Rush Enterprises Inc (RUSHB) 2005 Q3 法說會逐字稿

Good morning. Thank you for joining the third-quarter Rush Enterprises earnings conference call. As a reminder, all lines will be on listen-only mode, and we will conduct a Q&A session periodically. At this time, I would like to turn the call over to Marvin Rush. Marvin?

Good morning. Welcome to our third-quarter earnings release conference call. On the call with me today is Rusty Rush, President and COO; Marty Naegelin, Senior Vice President and CFO; John Hiltabiddle, Controller for Rush Enterprises; Steve Keller, Director of Finance, Jay Hazelwood, (ph) controller for Rush Equipment Centers; and Derrick Weaver, Chief Compliance Officer. Now Marty Naegelin 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. 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 31, 2004, and in our other various filings with the Securities and Exchange Commission.

Now we would like to give you an update on our progress. We have had a very exciting quarter. Our third-quarter results were strong and consistent with growth we have been experiencing this year. Revenues for the third quarter increased 63.5% compared to 485.4 million versus 296.9 million last year. Net income for the quarter was 13.2 million or $0.53 per diluted share, compared to 55.5 million or $0.35 per diluted share in the third quarter of last year. As the numbers demonstrate, the tend of an increasing demand for heavy-duty trucks and the execution of our quality of earnings process continued in the third quarter.

Let's talk about the truck segment first. The Company's truck segment recorded earnings of 467.8 million in the third quarter of '05, compared to 282.2 million in the third quarter of '04. Rush delivered 2,709 new heavy-duty trucks during the third quarter of '05 compared to 1,546 new heavy-duty trucks in the same period of '04. As a result, revenue from heavy-duty truck sales was approximately 286.5 million in the third quarter of '05 compared to 153.6 million in the third quarter of '04.

In the third quarter, the Company delivered 610 medium-duty trucks compared with 458 medium-duty trucks in the same period of '04. (technical difficulty) the parts and service operations. Our current projections call for sales of medium-duty trucks to become a greater part of our business, with our goal to sell 2,500 new medium-duty units this year in '05.

Recently, we have made several acquisitions aimed at increasing our medium-duty presence in our existing areas responsibility. We acquired GMC and Isuzu medium-duty truck dealerships in Orlando, Florida, and Texarkana, Texas. We subsequently added heavy and medium-duty Peterbilt trucks, parts, and service, and are operating the newly acquired dealerships as full-service Rush Truck Centers.

We also purchased GMC and UD medium-duty truck franchises in Dallas, and have combined these facilities with our Peterbilt and Hino franchises at our existing medium-duty store in Dallas. Finally, in October, we acquired GMC, Isuzu, and Hino medium-duty truck franchises in Fontana, California. These newly acquired franchises are being operated from our existing Fontana dealerships.

These capital investment and others are underway to add capacity to our service departments, coupled with our focus on medium-duty truck growth will be the primary drivers to attaining our 110% absorption rate goal.

Rush delivered 890 used trucks during the third quarter of '05 compared to 673 used trucks in the same period of '04. As a result, revenue from used truck sales was approximately 40.8 million in the third quarter of '05 compared to approximately 45.1 million in the third quarter of '04. Truck segment parts, service, and body shop sales increased 26.6% from 70 million in the third quarter of '04 to 88.6 million in the third quarter of '05. Additionally, gross profit margins increased approximately 4.3% this quarter versus the same period last year.

The Company's absorption rate increased from 99.5 in the third quarter of '04 to 101.2 in the third quarter of '05. The Company's same store absorption rate was 105.2 during the third quarter of '05. Absorption rate is calculated by dividing the gross profit from parts, service, and body shop departments by the overhead expenses of all dealership departments, except the selling expense of new and used truck departments.

Let's talk a little about the construction machinery business. The Company's construction equipment segment recorded revenues of 14.2 million in the third quarter of '05 compared to 12.1 million in the third quarter of '04. Revenue generated from the sale of new construction equipment units increased from 7.4 million in the third quarter of '04 to 8.8 million in the third quarter of '05. Parts and service increased from 3.5 million third quarter of '04 to 3.7 million in the third quarter of '05.

