Rush Enterprises Inc (RUSHB) 2003 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. If anyone should require assistance during the conference, please press star then 0 on your touch tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Marvin Rush, Chairman and CEO. Mr. Rush, you may begin, sir.

Good morning everybody. Welcome to the second-quarter earnings release conference call. I would like to introduce our attendees here today. Rusty Rush, President and COO, Marty Naegelin, Senior VP and CFO, John Hiltabiddle, our controller, Jay Haselwood, Vice President of the Construction Machinery Division, and controller, and Steve Keller, Director of Financial Reporting. Now I would like Marty to say a few words regarding forward looking statements.

Certain statements we will make today are forwarding statements, as such term is defined in the Private Securities Litigation Reform Act of 1995. Because the statements include risks and uncertainties, our actual results may differ materially from those expressed or implied by such forward-looking statements. The factors that could cause our 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 31st, 2002, and our other filings with the Securities and Exchange Commission.

Now I would like to give you an update on several key issues. Let's talk about the second-quarter results. Revenues increased 12.1 percent, from 172.4 million, to 193.3 million. The composition of sales and related gross profit margins remained relatively flat from 2002 to 2003. SG&A expenses increased 3.4 million, from 27.7, to 31.1 million. This increase is primarily related to the newly acquired Florida and Alabama stores, and increased insurance rates.

Same-store SG&A expenses increased 1.1 million, or 3.9%, but overall SG&A remained flat at 16% of sales compared to 2002. Income from continuing operations increased from 2.1 million, or 15 cents per diluted share, to 2.3 million, or 16 cents per diluted share. Net income increased $244,000, or 12.3%.

Let's talk about the truck operations. The industry sold approximately 52,818 new trucks during the first five months of 2003, a 4.9 percent decrease from the first five months of 2002, and expects to sell 82,000 to 97,000, during the remainder of the year. New truck sales for the quarter ended June 30, 2003 were 990 units, an increase of 18 units or 1.9% from the second-quarter of 2002.

Our average sales price increased by 6%, resulting in overall new track revenue increase of 6.8 million, or 7.9 percent. Used truck sales for the second-quarter 2003, were 588 units, an increase of 53 units, or 10% from the second-quarter of 2002. Our average sales (inaudible) remained flat, resulting in an overall used truck sales increase of 1.7 million, or 9.9%. Parts, service and body shop revenues increased 18.8%, from 50.5 million during the second-quarter of 2002, to 60 million for the second-quarter 2003. Gross profit from our parts, service and body shop, increased by 12.2%, from 19.9 million, to 22.3 million.

Let's talk a little about the construction operations. The industry sold 32,200 new construction equipment units during the first six months of 2003, compared to 31,500 units for the same period in 2002, and expects to sell approximately 42,000 more during the remainder of the year. New and used construction equipment unit sales revenues increased 1.9 million, or 29% from the second-quarter of 2002, to the second-quarter of 2003. Parts and service sales increased 300,000, or 10.7% from 2.8 million in the second-quarter of 2002, to 3.1 million in the second-quarter of 2003.

John Deere's market share in the company's area of responsibility increased from 13.7% to 15.3% from 2002 to 2003. In the construction equipment industry, market share is calculated using dealer sales and rentals, as well as direct sales from the manufacturer.

Let's talk a little bit about our growth strategy. Internal expansion. We are adding a total of 11,500 square feet to our shop area, and service and body departments in our Denver dealership. The additional increase to our shop capacity by approximately 50% and the estimated cost is $500,000. We're in the process of leasing a total of 38,000 square feet of used truck sales service and body shop space, on five acres at additional locations in Fontana. This will be triple net lease, with a monthly rental rate of approximately $23,000. We're in the process of adding a state-of-the-art paint booth Pico Riveras, San Antonio, Fontana, Albuquerque, Phoenix and Denver truck dealerships. The total aggregate cost is to be approximately 1.2 million, with expected completion dates extending through August of 2003.

Additional capital expenditure items are limited to the replacement of existing equipment and essential operational assets. About internal expansion, we have nothing definitive to report at this time. Now, Mary, I would like to turn it over to questions and answers

(Caller Instructions) Steve Haggerty (ph) with Merrill Lynch.

Just 2 quick questions. On the truck sales that you mentioned, the both new and used, were they on a comparable store base, or is that on an expanded store base, year-to-year?

That's expanded store basis.

Steve, same stores were down about 137 new units, compared to last year.

