Rush Enterprises Inc (RUSHB) 2005 Q4 法說會逐字稿

Thank you for joining the Q4 year-end 2005 Rush Enterprises Inc. earnings conference call. As a reminder all lines will be on a listen-only mode and we will conduct a Q&A session at the end of the call. At this time I'd like to turn the call over to Rusty Rush so that we may begin.

Good morning and welcome to our fourth-quarter year end 2005 earnings release conference call. On the call today are myself, Rusty Rush, President and COO, Marty Naegelin Senior Vice President and CFO, John Hiltabiddle Controller at Rush Enterprises, Steve Keller Director of Finance, and Jay Hazelwood Controller for Rush Equipment Centers. 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. Important 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 disclosed in our annual report on form 10-K for the year ended December 31, 2004, and in our other filings with the Securities and Exchange Commission.

Now we would like to give you an update on our progress. We've had a very exciting quarter and a record year of accomplishments. Our fourth-quarter results were strong and consistent with the growth we've experienced this year. Revenues for the fourth-quarter increased 71.3% to 515 million versus 301 million in the prior year. Net income for the quarter was 12.6 million or $0.50 per diluted share compared to 5.1 million or $0.26 per diluted share in last year's fourth-quarter. As these numbers demonstrate the trend of increasing demand for heavy-duty trucks and the execution of our quality of earnings process continued in the fourth-quarter. Now let's look at our business segments.

The Company's Truck segment recorded revenues of 494.7 million in the fourth-quarter of 2005 compared to 287 million in the fourth-quarter of 2004. Rush delivered 2809 new Class 8 heavy-duty trucks during the fourth-quarter of 2005 compared to 1546 new Class 8 trucks in the same period in 2004. As a result revenue from heavy-duty truck sales was approximately 302 million in the fourth-quarter of 2005 compared with 156 million in the fourth-quarter of 2004. In the fourth-quarter the Company delivered 831 new medium-duty trucks compared with 548 medium-duty trucks in the same period in 2004. Medium-duty truck sales for the fourth-quarter in 2005 totaled 46 million compared to 30 million in the same quarter of 2004. Rush delivered 933 used trucks during the fourth-quarter of 2005 compared to 621 used trucks in the same period of 2004. As a result revenue from used truck sales was approximately 40.5 million in the fourth-quarter of '05 compared to approximately 23.6 million in the fourth-quarter of '04. Truck segment parts and service, and body shop sales increased 36.7% from 66 million to 90 million in the fourth-quarter. Gross profit margins widened by 3.3% from 38.5% in the fourth-quarter of '04 to 41.8% in the fourth-quarter of '05. We expect these margins to remain constant in 2006.

The Company's absorption rate increased from 90.2 in the fourth-quarter of '04 to 99.2 in the fourth-quarter of '05. The same-store absorption rate was up from the previously stated 90.2 to 104.3% during the fourth-quarter of '05. We calculate our absorption rate by dividing the gross profit from parts, service and body shop departments by the overhead expenses of all the dealerships departments except for the selling expenses on new and used trucks. The Company's Construction Equipment segment recorded revenues of 15.9 million in the fourth-quarter compared to 12.1 million in the fourth-quarter of '04.

Now for the year results. For the year ended December 31, '05, Rush's gross revenues totaled 1.9 billion, a 72.7% increase compared to gross revenues of 1.1 billion in '04. Net income was 44.6 million on $1.79 per diluted share, a 164% increase compared to net income of 16.9 million or $1.02 per diluted share in 2004. It has been an extremely productive year for Rush in terms of acquisitions, dealership openings and absorption rate increases. Let's review some of our major achievements in 2005.

We targeted goals of selling 10,000 new Class 8 trucks and achieving 100% absorption in 2006. I'm proud to say our people made it happen a year early. We reached a milestone by delivering 10,111 new Class 8 trucks, 2807 new medium-duty trucks and 3677 used trucks for a combined total of 16,595 trucks. Since the last large truck market of the late '90s we have increased our absorption rate from below 80% to just over 100%. This improvement in our absorption rate has greatly enhanced our quality of earnings translated into widening EBIT margins.

On January 3, 2005 Rush completed the acquisition of certain assets of American Truck Source, Inc., the largest acquisition in Rush's 40 year history. The Peterbilt dealerships that were acquired in Dallas, Fort Worth, Abilene and Tyler, Texas, along with the Nashville, Tennessee dealership made a significant contribution to the Company's revenues and profitability in 2005. Some of the other noteworthy accomplishments in '05 included the opening of 120,000 square foot state-of-the-art facility in Smyrna, Tennessee to replace our existing Rush Truck Center in Nashville and allow us to better serve this important market.

