Rush Enterprises Inc (RUSHB) 2020 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Rush Enterprises, Inc. Results Third Quarter 2020 Earnings Results Call. (Operator Instructions) As a reminder, this conference call may be recorded. I would now like to turn the conference over to your host today, Mr. Rusty Rush, Chairman, CEO and President. Sir, the floor is yours.

Good morning, and welcome to our third quarter 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 quarterly revenues of $1.18 billion and net income of $34 million or $0.60 per diluted share. We delivered a cash dividend of $0.14 per common share. And as previously announced, we declared a 3-for-2 stock split earlier in the quarter.

The COVID-19 pandemic, along with the previous anticipated industry downturn, continued to have a direct result on our financial results in the third quarter. However, when compared with the second quarter of 2020, we experienced a notable increase in revenues, primarily from an increase in truck sales and increased profitability due to our previously implemented expense reduction measures. We remain focused on monitoring COVID-19 and its effect on the economy and our industry. And we are cautiously optimistic that we are not only rightsized to support our customers, but that the economic recovery, though gradual, will continue.

Turning to our operations. In the aftermarket, our annual parts, service and body shop revenues were $400 million. Our absorption ratio was 119.4%. While our revenues declined year-over-year, they did improve 6% when compared to the second quarter of 2020. This was due to the increased aftermarket activity in August and September, especially from refuse, construction and over-the-road customers.

Looking ahead, uncertainties remain about the pandemic and overall strength of the economy. And the energy sector is still much slower than normal and likely will not improve significantly for some time. That said, though, we expect some typical seasonal decline through the winter. We believe that the gradual recovery of the aftermarket business will continue.

In truck sales, we sold 2,584 Class 8 new trucks, which accounted for 5% of the total U.S. Class 8 market. Due to the pandemic and an industry-wide downturn slowdown in Class 8 truck sales, our results were down significantly year-over-year as we expected. However, our new Class 8 truck sales did improve 38% when compared to the second quarter of 2020, and our used truck sales increased 16% compared to the same time period.

Government stimulus payments issued earlier this year, combined with state reopenings, bolstered consumer spending in the third quarter with strengthened freight and spot market rates throughout the country. As a result, we experienced an improvement in quoting and sales activity for new trucks, primarily from over-the-road customers. Further, the availability of the new trucks off the production line was limited due to manufacturing shutdowns earlier in the year. This resulted in an increased demand for stock truck and used truck sales and improved used truck values, which is consistent with what the industry experienced.

ACT Research adjusted its Class 8 retail sales forecast to 186,300 units in 2020, a significant increase from earlier estimates. We are encouraged by our third quarter truck sales results, but we expect COVID-19 and uncertainties about our economic recovery to continue to impact Class 8 new truck sales for the foreseeable future. We believe our Class 8 new truck sales in the fourth quarter will be consistent, though, with our third quarter results, and our used commercial vehicle sales will also remain solid.

Our Class 4-7 new truck sales were 2,941 units, accounting for 4.8% of the U.S. market. These results were up 26% over the second quarter, primarily due to increased activity from landscaping, residential construction and other small businesses. ACT Research is forecasting U.S. Class 4-7 retail sales to be 216,100 units in 2020, another significant increase from earlier estimates. Although we expect medium-duty truck sales will continue to be directly impacted by the uncertainties around the pandemic and the economy in general, we believe our Class 4-7 truck sales in the fourth quarter will remain on pace with our third quarter results.

I am truly grateful to our dedicated employees for focusing on what's important: protecting the health and safety of themselves and those around them while serving our customers and helping our country recover from these challenging times.

With that, I'll take your questions.

(Operator Instructions) We have our first question from the line of Mr. Justin Long from Stephens.

So maybe to start with G&A, continued to see some pretty positive trends on that front in the third quarter. How should we be thinking about G&A in the fourth quarter? And then looking into next year, assuming that ACT number is right on truck sales, what kind of G&A would we see in that environment?

All right. G&A -- one thing I'm very proud of is the reduction in G&A that we've been able to accomplish so far this year. And of course, that's always the question, right? What does it look like going forward? From a Q4 perspective, I'm going to tell you we're going to be relatively flat. We have to eat into some holidays, but you have a few less working days that offset that. So I would tell you, probably relatively flat with Q3.