Let's look a little farther into 2005 and '06. As we move into the final quarter of '05 and into '06, we expect to continue strong financial performance as demand for new trucks remains strong. Our parts and service business continues to perform well, as reflected in both our revenue and margin growth. Finally, we expect positive results as we continue to integrate our new, medium-duty acquisitions into our existing businesses.

In the third quarter we opened a massive 120,000 square foot state-of-the-art facility in Smyrna, Tennessee, to replace our existing Rush Truck Center in Nashville, thereby doubling the size of our existing Nashville dealership.

We intend to continue to strengthen our geographic footprint and add to our competitive strength through our geography of performance plan to enhance overall results, sell more heavy-duty and medium-duty trucks, leverage off our existing asset base, and improve our operating margin. We feel comfortable that we are well on our way towards achieving these goals.

Finally, as we mentioned in the press release, we enjoyed a milestone in the life of the Company when we celebrated our 40th year in business and our ninth year to be listed on the NASDAQ stock market by ringing the opening bell of the NASDAQ market site in Times Square, New York, on September 14. We are grateful to our employers, employees, our Board of Directors, and our shareholders for the growth we have achieved in the last 40 years and look forward to many more years to come.

We're now prepared to answer any questions you may have. Operator, please review the procedure for asking questions.

(OPERATOR INSTRUCTIONS) Andrew Obin from Merrill Lynch.

Sorry; I was five minutes late for the call so I apologize if you covered this. Two questions. A, the sequential decline in medium-truck growth, while I recognize that the medium truck growth year-over-year was still very impressive, as I look at the industry statistics for sort of Japanese-made trucks, your outgrowth versus the market sort of was not as dramatic as it was maybe in the second quarter. I was just wondering, what is going on?

Andrew, I don't see anything that is going on, other than the same thing we have been trending towards for the last two years. I would tell you not to take just a quarter look at the medium-duty truck growth. With the additions we have had and the growth of the same stores, it is probably more of a timing issue. Let's wait and look at what the fourth quarter deliveries are, and I think you will hopefully impressed with that.

Do you guys -- I think the concern was Freightliner taking production rate down on medium trucks. Are you detecting any reluctance on the part of your customers in the medium-truck business to sort of -- to make purchases due to high fuel prices?

I don't think there's any question that affects it, to make that capital investment. But at the same time, also municipalities are being stretched with fuel prices also. Municipal business is a lot of medium-duty business. So there has been a little softening I know, and order intake was pretty soft the last couple months in that sector.

But as long as -- you remember -- medium-duty growth is going to be tied more directly with the general economy than industry specifics. So as you look at that and you look at the municipal budgets and what is going on in the general economy, that is pretty much how medium-duty is going to flow along those lines. But I don't see anything long term.

But there's no question. I mean, you are talking about fuel. Fuel has hurt everything. I think everybody, we all know that. But I don't think that that is going to stop what is going on. To me, it is more of a slight slowdown due to the -- I agree with you -- with some increases in fuel prices.

But they have to replace the product. So it will get replaced, especially because the engines nowadays are more fuel-efficient than the engines they were probably running 6 to 10 years ago. Once they realize that, you will continue to see purchases in the medium-duty size.

But I guess the question is, it's a very exciting part of the growth story for me. Do you feel that, insofar as your plan goes, you're still on track to meet your '05 numbers and '06 numbers? You're not seeing anything in the market to make you more cautious in the medium-truck segment?

No, not at all. Nothing to slow us down on where we're headed. This is a long-term strategy we have had. We have been working on it for two years now, and we expect it to pay huge dividends come '07, '08, and on down the road.

The other question, just sort of impact on sales from hurricanes Katrina and Rita. I guess I know that your dealership in the area affected by Katrina was absolutely fine. But what about Rita? Did you guys see any negative or positive impact on your sales in the quarter? And any impact on fourth quarter from these events?

Short-term, negative impact, obviously. When you take -- you can take Katrina. We had to shut our Mobile store down for a few days there. So you can take four stores; there's the Mobile, the Houston, the Sealy, and the Lufkin truck stores. The Rush Equipment Center in Houston. Our leasing operation in Houston. We have insurance; the entire business is in Houston also.