And the second thing, the pricing sounded like it was up, I think you said Marvin, it was up 6 percent, on the new tracks. Any particular reason why that's up so strongly? Or is that a seasonal pattern that I should expect to see?

Well, I think it could be the mix, number one, and number two there have been some price increases.

New engines have cost more.

Thanks a lot guys.

Doug Cole (ph), with Morgan Keegan

Good morning you guys, what a great quarter in this environment. I know in the first quarter you made a little bit of money, I thought in Florida. How quickly does that ramp up? Can you give us a little bit more detail on how the most recent acquired centers? How quickly you get those guys to margins that you find more acceptable?

I think there's not doubt, Doug, that we were able to bring, just a couple of sidelines and things, you look at their new truck sales before we acquired Alabama, Mobile and Florida, and combined last year, they were up a little over 300 units. In the second-quarter were able to deliver 155 units, in one quarter, so as you can see, we brought a little bit of sales activity to it, and the efficiencies in the back end, things like, they didn't even run second shifts in Florida, and we've opened a second ships running through to midnight, 1 o'clock. They shut down at like five o'clock in the afternoon. And we've just been able to bring our culture, our style and hopefully our expertise to them, and they've been after burden charge and everything else, they've been accretive from the get go.

Following the story for a number of years now, I know one of the issues has been, as you guys have grown geographically and just internally done a better job, you start to wonder how much more expansion Peterbilt is comfortable with letting you guys take on. What do you see out there, the stance from Peterbilt, they've got to be pleased with the share gains, when you enter a new market and you improve the guys business and allow them to take share, they've got to be pleased with that, so is that the trade-off they wrestle with? And how does does that stand at the moment? Not that we've ever put acquisitions in the model, model but I'm just curious I know they don't, probably wouldn't be comfortable with you guys getting 40% of their sales through your units, but they're got to be pleased when you guys go into market and take share, so how do you read that relationship?

I think the first question to answer, is first, they've never turned us down. Second, you're right, they like what we do, and how we present ourselves, and the margin market share, and all the things that we do for the numbers for PACCAR. If they ever will, who knows? But we're just going to keep looking and plodding, and we think our future's still bright with Peterbilt, we really do.

I think if you look at our growth strategy, we've tried to define it with a geographical growth strategy from coast-to-coast you know, staying in the southern interior of the United States, so it makes sense to where you are all geographically aligned, and you are not just across the board, with stores up here in the Northeast and the Northwest, scattered around, so we manage to stay in our area, what we like to call our lanes, from east to west all across the southern interior of the U.S.

One other thing, as I look back at '99 and we've had this discussion, Rusty, but I try to, if I'm looking out to the next big event in the industry, I guess more engine standards are on the way, higher EPA requirements and such. If I start to try to model out a couple years from now, one of the lines I always struggle with is that finance and insurance line, because that is such a profitable line item for you guys. But I know that marketplace has changed a little bit, some of the players have gone away, and how you see that kind of gradually coming back? And what kind of timetable do you see for seeing that finance line become more significant?

I think you know, Doug, we've managed to work through the downturn on the finance at the business, just looking at the numbers we've had on the truck side over the last year or so, based on the volume that's in the marketplace, it hasn't been that high. We will continue to work forward, we're always on the back side of the business, looking at deals with finance companies, that will set us up better in the future, as we go into these growing markets, that we anticipate in '04 through '06.

And to answer your question, I just believe that -- will we be at the same levels we were in '99, I've told you before Doug, probably not. Okay, but can we get closer, get back about 70, 80% of that? I think it's possible. I do believe we will be able to from the finance and insurance side.

And the key thing, and the reason we've been able to maintain the earnings in the truck side through continually through the up-and-down last three years, is because the efficiencies we brought into the business, you know, you look at the absorption rates back in '99, I think this is the trade-off for you, is the absorption rates we ran in '99, which is how much of your overall expenses, without your variable selling new truck and used truck variable selling expense, do you cover with the back end, the parts, service and body shop of the business. And we didn't run 80 percent back then, okay, we were in the high 70s to 80 at max, and the high 70s on an annualized basis.

But we're currently -- we've increased that by 15% let's say, since '99, through the efficiencies we've driven into the company during the down times, or the rough sales times in the last three years. So that well, well more than offsets any hit we will take in finance, like I said.

That's a great answer, and to me that would be a better story to follow actually. And finally, I commend you guys on backing out of the D and D business model. Can you just give us all an update on where you stand with that real estate, and that's all I have.