We are seeing some gradual increases in selling expenses as our parts and service business has picked up. As I've told you, we've got some goals going forward in how much we're going to retain as gross profit continues to grow. We will probably spend less than what we have historically. I'm very confident that we're going to be able to do that. I just finished the conference with all our folks, and I think everybody's got their heads wrapped around it pretty good as we come out of this where we've been with what looks like a pretty good run going ahead of us here, we believe, once we get through this pandemic and all, and things settle down, that -- from an industry perspective that we're going to do a better job of managing these expenses and that -- where we've taken them down to as we go forward -- understanding, though, that it does take a little extra expense and more gross profit, right? We sell parts. We turn wrenches. We do all these things for a -- it's how we make money. But looking out into next year, I would tell you, our goal is to be somewhere in that 35 -- every gross profit dollar we produce in parts and service is going to be somewhere around 35%. Of that, we will probably spend the rest, hopefully dropping to the bottom line. But as a basis, we're using -- I would tell you, look at Q2, not Q3, because we're already seeing -- we're already starting to increase some stuff, but I still believe we'll be close to flat, maybe slightly up in the fourth quarter. We'll just have to wait and see how it pans out. There won't be any big rise, for sure. So -- but that is the goal.

So using Q2 as your baseline, not Q3, from an expense perspective, that would be as we grow gross profit off the Q2 level with the expense from there back in gross profit number. We're not talking about trucks here. We're talking about parts and service, okay? So I'm not talking about trucks; and I would split -- there's S and G&A. We look at it, we manage it separately because S is always a variable component tied to truck sales, and G&A is the overall cost of running the business. So I hope it gives you some flavor on it.

That does. And with parts and service, it sounds like things really picked up in August and September. Have you seen that strength continue into October? And any thoughts on parts and service top line performance in the fourth quarter versus what you just saw in the third?

Well, yes. I don't know that we're going to increase a lot. You look at it -- we look at it as working days a lot. And the fourth quarter is the shortest working day quarter of the year, right? You've got really 3 less. Now we work on Saturdays and stuff, but we measure it by how many Mondays and Fridays you've got. You've got 3 less working days in Q4. So I'm going to believe that we will be slightly off because 3 less working -- yes, 62 days versus 65. So I'm going to believe we'll be slightly off, but I do expect to maintain at least the average per day where we're at.

It's always a little bit -- wintertime is always -- November, December, January and February are not always my favorite months from a parts and service perspective. Holidays are nice, but they're not exactly good sometimes for our business. So -- but that said, I do believe we'll maintain. Some years, we go backwards a little bit in gross profit per day average, but I don't expect that to happen, but you just have less work. And so slightly down from the gross profit perspective, but not dramatically.

We picked up -- really it was quite -- it was interesting that we went from like April, May, June, July were all very similar. We dropped, obviously, as I told you at the last call, March was -- it's a 13-month year. There were 2 Marches. But once we dropped into April, it stayed flat, but we started to see the increases come back in August -- and parts more dramatically; some in service, to be honest. But I think it's sustainable. And I think that once we get through the wintertime, I think you'll see us start growing it again, okay? I really believe that.

We have our next question from the line of Jamie Cook from Crédit Suisse.

I guess, just first question, Rusty. The margins on the truck side were fairly good in the quarter, up from where you were in the second quarter. So can you just talk broadly about trends, how you expect that to progress in trends you're seeing in terms of ordering from the big fleet guys versus more of the vocational markets, where potentially people are slightly more concerned about going forward, just as there's concerns on like state and muni budgets and stuff like that. And then I just guess my second question, if you could just decipher more within your parts and service business -- the margins were a little lower this quarter relative to where they've been trending. Any view on that or just color on what you're seeing, parts versus service with -- in terms of mix within that segment?

You bet. Around truck sales, I would tell you that used -- new truck sales in Class 8 were slightly up. I think used margins were dramatically up. Even though they make up a lot less sales, they were -- used margins were almost -- they were in the 6s last quarter and they were 12, okay? And that was indicative -- okay. That's what really has some effect on it. We were up slightly, I think, 5/10 in new from Q2, but -- in Class 8 new, but really used truck margins were up because -- you have got to remember, the used truck market took the hit, right, in March. Boom, you lose 10%, 12% out of everything, right? So you rightsize your inventory, as we always do, as you finish Q2 and then you roll into Q3, and here comes the market, right? So market picks back up, values go up. And fortunately, we captured some of it, right?