All of those were roughly down, you could say, about a week (multiple speakers) between. So it had a short-term effect, no question. When the shops are closed, and mechanics are not turning wrenches, and people are not coming up to the parts counter, you have a short-term effect on the back ends. But long term, I'm sure we will pick up some truck sales over in that region, even though it is not our -- Louisiana is not our area from Katrina. We will pick up some in East Texas. But long term we will get it back, probably plus some, from a sales perspective. But short term, parts and service was definitely hit. We were definitely hit there.

Okay. Thank you very much.

Chip Miller of Bear Stearns.

For the second quarter in a row, it looks like parts and services margins have been up around 42%. Sense for what has been driving that? Is it a greater mix of -- towards service and body versus parts? Or is it just being able to drive more volts (ph) through ATS and the other acquisitions? I am sure it is a combination, but can you give us a sense for where it is primarily coming from?

Service growth is higher this year than last year; no question there. That has something to do with it. A lot to do with it, Chip. Probably the most -- the thing that has the most effect on that number. I think we mentioned on the last call that 42 would be top of the card. And I would tell you still 42 would be top of the card.

But that can fluctuate depending on mix also. If we get into some large parts sales, heavy -- some wholesale parts deals, that will drive it down, obviously, because parts margin is less than 42. It runs in the mid-20s. So a lot of it is mix, and a lot of it is service growth would be my answer to you.

Okay. As a follow-up to Andrew's question, can you tell us what the absorption ratio -- what you think it would have been ex- the hurricanes?

I would tell you we missed a couple points. It cost us a couple more points in absorption ratio, best I can quantify it. You take your averages and you lay it in there; I would tell you it cost us a couple points. We would have been -- without the hurricanes and without all the acquisitions and everything else we were doing, we would have probably been a flat with the second quarter.

Okay.

Okay? Because we had the same amount of working days second and third; and we had a great second quarter. And I felt we would have had a great third quarter, but having those four stores shut down for basically a week on the truck side definitely didn't help.

Okay. Can you give us a sense for how the absorption ratio at ATS has been trending?

It is trending up. No question. It's not up as much like I have spoken to you in the past, about -- I expect to try to get 10 points, 8 to 10 points of growth out of the ATS acquisition in '06. Not necessarily this year. This year is a building process, so we will be able to kick that off in the first quarter. It is trending up slightly, a couple, three points. But I would expect us to -- hopefully the initiatives that we have put into play.

We just opened Nashville in October; that is going to take a couple, three months to ramp up. The expenses come first; then the growth comes with it. So I would look forward that we're moving into a new store in Fort Worth, which was part of the ATS acquisition. That only had parts only; we're making it parts, service, sales. Complete dealership. That will take place in November. We're laying all the groundwork and all the bricks and mortar so that we get hit that 10 points growth in absorption next year.

I will ask one more, then get back in line. If I look at the industrywide data, it looks like Peterbilt might have lost a modest amount of market share in class 7. I was wondering if you guys are seeing that; if you think it is temporary.

I would tell you it is probably temporary. I have been pleased with some of the orders we have taken in the last few weeks. I will just leave it at that.

Okay, thanks.

From my perspective, from our perspective, it is just temporary. Trying to do that by quarter-to-quarter, month-to-month, guys, gets -- that is extremely shortsighted. I think you need to take more of an annualized view of those numbers. I am pleased with where we are at with the Peterbilt medium-duty product. Especially going into this quarter and into '05; we have taken a couple of nice orders, and look forward to doing some more.

Okay, great. Thanks.

Chaz Jones of Morgan Keegan.

Congratulations on another good quarter. One quick question here; a lot of my other ones have been answered. But maybe if I could ask about the demand environment on the used truck market side. Warner earlier this week in their press release basically said that, due to the rise in fuel prices, as you discussed earlier, that their used trucks sales had declined in September and October. And third-party financing had tightened in the industry. Are you seeing a similar trend there?