We've got a couple of deals on the real estate, we have not have any firm deals on it. The D and D store is still for sale, it is profitable. The one that is left, and we've got a couple deals working on it. We hope to bring something to fruition in the next 90 days, but who knows you know, how these deals go. But least, except for the real estate drag on us, which is about $60,000 a month, and we only took $100,000 hit in the first quarter, and last quarter, you can see that the D and D, it's exact, made up the other 80 or so thousand in profits that it made, so it's not as big a drain as we anticipated.

I lied, I've got one more question. You've got the tough year-over-year comparison for sure in the third quarter, that was going on last October, and then again, some tough comparison in the fourth quarter, as you guys had a lot of trucks in inventory that you were able to move in the fourth-quarter. Any guidance on unit sales, in third and fourth quarter you can give us?

I guess, unit sales, I have to tell you that the manufactures still are not that far out. Unlike we were in the second, third and fourth quarter last year, when you had 4 to 6 month lead times, we still don't have that. The manufacturers press them to keep a 5 to 6 week build, and that's pretty much across the board for all manufacturers. All OEMs. So it's a little hard to look totally out into the fourth quarter, but I continue to see demand easing back into the marketplace here, everybody's comfortable with engines now, even their -- CAT is coming out with all their (inaudible) and everything that I can hear on it, it's going to be fine, everything their bridge engine has worked well, the EGR, like I said for Cummins has been accepted okay, there hasn't been the field degradation that there is, so the marketplace is getting more comfortable. And I have to tell you that it's going to continue to ramp up during the second half overall.

As far as for us, and can we get to those numbers exactly? I'm not sure exactly what those exact numbers are, because like I said, we've got six week lead times. But I anticipate bye year-end, that the annualized rate will come close to the 2002 annual number also. I just hate to tell you for sure we're going to sell this many units, when I'm still building trucks in the second week of September.

Great, good quarter again, and thanks for the update.

(Caller Instructions) Brian Flynn (ph) Columbia Equity Partners.

Great quarter, guys. What progress has Rush made in driving units sales growth for classes 6 and 7 during the first half of '03, in contrast with '02?

Okay, I'd love to answer that question, because that's one of our most exciting areas in things we've got going on right now. You've got to remember, we really didn't start ramping this up until the end of the first quarter, about April, really the first of this quarter, about April, when we hired some key people, or a key person, to oversee that from a corporate level, and put an extended press on and focus on it, to try to meet the goals that we've set for ourselves out over the next three years.

But to give you an idea, just a quick snapshot, he hadn't even been here 90 days is all, and in the month of June, annualized last year in our 7 GMC locations, we didn't sell but 250 units total. We sold 50 units in the month of June, and the order board's increasing, and we've increased our inventory stocking levels, stock is on the way. We've hired a bunch of salespeople. We're also looking at a couple other lines right at the moment, and it's going well. To answer your question, it's going extremely well. It's early in the game as we set up for '04 through '06, but I think we're off to a real running start here.

Great, one follow up question to Doug's on the future acquisitions, and I'm wondering, since the industry growth appears to be poised to take off fairly soon, are you currently contemplating any acquisitions for the next twelve months or so? Are you going to try to do anything? Or are you going to simply work on consolidating the Mobile and Orange County acquisitions?

Well, we're always looking for a deal, but right now we've got plenty of challenges getting our Southeastern region up and running like we'd like to see it, and there's probably an opportunity to open another one or two stores in that area, without even acquiring anything, so we feel like that, we're looking for deals, but we're not out pounding the bushes. But if one comes along, we'll certainly look at it. But we think we've got a great opportunity to the Southeast over the next year, to increase our market share there, and really grow our business.

Are you planning on adding new shores in the southeast, within the AORs that you already own?

We surely think so. We're looking at that now.

On the like-to-like question, I had a couple follow-ups there. In terms of the same-store sales growth in new trucks, you mentioned that you were actually down 137 units in the first half. What about used trucks, and parts, service, and body?

Used trucks, one second, let me flip to same-store here real quick? We are down 36 units in used trucks sales.

What about on a dollar basis for parts, service and body?

Parts, service, and body we're up, and sales were up same-store basis, overall we're up 13.7%, that's year-to-date now. Same-store basis, we're up 6% on the sales line, not quite as much on the gross profit line, but it's trending the way we want, especially part sales. Part sales have been extremely strong. For the quarter, we were up 8.5%, on the sales line. I think one of the key things also, is we trend, I talked about that absorption number earlier, it's one of the exciting things to me, is when I look back at just the month of June, take it in, just in it's own self, we brought our absorption rate up 4% same-store, year-over-year, so that's exciting. Those kind of things are exciting, as we continue to drive more efficiencies through not having to put as much expense in, but yet get the growth on the sales line.

