studied RNG, they see it's the cleanest thing out there. Remember, electric still got 50% of coal burning at plants, okay? They make electricity.

So I mean, Class 6 and 7, it will probably move up into the -- I mean, next 4 to 5 years, you might have 10%, 12% of it by '24, not now, not '21, not '22, not '23. Probably, when we get into '24 and then probably move up in the 30s by the time you get to 2030. But you're not going to see that across Class 8. You're not going to believe you're going to see those same numbers in 8, just because of applications. Think about electric, there are certain applications, not just long haul, but electric, I don't think it's going to work good for. It will work good in refuse, all right? It will work good. We know it will work in buses. We know it's going to work in that type of stuff in medium products that run around town.

It's not going to work on a dove truck that's sitting on a job site, doing this, that and the other and not moving and waiting for 3 or 4 hours. I mean there's just certain applications, whether it's weight sensitive or this or that, but it's going to be difficult for a while to get to. Now when you ask about hydrogen, folks say that hydrogen is the answer for long haul, okay? I've got to tell you, hydrogen is a little waste out there, okay? That's even further out. Electric is closer to us, even though it's not going to overtake the whole market, as I said. Everybody is a little bit out there thinking that, but hydrogen is further out.

The application of hydrogen, you're talking 10 to 15 years, I think. Just -- I mean, not that they don't only have hydrogen trucks testing them or don't have them now and running them, but infrastructure is huge around that. And costs, fuel costs and other costs, there's still a lot of -- hydrogen is just really a leverage to make future steel with hydrogen, right, at the end of the day, when you get into all this. And I just remember, I'm not a technical expert, but I'm doing my best to keep up with it, while adding a little bit of practicality of things. I think that's where I'm pretty decent at.

It's that little practicality of things when wishes and wants of folks and everybody out there trying to sell toot their own horn. I just think that all fuels are going to be in play for the next 20 years, okay? We're not just all of a sudden in 2030 like they want. Everybody wants to do 0 emissions, and I get that.

And also, these demands we're putting in '24 and '27, they're going to raise the price of diesel dramatically. The price of engines, I don't mean the price of fuel. Fuel is driven by something else. But the price of engines are going to go up dramatically to meet the requirements of the government. I'm talking more than 2006 and '10 and all those, okay? I think the costs are going to go because of the frequent systems and the demands that are going to be put on the diesel engine, okay? It's still nothing cheaper than electric and everything else. But I know -- and you can get into payback periods and all that. I don't know have time on this call.

Again, though, I would -- I've learned a little bit. I'll recommend trying to look up, get that report because I think you -- it sounded like a pretty good report what I've been -- and the snippets that I've been getting from it from an independent view, as it just try to get your arms around where we're headed. So it's hydrogen, but that's out there. It's going to continue to be in the news. But at the same time, I do believe you're talking 10 to 20 years. Electric quicker, market segment driven. You're not going to be able to use it in every segment. But technology still has to rise. Battery -- the battery storage and usage and weight and density, and then you're going to run into problems with lithium or whatever 4 batteries being controlled by certain countries. I'm not going to get into all of it. There's going to be -- I don't think -- if I say, well, costs are going to come down, and they are going to come down. But there's going to be a demand that's also going to drive costs up in certain ways.

So those are things to be sorted out as we go through this next decade. And I probably have rambled long enough. I'm probably not your #1 expert, but I will try to give a little bit of color. Diesel is not going away. I don't care what they tell you. We're still going to be selling diesel trucks in 2035, folks, okay? Especially in Class 8 long haul, I don't see it taking that over. Other applications, as I said, will be where you really pick it up at, but not in certain applications. And so I'll leave it at that. I could probably go on longer, but I probably talked long enough.

As long as I got you going, I'll ask a followup, any thoughts on autonomous?