Yes, I would say we're seeing some of that. No question that used truck values, I would tell you, probably peaked earlier this summer. They haven't dropped dramatically or anything. But they are just sort of bobbling, let's say that, around where they have been as far as valuation goes.

Over the road we have tried to do a little -- again it is a mix thing as far as for us. Some of those customers you refer to, they have only one type of truck to sell. Basically we try to sell used trucks across the breadth of the marketplace.

So we have to watch our inventories and try to balance it to where there is more demand. Obviously in some of the sectors we are in, with all of the reconstruction going on along the Gulf Coast, we have tried to get into maybe some more non-sleeper type used trucks. Work trucks. But on the sleeper side, there is no question; there is a little bit of softening out there. But our numbers are still in line with what they were running earlier this summer as far as total deliveries are. We are managing to keep our numbers pretty solid throughout the summer.

Then maybe one last question here. I know you guys aren't going to talk specifics on acquisitions. But you had four here over the last several months on the medium-duty side. What is the expectation out there as we kind of look forward the next, call it, 12 to 24 months? Could we see another, call it, three to six medium-duty acquisitions hit here fairly quickly?

You know I'd take the point to not really give you numbers and say three to six. But I would address it that we will continue to enforce and build out, reinforce the buildout, of our stores and continue to add franchises to make sure that all stores have breadth in medium-duty product, so that they can touch all sectors of that market. We will just continue doing what we have been doing. I really don't want to get into the numbers side of it and how many acquisitions, Chaz.

Sure, I understand. Okay, that's all I had, guys. I appreciate the time.

Gary Haubold of Gartmore Global.

Good quarter. Just more of a longer-term question. Does the dramatic change in maybe labor relations with the UAW at Delphi and also General Motors portend anything for Class 8 manufacturers down the road?

Gary, I'm going to answer you; nothing that I am aware of.

Okay, thank you.

Kevin Maczka with BB&T.

You talked just briefly on the used pricing, saying that you thought that the values probably peaked this summer. I'm just wondering if you can comment on pricing in the new market.

I think with the new pricing for us, I can tell you that our average sales price was -- the second quarter was like 106,190 and this quarter was 105,754. So basically the same. I don't know how you differentiate between $440 difference when you're up that high already. So I would tell you from an order perspective, that the customers and the manufacturers have come more in line with each other, as the order softness of the order (indiscernible) of the order intake during the summer has continued through September.

I still anticipate that the big buy for '06 is on the way. I know our October has started a lot better than our September order intake was, so I would look for that to continue. So I would tell you that pricing has basically I believe gotten in line with where real true cost increases were over the last year.

Okay, thank you.

(OPERATOR INSTRUCTIONS) John McGinty of Credit Suisse First Boston.

Why was the tax rate down?

John, this is Marty. As you know, when we bought ATS we moved of our operations into Texas, which moved them into none unitary tax states. So our first two quarter estimates we thought we were going to wind up at about 38.5% for the year. After actually completing our return and filing it just recently for last year, on a revision of that estimate we are going to wind up the year at about 37.25. So we are booking the last two quarters at 36.25; and we would expect going forward the effective rate will be annually 37.25.

Okay, so we will see this 36-plus rate in the fourth quarter as well, then?

That is correct. (multiple speakers) 36.25 for this quarter in the fourth, and then we ought to be at about 37.5 a quarter for next year, which (multiple speakers) put us 37.25 for this year as well.

All right. What experience have you all seen on the '07 engines at this point? There are only probably 100 out there. Have you see any in the territory? What do you think?

John, I haven't really seen any. I mean, we have; but I don't have enough information to give you any real serious feedback on it.

Okay. You alluded, Rusty, to the orders for '06, expecting them to pick up. When you look at '06, two things. What is your manufacturer telling you about their availability in '06 versus '05? And what is your expectation for deliveries in '06 versus '05 of Class 8 trucks?

A manufacturer from availability perspective, I'd tell you we probably have more vehicles available in '06 than we had in '05. That is not necessarily a ramp up from where they're at now; but just because they ramped up during this year and they didn't catch it during the first half of last year. In regards to -- are you asking in regards to us?