As a follow-up to that, what was the operating income for Rush excluding the acquisitions completed in 2003?

We don't we make it a practice of going out and dissecting store-by-store operating and same-store operating profits. We just let them fall -- we will give revenue comparisons and expense comparisons, but because we do so many acquisitions over so much given period, we really don't get into discussing individual store contribution rates.

On the Orange County/Mobile acquisitions, what significant issues if any, have yet to be successfully addressed?

I would tell you there really hasn't been -- there has not been any hiccups, we though we put a pretty good team in place that we sent over there, that's been a part of our organization for awhile, and we've -- (inaudible) well marketing, as far as the sales issue, I think I touched on that earlier, as far as, it's not an issue, it's actually an opportunity.

I don't know if you were asking about problems or opportunities. To us it's an opportunity, because we've gone out and gone after customers.

They were really focused on basically half of what they sold, went into the car hauling business okay, but there is many, many customers, as we have found since we've gone into Central Florida, and I would tell you that, they've never done any real fleet business, and we've managed to knock down a couple of medium-size, large size fleets over there, since we've been in there, and in fact, some of those are still on order, that's what I was talking about, I mean the sales growth will, in less than -- in 11 months, I'm sure we will far exceed what they did in twelve months last year, as we continue to look into -- they weren't in the construction business at heart, and Florida is a great construction market.

So, as we continue to build our team, there's just lots of opportunities, I wouldn't really call then issues but opportunities, and there's been, really nothing hidden, of any problems or anything like that, from a company basis since we've gone in there.

Great, excellent, that's it.

We do show a follow up question from Steve Haggerty with Merrill Lynch.

Real quickly on construction equipment, it looks like you had a good quarter with your own market penetration in the area, based on the numbers Marvin gave. I know you're out of the Michigan stores, can you just talk a little bit about the long-term role of construction equipment in the overall Rush business mix?

We are very comfortable with where we're headed in Houston. As you know, our market share has increased, I think from an industry standpoint for the first time in like, two years, dealer sales has really done extremely well in North America. We are not sitting on the fence in the construction equipment business. We want to grow that business. But we want to do it where it makes sense. And I'm not going to say we're going to jump out and buy anything right now, but we are not giving up on the construction equipment business. We are always looking around, and we want to grow that business but we certainly want to do it where it makes sense, and it's got to be in some of the lanes that we do it in. We're not going to be up in the Northeast again like in the trucking -- same ideology in the trucking side. We don't want to grow up there, we want to grow in our lanes, and as things present themselves to us, we're certainly going to look at them, and try to take advantage of opportunities that present themselves.

So, just to think about that Marty, the fact that you got out of the Michigan stores was more indicative of the situations up there, and this lane strategy that the company follows, but if there's opportunities that fit the overall Rush business model, construction equipment could be an area where you guys would love to grow.

Absolutely.

Great, thanks very much.

I do show another follow up question from Doug Cole with Morgan Keegan.

Rusty, anything to report, in terms of sales to the non-over the road market, that you guys have had some success in the past? I know 2001 was a good year for you guys, in the oil field services, and then it fell off last year, and I think you had a big garbage deal with one of the municipalities. Anything to report on those, or anything exciting?

I actually tell you Doug, that construction sales were a little soft this spring, compared to normal. But the oil field sector's still off, around the country. We're not getting even the -- you don't get the big companies, then you don't get the ancillary companies that go with them, that buy product also, so it's been off also this year. So to me that's just -- that just excites me, because I know those are very -- the oil field is very cyclical, so I'm looking forward to it coming back, and there are indications that over the next 18 to 24 months, that that will come back extremely strong, and I think the construction business is going to come back even stronger next year, than it's been this year. Because it wasn't as strong, I don't think this year, as I anticipated it to be. I mean we still do our usual business, but we didn't have a big kick of additional business this year, so from everything I can read and see, that just means the replacement cycle got moved out a little bit, and people didn't spend as much capital, and they'll have to spend more next year.

Thanks, that's it.

Thank you. Mr. Rush I'm showing no further questions at this time. I would like to turn the conference back to you.

Thanks everyone for listening. We're proud of this quarter, we hope to see you next quarter, with a little better results. Thank you.

Thank you ladies and gentlemen. This concludes today's conference. You may disconnect now and have a nice day.