You're marking to market on used all the time because that's a moving target. So we got the good side of it this time, where 6% in Q2 was down from our typical 8% to 10%, because you had the COVID hit and nobody was buying anything for a while; and then when everything picked back up -- because it's when inventory started to move, both on the stock inventories on the new side and on the used side. So that was -- that helped truck margins right there.

From a parts and service perspective, we -- parts more than doubled the growth of service, okay, in the quarter. So -- and remember, parts are a lot less margin than service. Parts run, say, in the 28% range, just varying. It just bounces. But service is typically 65%. So it's sort of a mix issue right there.

I would expect that what you saw, I think, is going to be trough for combined fee in parts and service margins. I don't -- because I think service is going to start accelerating back up, keep more in line with the parts growth, as we go forward. Like I said earlier to Justin, I'm not sure that we'll pick up a lot per day here in Q4. But staying where we're at and maybe picking up slightly on a per day basis is better than we usually do in November, December, January and February. It's just the way it works.

So the reason for the overall margins being -- blended margins being down was basically a mix issue, to be honest, with parts growing at a much higher rate than service in the quarter.

Okay. And then just a follow-up on -- you talked about why the margins were better on the truck side. But can -- how concerned are you about sort of -- or what you're seeing specifically on vocational trends and just concerns out there with, say, municipal budgets? I'm just trying to understand your viewpoint on that.

Yes. I guess I look -- I don't tie vocational totally to government, okay? I look at it in a broader perspective. When you still see residential construction is still strong, okay, at least in a lot of areas we're at, I can tell you. It took me -- I just barely got here for the call between a (inaudible) and all. So I had to go over 3 different ways this morning to get here. It got me 3 -- you couldn't believe how many trucks I had tried to get around hauling aggregate and stuff this morning. But no, you see -- we still believe that the vocational side will, outside of oil and gas, okay? And I understand where commercial building's at. But residential construction in a lot of areas we're at is still pretty strong. And we're still -- when it comes to customers that are in that type of construction, housing construction, road construction, stuff like that, we're still seeing -- I think there'll still been a lot of money spent around those areas.

Now sustainability, folks, I'm not -- I don't know what I can tell you how it's sustainable. I got a 6-month window. I don't -- it's hard for me right now in this environment. I challenge anyone -- I mean, everybody puts stuff out there, but -- to give me a 12- to 18-month outlook with all the uncertainties we've got right now. But I feel decently blessed at -- the margins you saw in the quarter other than used, I don't think that 12 is sustainable, it will still be solid, not 6, more in line with our typical 8 to 10. I would look at the truck margins to remain where they're at, to be honest.

And we have our next question from Andrew Obin from Bank of America.

So a couple of questions. So how should we think about Rush in an upturn? Because you do have specific brands, Peterbilt and Navistar are the big ones, I guess, international. And Peterbilt behaves -- in terms of market share, right, it sort of does not behave like the rest of the market. And then you have your own very industry-specific exposure relative to the industry. So how should we think about your market share relative to the industry in an upturn over the next, let's say, 12 to 24 months? Are there going to be any big differences?

No. I don't believe so, Andrew. I mean, when you look back -- I will tell you this, I would hope that our market share from Class 8 troughed in Q3, that that 5% is the bottom. We have historically been a high 5s to low 6s, in that range, depending on what the volume is. And I would anticipate that we will -- I don't think Peterbilt's market share is going to fall off. I look back at what they were in 2019, a big year, and it was solid. It was solid on historical terms. And Navistar's market share, I believe, will continue to grow as they go forward.

So I feel pretty good about where my Class 8 OEMs are, and I would look for us to maintain where we historically have been. Probably the biggest headwind for us, to be honest with you -- I think we're capturing new customers. But folks, we used to sell oil and gas trucks. I feel like that would -- that's one of the reasons I'm so proud of the print and the prints we've been having is because we've done that without O&G. And we couldn't have done that 4 or 5 years ago. So the organization has done a very nice job of -- you look at our exposure, Oklahoma, Texas, Colorado, New Mexico, lots of oil and gas places, right? And we've had to do all this with huge declines in those areas and sort of reinvent ourselves around it, and I'll let the results speak for theirselves.

I guess what I was -- yes, what I was referring to, maybe we can take it off-line, but I always thought you have more exposure to vocational. And so at the peak of the cycle when large fleets come in, that's when you sort of lose some market share just structurally and particularly Peterbilt would. But that's what I was referring to specifically. If you think...