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

We also purchased a GMC and UD medium-duty franchise in Dallas, Texas. And have combined these franchises with our Peterbilt and Hino franchises with our existing medium-duty truck store in Dallas. In October we acquired a GMC, Isuzu and Hino medium-duty truck franchises in Fontana, California. These newly acquired franchises being operated from our existing Fontana medium-duty dealership which also sells Peterbilt and UD medium-duty trucks.

Now for an outlook for the industry and for the Company. We're running very confident about Rush's prospects in 2006. We expect the truck market in 2006 to exceed 2005's near record levels but to be followed by a decrease in truck sales in the first half of 2007 because of the new emission standards that take effect on January 1, 2007. Industry expectations are for the new engines to add between 6 to $8000 to the cost of a truck and increase operating and maintenance costs as well. Furthermore, though, we expect truck sales to rebound in the second half of 2007 and be followed by extremely strong markets in 2008 and 2009 due to the impending 2010 emission standards. We expect to continue to grow our absorption rate and accomplish our goal of achieving 110% by year-end 2008. We believe by continuing to increase our absorption rate we will be positioned to soften the earnings impact that will result from fewer trucks being sold in 2007.

We expect our acquisitions to continue to be very accretive to earnings. Expense management will remain a focus and contribute to widening operating income margins. 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 medium and heavy-duty trucks and continue to leverage off our existing asset base and improve our operating margins.

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

(OPERATOR INSTRUCTIONS) [Sean Nickolson].

Very good quarter. I guess my questions, I have a couple of them. The first one is really kind of your comments on in '07, what -- I mean can you give a little more color on what you think that downturn in the first half is really going to look like? I mean is it going to be severe to more than people may expect or not as bad do you think?

I'm not sure when you say what effect who you were referring to because there are different forecasts out there for '07. We have our own. If you look at, we look at ACTs, we use them for guidance, ACT, as far as guidance for future numbers. I think they are at around 220,000 right now. If that's the number you're probably talking -- you can -- if you really want to talk about '07 I guess you have to go back and look at similar to maybe a little less than '04 was. And if you look at us as an organization I think you have to look at what we've done since that time. The increases in the absorption rate, the adding of the medium-duty franchises which will help supplement some of the lack of Class 8 sales. Along with the acquisitions we've done. We feel very good about how we will be able to weather the downturn of the truck sales side and show how we moved our earnings stream away from strictly all being tied to truck sales and moved it more to the more profitable, more stable area of the business, the part, service and body shop operations.

Okay. And as far as your parts and service revenue covers pretty much like you said almost 100%. How fast you said you wanted to grow that another 10% by the end of 2008, that absorption rate?

Yes.

What do you have to do to really get that, I mean what is the next steps to get there?

The next steps just to continue to execute on the initiatives that we have in place at the moment and are going to continue, especially the medium-duty truck business. We've been able to ratchet that up quite quickly as far as I'm concerned over the last two years. But where we haven't seen the growth is in the parts and service; they really have not been a driver to the growth we've already had in absorption. But it will be the major driver going forward. The least efficient times that we have in our shops are usually between say five in the afternoon, six in the afternoon and two in the morning. And we believe this customer base (indiscernible) we can fill the shops up in the evenings with more medium-duty trucks. But first you have to sell the trucks into your areas of responsibility, then you a get the parts and service business subsequently.

Just a question on the acquisition front what kind of -- where are you guys looking and if you can kind of give an area? And what are the prices out there for companies look like?

I would imagine we are looking where we always look. I think if you (technical difficulty) our patterns of the past you will see they've been pretty much East to West across the South so I think that would be a good start right there. As far as prices I really don't want to get into that at the moment but I would imagine as we get into '07 prices shouldn't be too terribly bad.

John McGinty with Credit Suisse.

Good morning, gentlemen. Could we talk for just a second about the margins, the deterioration of the margins in the new and used truck as you presented, slight deterioration from the third quarter and the fact that the sales are so much stronger. I guess the first question is could you give us the average price of the new truck? And was that fleet business or what is going on there?

I think you pretty much answered the question for me John. It's basically a mix issue, as you saw unit sales were up. We delivered probably a few more fleet trucks in the fourth quarter. Along with some other bodied up trucks, I think average sale price was up to about 100 --

It was 1 0 7 5 new for the quarter.

And what was that versus a year ago, Marty? Sorry.

What was it a year ago? 101, I think.

101, 123.

But a lot of that has got to be, I mean there is price as well as everything else, I mean it's got to be --

Yes, John, that is a 6% increase. Don't translate that into just pure pricing because you've got mix issues in there as well. Depending on whether we are delivering bodied up trucks to a city organization or whether or delivering (technical difficulty) trucks. A lot of that average price has to do with what you see in the mix.