Oh, boy, you try -- you think I am a scientist here, Andrew. You know me well. Well, all right, let's talk and talk. All right, automation, there's 5 stages of it. Remember, everybody thinks they say autonomous. Boom, there's a truck and there's nobody in it, right? Well, I don't think it works quite like that. There are stages. And by the way, there's a lot of folks. As you know PACCAR just signed up. They're with Aurora. TuSimple is with Navistar. And you've got Waymo out there, and you've got always in park. I mean there's autonomous being worked on as we speak.

There are trucks running up and down the highway in certain states that have been running now for a while, being tested with different levels of autonomous. I do believe that we -- but first off, there's going to need to be some more state laws and regulations passed to allow it, okay? That's got to happen first, okay? There are areas that they are being run right now and tested. No question about it. But does that cover the country? No. Does that cover 50 states? No. There's going to have to be legislation passed, first and foremost, before you can really have autonomous trucks. But you're not going to see Level 5 in my mind because Level 5 means there's nobody in the cab, okay? I don't see that happening for a while.

I do think if you will get some legislation, and you will have a technology going forward that you will get Level 4 maybe in 3 to 5 years in some areas, which that means there's still a driver in the cab. He doesn't have to be right behind the wheel (inaudible) scientist Rusty, which I'm not, okay? But there's a guy in the cab, but he's maybe working on his books or he's doing this or he's doing that, but he's not behind the wheel the whole time.

I think you're going to get that within 5 years or so. But remember, there's still going to be legislation and other things passed to allow that. Full autonomy, Level 5, driverless, I'm not so sure how far down the road. Will it get there, 10, 15, 20 years? I don't know what the answer is, probably. But look, we haven't even gotten automotive cars all the way there yet. And people are much -- the natural human being watching an 80,000-pound vehicle go down the road with no driver, the first thing they're going to do is make right-hand turn to get out of way, okay?

So there's a lot of perception to get through from that perspective, even wherever technology gets to, to be dealing with once we get out there. But I do believe, as I said, you'll get into the lower levels of it, there's no question. As we go forward, there are large fleets that are wanting to rely because what's their big cost is drivers, right? So what's the big error all the time, it's driver. So they're wanting -- because even if they don't get the full autonomy, the skill set required would be less than possibly the skill set that is required now from a driver perspective. So I hope that helps -- I think we're going to get somewhere. I wouldn't look at full autonomous for a while, but I think you're going to get different levels of it. Maybe sooner than you think, 3, 4, 5 years down the road, but we've got to get through the legislative piece first, too, also. You got to get laws passed that will allow such things. I hope that helps.

The next question comes from the line of Joel Tiss.

I hope you didn't put your $500 bonus in GameStop.

Well (inaudible) put it in, I pulled it out. How well it did?

Yes, that's true. So I wondered if we can go in a little bit of a different direction and just talk about some of the lessons you guys are learning around like flexibility on the cost structure because that's pretty amazing. $1 billion decline in revenues and your net income was down $25 million. And so I just wonder how you guys are thinking about holding on to some of that? And what are some of the things that you learned in 2020?

Well, I think I've mentioned on the last call, I learned more than I -- my (inaudible), you know what I thought I ever could, right? It was an interesting year, but it was very learning. It was a hard year and a hurtful year in a lot of ways for everyone, yes. But at the same time, lessons are supposed to be learned in those types of environments. So let me look -- let's look -- I'm going to take it down a little further deeper, Joe. Let's look at the fourth quarter. Let's look at year-over-year Q4. How about that? Revenue is flat. Maybe Class 8 truck sales up a couple of hundred. Medium off $400 million, $500 million if I remember right. I'm going off pretty flat to used, 4% off a little. Parts and service off 6% or 7%. Let me see, net income $0.41 and $0.72. I think we're learning something here.