In other words, do you think that deliveries -- in other words, when you're looking at your deliveries of Class 8 trucks in '06, do you think they will be equal to '05, or up, or what do you think?

They better be ahead of '05, okay? That is what I am budgeting for, let's leave it at that, and planning for. So we're planning and budgeting to not a great increase, but maybe a 10% increase in deliveries over this year.

Okay, great. Thanks very much.

At least on the heavy side, now. We will definitely budget for a lot larger growth on the medium-duty side given these acquisitions and the growth in our infrastructure that we have had.

Is the 2,500 this year or next year?

That was this year. We were 1,900 and let's see what. We are 1,950 through three quarters, so we will surpass that easily. That is this year. Next year, we have internal goals; I don't know that I would tell you to sit here and model around it. But we have internal goals of doing 4,000 next year.

Great, thanks very much.

Andrew Obin of Merrill Lynch.

Just a follow-up question. In terms of just a broader, sort of 30,000-foot view, it seems that investors are very concerned about the health of the truck cycle, primarily because of the higher energy costs. A, I just wanted to see what you guys are thinking, just in very broad terms what you think is going on. Are you seeing any significant changes of behavior from your customers?

The second question is just a follow-up on McGinty's question. Basically are you guys -- do you guys think that the testing of '07 engines is going slower than expected and might change the behavior pattern of your customers from '06 to '07?

I guess taking it in reverse order, I don't think there's any question that the delivery of '07 engines is going slower. We had hoped to have some out in really early summer. A lot of them in early summer, late spring, and that didn't happen. I'm sure there was a number of reasons as they were engineering the engines into the trucks. That took a little longer maybe into the chassis than was anticipated.

Also mainly low sulfur fuel. You don't want to -- you can't blame an engine manufacturer for not wanting to run the wrong fuel in his trucks and his engine so that he gets the proper performance. So those combinations definitely slowed it down. I really have no feedback on what is going on now.

I think we have finally got, as John said, 100-some odd, 100 to 200 engines out there at least. But that was supposed to happen 120 days ago and didn't. So we're definitely slower, so that has an effect upon the customer base, when he doesn't realize the cost or the degradation of performance as to the effect (ph) of how many he's going to buy, how many units he is going to buy next year, when he can't get a feel for what the impact will be of the new engine. So that has definitely had an effect on it.

What about just general pattern of behavior from your customers, given where the energy -- particularly sort of -- not maybe on medium trucks, but on Class 8?

There is no question that it's been impacted by numerous things. Continual interest rate rises over the last year and a half. Continuing fuel cost increases. There is no question. As our customer tries to figure out how to recapture his fuel quicker and go to more timely surcharges and things that are going, that definitely has an effect on where you're at as you look out into the future.

The uncertainty. I think we have all -- I mean, the market. It is pretty indicative of what the market has been like. Just uncertainty from day-to-day has created a little bit of easiness out there, even though you've got the demand. Hey, freight has picked up the last month. I think talk to the transportation side, you will find that out. But the freight has tightened some finally over the last month or so.

Why do you think -- I am playing devil's advocate here, and I agree with you -- but why do you think production will pick up in '06? What will drive this incremental demand for trucks, in your view?

I think you -- first off, if you stayed at the same rates that everyone is building at now, it has to pick up, Andrew. Because it wasn't running at those rates during the first four or five months of the year. Okay? So you get the 12-month effect of it. I am not saying the production will increase over where it is at currently. But I am saying it will continue to run at that rate.

But what is the underlying, I guess, demand? Where does the underlying demand for these trucks come from, in your view?

Where does the underlying demand? As we get a better read on what '07 engine performance is going to be; as we get a better read on the cost of the '07 engine; and I do believe fuel will come down and make everybody -- I do personally believe that fuel is going to come down off the highs. Maybe I am wrong. But that is my personal belief, given what I read and what I see going on out there.

So it's a basic replacement of their current truck fleets and also something of a prebuy ahead of '07, right?

Sure. If you replaced in '06, then you time out on a three-year cycle to replace in '09 before 2010. You know? So it just makes sense.