Yes. So I think if you look -- historically, you could have been right, Andrew, back years ago. But if you look at the last uptick, no disrespect, in '18 and '19, they grew market share, okay? And those were big market over-the-road years, too. So they've broadened their customer base. And from our perspective, Navistar's back in the game, okay? So we feel very good. I'm not worried about the size of the market and us getting our share, just to answer it. I wish I had oil and gas, and I'd do a whole lot better than what you're seeing, but I don't, but we're picking up more over-the-road business than we historically have.

So I can model you in line with the ACT forecast, effectively?

That would be correct. I'm buying into their numbers. Right now, I mean, like I said, it's hard to look out 18 months or 15 months to me. But I feel pretty solid about activity that we're seeing right now and the stuff that we're booking, much better than we've seen, obviously, during the pandemic. But even right prior to the pandemic, we were not -- didn't seem to be getting the order intake that I've seen over the last 45 to 60 days.

Got you. And just a follow-up question, Rusty. You've done it in the past, but could you just walk us through some of your key geographies in terms of -- and just walk us through what are you seeing in terms of economic activity by key geography?

Sure. Look at the coast; let's start on the ends, both ends. Both are strong. Surprisingly, California has -- with everything going on, California has been pretty strong, especially from a parts and service perspective.

From an over-the-road in Florida -- Florida, while it took a dip, we have a lot of Orlando stores, with Mickey World -- Mickey Mouse closed for a while and all the other stuff there. But it is -- with the growth in Florida driven by growth in population and construction, it has been good. And also, Florida has always been -- a lot of car haulers when you see what the automotive business has done, right? So they've had varying factors that's picked Florida up.

As I work my way around the country, we've hit some -- from a truck sales, it is different, right? And my viewing from a truck sales or a parts and service perspective, pretty solid. Virginia, North Carolina, pretty solid; Ohio, truck orders intake was good; Illinois, coming around.

If you look for negatives, we're still suffering, say, in some of those areas -- Arizona is strong, too, by the way. And of course, I would tell you, Arizona, California and Florida being the strongest, but we're still suffering in some areas that are oil and gas related; not doing as well as we'd like out in West Texas into New Mexico; and Colorado, so-so; picking up better than what we were last year from a return perspective up in the Mountain West in Utah and in Idaho.

So I mean, I was just running around the map here. I'm looking at the map over here by my side. And I will say it's broad-based, but those will be the ones that stand out.

I must say congratulations to you and your team on all the hard work and great results.

Thank you. We appreciate your comments. As I said, it's a print that I'm pretty proud of.

(Operator Instructions) Your next question comes from the line of Joel Tiss from BMO.

Take it off mute, Joel.

Joel, please unmute. Your line is open. I think we have to move on. We have 2 more questions. We have a question from the line of Shawn Kim from Gabelli Funds.

I just had a quick question for you guys. I wanted to follow-up on the big news from Friday. Obviously, you guys [have it here in the pavement], but Rusty, wanted to get your thoughts on the Navistar trade announcement. When you think the final documents will be signed? And anything else that you could shed some light on, on that combination and how that impacts you guys long term?

Well, as far as the closure of the deal, I'm not totally in the middle of all that. I would expect -- I would imagine that they've already done -- been pretty far along the path from a due diligence perspective. They announced that prior, remember? So I would expect that they'll get the documents signed here, I don't know, maybe the next month or so. And then I would imagine working through the SEC, and things like that sometimes close sometime in the spring, I would think. Late winter/springtime would be my guess, but that's something they would have to tell you. I'm just -- that's a little conjecture on my part.

What do I think about it? I think it's great. I think it's great long term. It brings a global -- a strong global partner. When you talk about Traton, you talk about [Sconyon] as being a partner to leverage off of, from a new product perspective going forward, especially with the amount of money it's going to take with all this new technology -- with the green wave and new technology over the next decade or plus, as we transition -- you know, the transition is going to happen. Sometimes I tell you, it's not going to be as fast as people say. But that transition will happen. And that takes a lot of money. So they have the ability to leverage off the global efforts of Traton, not just a stand-alone. So from my perspective, that's a win-win big for both organizations. Obviously, most likely (technical difficulty) North American brand. You don't come into this country and start from scratch. It just doesn't work that way in the commercial truck business.