So we learn anything, we're going to do a better job. I don't -- and by the way, you may look and say, well, your G&A was up, this and that. We strip this out. I tell you look at the results. You can tell I feel pretty good about it. And I feel good about where we're going to be headed with the -- what we have learned about how we can manage. And right now, it was a little muddy in the quarter in a lot of ways. We had reinstatements. We -- I gave out extra money to all the employees and thankful -- very thankful of their hard work and dedication throughout the year. I did this, and I did that. But at the same time, I go back to what I just talked about, and that was the results. When you count the quarters, year-over-year, the biggest change was net earnings. So regardless of how it may look a little muddy inside of there, obviously, expenses were very much -- whole lot better and in line where they should be.

And so I feel really good about that. And that's part of the goal inside of the organization. I mean I was speaking to someone of the things we've implemented, just like sports, guess what, we got salary caps without rush now, all right? So if you grow revenue, you can grow your salaries. It's pretty simple. It's going to be tied to some strict numbers. So there's other -- I don't want to get into it, but there's other things that we learn that we're implementing, not saying we won't add and take care of business and do this, that and the other, but we can do a better job than what we have done historically.

And sometimes, it's hard for you all to see it. Don't look at it in the quarters. Look at it in a year and look at it in the results because quarters can float and fluctuate and things go on, especially as I've been doing reinstatements and this, that and the other. But I feel very, very good. And I think you'll see the results will show that as we go forward.

Look, I think the truck business itself, if you look out there, and that's -- and I can't control sales, but truck sales ought to be pretty good the next 3 years, okay? '24, we'll worry about when we get to it and we started implementing all this other -- all these other costs and stuff in the products. And these technologies are changing. But I will tell you for the next 3 years, you got to feel good about that side of it. And I feel very good about where we're at. I feel very good about what we're going to do with our parts and service business with the initiatives that have not -- we've not squeezed at all. They're not to fruition and not -- and we're continuing to invest and spend money in other ways, and I'm not going to talk about, okay, to support the growth of the future.

So I mean, as I would tell anybody, look at the balance sheet, right? Look at the cash, look at the balance sheet, look at the situation we're at. We're set up to continue to invest and continue to grow and do what we've done and also do it better with the knowledge that we got from last year. I don't know, you know you wanted me to draw axis. You get me going. I get excited about it, but I truly believe that we're a leaner company. And I think we're not alone out there. But I think what we learned is up to us because we have to look back in 2 years and say, hey, we walk to the talk, right? I can sit here and talk to all I want.

What is up to us to execute and talk and that will end up showing up in the numbers hopefully as we go forward.

That's great. Can you give us a little bit of a sense of your best guess kind of a free cash flow in 2021? And just the thinking around your $100 million share repurchase, are you going to do that all more front-end loaded? Or is that more of a longer multiyear rollout?

Well, we better approve that. I can't -- I feel good about what our company is going to do, but I can't control market corrections. So we want to make sure that we're set up, but there's an overall. We're going -- we've been nibbling at it in mind. We're going to probably accelerate that some, but more on a consistent basis. As we go throughout the year, at the same time, we'll have powder there if we believe that we're being just because of a market correction and not a Rush correction or something that we're doing. We feel pretty good about our strategic plan, and that's why we continue to buy at it. And we will probably accelerate that somewhat. Cash flows, Steve and I can answer, but go ahead, Steven, you can.

Our free cash flow, and I know it gets masked in the cash flow statement. But if you just look at the number we printed at the end of the year, even in a year like '20, we grew our cash considerably entering the year with $312 million, that will continue. Free cash flow is going to be, I'll call it, $175 million to $200 million next year. And kind of piggyback on Rusty's answer on share repurchase, we -- our guideline is to try to return about 40% of that to shareholders of free cash flow. That's our capital allocation guideline, but that includes both the dividend, which we just raised considerably. Actually, we've doubled it from a year ago quarter. When you do all the split adjustment, it was $0.09 a year ago, and it's $0.18 now. So that's going to eat cash. And then the balance of that 40% of free cash flow, we would expect to deliver through a share repurchase. And if we see an opportunity to actually repurchase more than that because of market correction, we've got plenty of dry powder to do that.