And in the same regard your margins just to repeat you were running 42% plus margins and you kept saying we are not going to be there; you are damn close to being there. And that is a sustainable number?

We believe we can remain constant John. It's a mix thing again as we go forward. If we, obviously your margins are different on parts and service. If your service grows at a faster rate you can increase that margin. We would imagine it to remain constant though within a point of there, okay.

That is fair enough. On the '07 engines, you said people are talking 6 to 8000, and 5 to 8000. Are you hearing that -- in other words that is what people are saying. What is Peterbilt saying to you?

Well, they are not saying really anything. In fact our -- really had no comment on it as far as pricing goes. I would tell you the information I'm giving you is more industry information from other OEMs that I think are (indiscernible) out there for public knowledge at the moment. And the knowledge that I have in the trucking --

I'm not disputing it; I am just trying to find out how official it was and as it relates --

I would say those are pretty solid numbers in my mind; from everything I've gathered everywhere those are solid numbers.

And what about the performance? You know we've got a couple hundred out there; they were late, they were out there, we've got three more months, what have you seen?

I've got initial feedback, John. You know they are going through like any new product; it takes a little bit, you can't give an answer in just the first few months. It takes a little bit of tweaking and working through bugs. I would hate to give any comments on performance at the moment.

And that same thing would go with fuel efficiency I assume?

Obviously degradation of performance if there is any there, which we believe there will be some is not quantifiable at the moment.

With regard to you are saying just to come back to, are you in essence implying with the decline in the first half of '07 and an increase in the second half of '07, are you in essence saying that that is the ACT 220 down from what, 310 ,330 something like that? Or are you assuming -- what kind of a number are you assuming because you are saying '08 and '09 better. Are you assuming '08 and '09 get better than '06?

I think the early -- they really don't -- they're coming out I think with new numbers. But judging on some of the other very well-respected economists in the industry that I've looked at from our supply-side, they're projecting 09 to be huge. As we try to come up with answers to take care of this emission issues and (technical difficulty) more focused on what price and also to get past '07 and then you start focusing on 2010. If we have to go to SCR, which it looks like we will, the cost and the performance of those engines in the North American environment, I have a feeling will drive -- in my opinion will drive markets that are even larger than what we are going to see in '05 and '06.

Absolutely if that occurred. Final question, just trying to get a gauge. You are such a dramatically different company in '06 at least were in '05 and '04, but in '06 the question I have is, if you do what you're doing in '07, I mean the 220 versus the 330, can we do call it 200, 210, 215 in '06 over the 179. Can you come close to the 105? I mean just in order of magnitude are we looking at 150, 175? Can you do that even with a 220 that kind of a fall -- it seems to me you can. I am just trying to get you to see if you can put some windage around it if you will.

John, this is Marty. You know it's hard for us to give out a specific earnings guidance.

I understand that's why I am trying to give you a little wiggle room with something that might approach '05.

I think our answer is back to what Rusty said in the beginning which if you look at the truck markets of '04 --

240 I believe.

About 240 we think and we are saying 220 for '06, we made $1.03 in '04, we added --

The absorption rate was under (multiple speakers) 95 at that point.

-- absorption rate was about 95% slightly under. If we do a good job of growing the absorption rate into '07, which we have every intention of doing and believe its very realistic to do so --

In other words just to clarify, the parts and service revenues should continue to rise because the trucks are going to move even if we fall off new deliveries by one-third.

That is correct. We have been successful in growing our parts and service revenues through down cycles.

Maybe not at the same rate --

Maybe not at that, not at an accelerated rate of course but --

We've always maintained.

And we've either grown or at least maintained absorption rate even in economic recessions of the 2001, 2 and 3 timeframe. So you looked at those factors and you add in obviously the ATS transaction, which anybody can go back and look at the modeling on the S1 that we did last November, you added about 30% of the size of the business in that transaction. So you look and factor all those things together and I think you do not have as precipitous a fall off in '07 as people may have seen in the past. Now does that translate into an absolute economic dollar per share that I'm going to give you? No. I'm going to let you guys model that. But I think our guidance is it's not nearly as profound as the last decline in the truck market.

And if you look also at the fact it will supplement some of the Class 8 sales with medium-duty truck sales the growth on that side of the business, you have to throw that in the equation also.

Just one final question on medium. Can you split, Rusty, for your medium trucks, for your medium trucks, all of them, just kind of windage for the whole thing, kind of how they break down between government, vocational, fleet or versus the onesie, twosies?