Okay. I don't know; maybe it's too early to say, but how do you see '07 truck -- when do you think we will start seeing a pickup in order activity for '07 trucks with the new engine? How do you think that will play out? Because I would imagine that production slots for '06 are going to be full sometime at the end of the first quarter. So how do you think, when do you think people start placing orders for '07 trucks with the new engine?

I don't think there's any question we will have a little slowdown in the first half of '07. I would imagine sometime in the first quarter of '07, once you have a full read on what engines are out, that you will get pickup. You should pick up and start running the better rates again by the second half of '07. I look at it as a six-month phenomenon, myself.

Thank you very much.

(OPERATOR INSTRUCTIONS) Chip Miller of Bear Stearns.

One quick follow-up. When do you think 2007 trucks are going to get priced? Do you think any carriers are waiting to see what that exact price differential is going to be, before they place their orders?

I don't think there's any question, they already are getting priced. Okay? I have been taking orders.

'07?

I'm sorry? You are talking about '07? I'm talking about (multiple speakers).

2007 pricing. When do you think 2007 trucks will get priced?

I'm afraid (multiple speakers) model. Chip, that is a next-summer question, to be honest with you. You won't see any pricing for that until sometime next summer.

Okay. Thanks.

At the earliest. You bet.

Andrew Casey with Prudential Equity Group.

Quick question, back to the pricing question that was asked earlier. Are you seeing, not in your own dealerships on the heavy-truck side, but are you seeing any increase in discounting activity going on at maybe some of your competitors?

Nothing more than usual. I mean we are out -- when you are talking about orders that we're trying to take in, or selling off the yard currently? Out of inventory or order (multiple speakers)?

We have heard some spot inventory programs. But if you can answer --

No question, inventory levels are trying to be reduced right now, given that by the time we finish up here in December, you know, and your new year models start coming out in March, February-March, or in April, so everyone is tried to get their yards cleaned up so they can take some orders next year. So there is definitely some inventory discounting going on right now. Order discounting is just being driven by demand, as we continue to compete with other manufacturers. It is really no different than usual.

Okay, thank you very much.

John McGinty of Credit Suisse First Boston.

Rusty, did you say that your orders in October are starting to show a good gain? You had been expecting those orders to pick up in September. They didn't. But are you seeing that now?

Yes, sir, I would say tell you that we're saying that now, okay? From our perspective; I can't speak for the whole market, but I can speak from a Rush perspective. That we're starting to close some deals that we typically get closed sometimes maybe a little earlier than now. Our customer base is starting to close, our traditional customer base, on some transactions.

Including the couple of large fleets that might be out there?

Not all of them, not all of them. But a couple of them, yes.

Okay. Second question, what would you guess that the prices in '06 are up on a Class 8 truck over '05?

Gosh. I would tell you they're up about 3% to 4%.

Now if we go back to 2002 in March, it was actually our friend up in Bellevue that started the whole prebuy by jacking up prices on the old trucks. Do you think they're likely to try to do that again? Because in essence the '07 truck is worth less than in '06 if it's got the new engine in it. Do you see any kind of further move that they will do in March or April on prices like they did in 2002?

I don't know about reflective as to where or what drove pricing or anything else. I am not going to reflect on that, John. But I will touch on the fact that I think as order intake accelerates, there is no question that once we get more than half of next year filled up, and you start filling out the last four or five months, there will be pricing increases. That is just typical of anybody's business model and how you would run your business. But right now, I think we're all trying to get --

The first set of orders.

Right. We're trying to get the ball rolling per se, that we expected to start rolling in September, which September as we know was soft. But, hey, there is a bunch of uncertainties out there amongst everyone. So I think that is one of the things, given the '07 engines running late, given everybody was jostling for margin between the customer and the manufacturers. So it just got pushed off a little bit. It will happen.

Okay. Final question, you have got all these mediums. Are you looking at any heavy-truck acquisitions? Or is that just out of the -- not in the cards at this point?

Always looking, John.

Okay, thanks a lot.

(OPERATOR INSTRUCTIONS) Okay, at this time there are no more questions.

Thank you very much. We will talk to you later, if we don't talk you before the next quarter. Give us a call if you need us. Bye bye.

Thank you. This call has been concluded.