Yes. The balance sheet still holds a lot of cash, the numbers. We still -- we're still spending a lot of cash, even returning that. So -- and the balance sheet is holding a lot of cash right now. So we're in -- we feel compelled to continue because I don't -- you're going to say what about acquisitions? I don't have a lot of big ones, unfortunately. I wish I could. And we're continuing to look. But with the market as strong as it is, I don't know how -- I don't know what opportunities will be out there and given the breadth of our network already and when you're the largest for 4 or 5 manufacturers already, it becomes a little bit more difficult, so yes.

Well, having a lot of cash is a beautiful thing. Thank you very much.

You bet. I mean, if you really look at it, just piggyback on that real quick. Let me finish it, mam. Is really about -- other than a couple of small items, the only debt we've got is lease trucks and We don't really consider that debt lease trucks and floor plan. We don't really consider that -- that lease trucks as just buy because we got 8,000 plus -- 8,500 plus unit leasing fleet. It's just tagged to an asset, and we always have gain on the sale. We're running conservatively in the floor plan. We turn it 3 or 4 times a year. So it's just a trade payable to us. So we feel like our balance sheet is in good shape. Okay, mam, I'm done for once.

We do have 1 more question left from Brian Sponheimer.

A question for you on -- a couple of questions, lease and rental customers, you had called this out as an area that had been weak. What are you seeing there?

We're seeing strong lease and rental again, right? We've started off the year strong. I mean, typically, and you get separated from lease into rental. Did we deal with -- when we had to -- go back when COVID hit, did you had some of your food service businesses, things like that. When I called it out on the call, I was talking about customers buying vehicles earlier, not necessarily my lease and rental. Which one are you referring to? What my sales are or my lease and rental business?

I'll take both.

Of course, you would. Lease and rental purchases for next year have accelerated, no question. They were way off from lease and rental companies last year. They aren't coming back this year. They can't stay out of the market long. They've got to turn that train, right? Because things roll up. So yes, the lease and rental companies are back in the market, much stronger this year than they were last year.

Our lease and rental business was quite resilient last year. I was very proud of the effort of our lease and rental guys. Well, of course, it wasn't a record year. It was a great year under the situation of what we dealt with. As I look out there right now, typically, we used to always say, you get to Christmas, and this is old school and your rental goes down. Your utilization rates go down. Ours hasn't gone down here right at the moment. So -- and that's indicative of the overall economy, right? Your utilization is in good shape from the rental perspective.

And our lease business, I'm sure will continue to grow. We have been slightly -- we don't grow it fast. We only grow 3 or 4, 5 points a year, but we expect that to continue as we go forward. We run it really conservative, but we run it very profitably in all markets now, especially over the last 5 years. They really turned the game up over the last 5 years, our folks have, and I've been very pleased with the results of our lease and rental business over the last 5 years. And I don't think that's going to change as we go forward.

Yes. That's great. Yes, going back to the cash question, you're sitting on quite a bit of it. What's the M&A environment potential for you to grow? Obviously, I know you can't grow the PACCAR part of your business, but other brands?

Yes. It's tough, man. It's -- when a market gets like -- let's go back, you would have told me in March, April, I thought, oh, boy, I was rubbing my hands together, my -- licking my chops. I thought I was going to get a chance, right? Well, let me accelerate it back up so fast that the opportunities out there dried up pretty quickly. So I would tell you that right now -- am I looking? Yes. If I got anything real and big? No, not really. But that doesn't mean something won't show up. I mean, we're still -- we've still got a JV up in Canada and I have got -- first part of '22, we'll consolidate that to some degree. But outside of that, a couple of little things, but nothing really big that I can say.