So I feel good about it. I really do. I'm excited about it. I think it's needed to happen, no disrespect to the old Navistar, but from a long-term (inaudible), the organization and growth of the organization, (technical difficulty) great. And that's great. It's great. I look forward to it. It's not something that's an add-water-and-stir. But remember, they've already been -- they've already had the LTAs, and agreements, and cut costs and things like that already as joining forces over the last (inaudible). So I think that unlike a normal acquisition, they're well on the (inaudible) products that had been started prior to this. I mean, this is just the conclusion, the culmination of what -- the way it was supposed to work when Traton bought a piece of it 3 or 4 years ago.

I think we have the line of Joel Tiss this from BMO.

Can you hear me now?

I hope -- I was making sure you were awake, Joel. That's all.

Okay. Well, the first question is the most important one. Rusty, how did you manage with a 25% salary cut? I think everybody knows you're kind of paycheck to paycheck.

Actually I've still got -- I still haven't taken mine. We did bring back -- by the way, to answer the question, we did bring back all -- by October, we started bringing back --some of it was in Q3. And that's part of we have a little bit of expense creep as we reinstate. The only thing we haven't reinstated is my paycheck and our 401(k), but all the normal reduction things that we did, those things will be reinstated as we -- our plan is, as we continue to get more clarity, I'll be able one day maybe to get my money back. Not back, just get started back, because my creditors are seriously after me, Joel, you're right.

Joel, we're making sure he has enough money for tequila and food.

That's all I get. I get a tequila and food allowance. That's it.

No, that's good. And everyone's kind of dancing around it, and I just wondered, do you think like on a 3- to 5-year basis that your Navistar dealerships are going to be a lot more profitable with what's going on with Traton? Or it's too early to tell? Or it's not going to matter?

No, it -- you better believe it matters, because I still -- the returns are not anywhere where I'd like them, right? I don't have to go back through the history of the last decade, all right? So those returns have not gotten there.

Are they getting better? You better believe it, okay? For 2 reasons. One, the growth -- Navistar's getting back on solid footing, forgetting Traton. And our internal growth is taking -- after we got through all the MAXXFORCE, and then our internal -- from a personnel perspective and from many other perspectives, just getting our arms around it. So when you add that together and then you throw a Traton to the mix, you better believe that is still what I believe is 1 of the biggest growth pieces of the organization, right? I believe it's -- we don't have the 55 years of being a Peterbilt dealer like we do with Navistar. So that's only going to get better. With Traton getting it, that's only going to help. Like I said, they can stay in the ballgame from -- with all this new technology stuff and not be having to worry about CapEx budgets quite as tight as they probably had to -- have been.

So the investments that will be made in product, and people, and the whole thing across the board can be nothing but a win. And we're still -- look, we're still in the third inning of running these things, and we're getting better. I feel much better about where we were for now and where we were a few years ago. So yes, that's got a lot of runway on it in my mind. You better believe it.

And then with all the disruption in the market -- this is the last one for me -- all the disruption in the market, are you finding more acquisitions? Or is that something you're likely to get back into that? Or there's too much work to do internally to drive profitability?

No. I'd like to find some. But unlike me, they all spelled PPP, okay? So that propped up everybody and then the market's come back strong. Remember, it was a -- it was such a sharp, steep decline and then rose back up with what happened with the freight markets. And as freight has rocketing back up -- because everybody was buying whole goods with all the money they got. So everybody is -- you didn't see -- if you had told me what was -- I didn't really foresee exactly that happening back in, say, May and June. But that's exactly what happened. It was such a steep drop, and then to come back from a transportation perspective -- because you had to fill the shelves back up. First, you had to fill the inventories, then you had to fill the shelves back up. So you've seen what freight's been doing and what everybody -- the miles being run.

So unfortunately, I haven't -- there hasn't been much M&A. But don't think we're not always looking. Some will show up somewhere, I'm sure, somewhere down the line.

(Operator Instructions) Speakers, I am not showing any further questions at this time. I would like to turn the conference back to Mr. Rusty Rush, Chairman, CEO and President.

Well, this will be the last time I speak with everyone. Once we get through an election, and then the holidays and everything else -- and I'm not going to worry about the first one, the election. But from a holiday perspective, I wish each and every one of you all all the best with your families. It's been a long year for everyone. So please make sure to enjoy and savor the moments with your families throughout the holidays. Other than that, we will see you and talk to you again in February. Thank you very much.

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