Anyhow I would tell you if I have something anyway. So I've never told you to begin with. When the mailman tells you, right do I get it inked up. I'm not going to tell you to begin with. So -- but I would tell you, it's -- we're out there looking, but with the market acceleration like what we've had, a lot of folks like clip coupons. And so instead of taking a buyout, okay? They rather keep clipping coupons. And you've got a pretty good runway. As I said earlier, it looks like there's a pretty good 3-year runway out there for the truck market. Given changes that are coming in the back half of the decade, they're going to demand a lot more cost in products. And when you've got the economy, you start running 5% and 3% for a couple of years here. But we haven't seen that since pretty '09 and pretty since '06 or so, but I don't remember when. So that usually bodes well for the truck business. We'll grow with it.

Yes. Last one. Any change of behavior with -- from customers now that TRATON will be wrapping up Navistar likely in the next few months?

I think the acceptance of -- the 1 thing you don't hear that we used to hear, say, 4, 5 years ago, you had that issue of long-term viability. Just wipe that off the board, okay? That gets taken care of. The other piece, as I see some of their announcements, you'll see some of their alignments, whether it be with General Motors the other day, working on hydrogen or with TRATON, they've already been working collaborating together over the last couple, 3 years. Products that I think will be coming to market, it's not like it just started because they were collaborating anyway on stuff, and they've already taken advantage of the purchasing and doing more and more of that.

So from a customer perspective, it just makes a stronger outlook for the organization. And we feel very good about it. Actually, they're building a new plant down here in San Antonio right now. So there's a lot of -- I think they've got a lot of good things, just like (inaudible). One thing I know is our suppliers, our manufacturers, I feel very good about the folks we represent across the board right now. And so Navistar, I think, is in a better shape they've ever been, in fact are always in great shape. So we feel good about both going forward and also our medium-duty suppliers. They got a little hiccup here or there, but sometimes on the supply side, on the medium side, a couple of OEMs, but I do believe that will all get ironed out and it'll work -- I feel very good.

We do have another one from Joel Tiss.

But I just wondered if you can give us a little bit of a sense of what's behind your next 3 years are going to be strong in the industry? Is that sort of a -- more of a gradual prebuy ahead of all these new zero-emission standards or anything else in there?

Oh, I think you'll see some of that in '23, okay? I think most of it, Joel, this has to do with the economy right now. It's the pace it's running at. I mean people took whatever income they had. They stopped traveling. When is the last time you went anywhere, okay? And then they're excited to spend it, then government stimulus and everything else, the whole goods sector. Well, that's got to get there by trucks. Okay, we're not back to start (inaudible). So -- and until we figure that out, trucks are going to be the way that things are delivered.

And that being said, I think you've got -- you've still got demands for -- on the driver side there are shortages. Then I realize there's distribution changes going on. Everybody says the Amazon trucks running around town. But at the same time, that's actually created more truck drive. It's driven for more trucks because nobody goes to the malls to buy it, okay? Driving home in their vehicles. So it's just created further demand across the board and changes in distribution.

And with GDP being up like it's going to be, and all those other factors, I think it's just that demand is out there. And that's what -- and I believe -- I just don't see -- I mean, I could be wrong. I mean, something -- this economy, we have -- I have my own overall concerns about how much money you can give away, but we're not going to get into all that. I'm not holding that kind of show right now. But I have my own concerns one day. But I do still believe that outside of some big national deal that drives economic recession or something like that, which I don't see now. I have concerns longer-term about that. But it's just going to bode well for truck sales across the board.

And that's -- if you don't see demand, you see freight up. I mean, freight is still up and strong. And I don't think people put as many miles as they used to because distribution dynamics have changed. They don't put as many miles on trucks, et cetera, et cetera. So -- but it takes more trucks to get it done if that makes any sense. So -- there's nothing I see out there that says it's going to be bad over the next couple, 3 years, okay? That's all.

There are no further questions, sir. You may proceed.

Well, great. Well, since it's been a while since we talked to you last time, since it was the Q4 release, we will talk to you in a couple of months in April, it looks like. So thank you very much for your participation this morning. We appreciate it.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.