Sure, that varies obviously because the most cyclical part of the business is the truckload side, okay. The vocational side is obviously a little more stable; it's tied more to the general economy as you look forward it's always a little bit more stable. I would tell you that currently our mix is going to be in the --

Just for the mediums, right?

Medium. I'm sorry; I was talking 8. That's going to be different, John, you don't have obviously -- I'm sorry --

You don't have truckload there, yes.

I misunderstood. You don't have the truckload or anything; I misunderstood the question. I would tell you that most everything -- it would be a little hard for me. I don't have that information in front of me. But if you'd like me to get that for you I can probably get it and see how much is governmental and vocational. I will tell you most of it is tied more to general small-business than it is tied to government or local municipalities. But we do have a percentage. If I was guessing I would probably tell you 20% will be tied to municipal and government business and the other 80% would be tied to small, medium and large business.

So there is not much vocational in the medium trucks?

No, there is plenty. There is plenty from a dump truck perspective, a small mixer perspective, many that's all vocational type business so, yes, you do have that. There is vocational in the oilfield, and the class 7 trucks --

I can get that later; I didn't mean to interrupt on this. I think that would be something that would help as you move into the medium to help us understand the less volatility of that business.

Right. Because it gets to more spread across the face of the general economy. Remember everything we are talking about assumes a decent economy as we look forward.

Chaz Jones of Morgan Keegan.

That is a new one I haven't heard that before. Good morning, guys, congratulations on a nice quarter. A couple things here. Rusty, could you maybe talk about the used equipment market? I think certainly in the early fall that market softened up a little bit and where it maybe stands today?

I can tell you right now we are in real good shape. In fact we're aggressively pursuing used equipment right at the moment. Our inventory level as of today sitting here is probably at the lowest point it has been in eight or nine months. We feel good about the used market; yes it did soften. The used market historically is always going to soften during the winter months and then pick back up as it thaws out. Historically the used market picks back up in about March, it gets a little soft November, December, January, February and picks back up. And right now I was talking with our head used truck vice president yesterday, we see it picking back up at the moment, looking pretty strong going forward.

Are you pretty much able to sell most of the equipment you can get your hands on rather quickly?

We've been turning it rather fast, we turn it over -- we are turning it in less than 60 days. We can keep it at that rate we feel very good about where we are at because it's very important that you turn used equipment quickly unlike new equipment it can lose its value a lot faster.

And then maybe on the medium-duty front. I think several conference calls ago you had said kind of a preliminary goal in 2006 was maybe to reach 4000 trucks on the medium-duty side. Certainly we saw some nice ramp up here in the fourth quarter with the acquisitions benefiting that a little bit more. Is that still an achievable goal looking out to 2006?

As you look at '06 from a delivery perspective I think everyone should be aware that a lot of fleet business will be backloaded in the year, on the truckload side and also on the medium-duty side. Deliveries units per se may not be as high as the fourth quarter was but I would expect deliveries to ramp up quickly as we get into the year. We are looking for a great first-quarter but at the same time I would expect it continue to ramp up quarter by quarter as we go through '06.

So 4000 is still an achievable number?

No question, no question. There's nothing -- the targets and goals have not changed, Chaz.

And then looking at the opportunity with the medium-duty side I mean should we continue to expect that the parts and service growth can maintain kind of a high teens type growth rate here?

I would tell you we can maintain a teens type growth; I am not going to say high teens. We had nice widening margins last year. If you look, gross profit I mean if you look at same-store parts and service sales for the year, it's the same-store sales for the year were up 13.6 and margins were up 20.6. That is nice. I don't know if we can maintain that same widening margin, we are going to try. But I would expect somewhere in that growth rate that you see the sales number in the 13 range that is usually our target from a same-store basis, even without the medium-duty. We always have an issue -- remember parts and service we work on anybody's stuff. It does not have to be a truck we sold. So we will work on any class 8 or medium-duty truck in the marketplace. So your opportunities are endless. Remember a truck is more than an assembled piece of equipment, so you have many nonproprietary parts on there that you're able to go out -- unlike it's not just all (indiscernible) you have many nonproprietary parts and perform many services on any piece of equipment. Your market opportunities are pretty endless to be honest.

Are you expecting any type of maybe hangover in the first-quarter of '07, Rusty? Maybe trucks that were manufactured pre '07 but actually don't come out until the first-quarter? So maybe it's not as bad as you might think?

Yes, I think the first-quarter will probably get a little over-lagged. Remember you got to read the rules, the rules -- you've got to stop producing engines by December 31st. That doesn't mean trucks. Obviously trucks, the OEM gets the engine, he builds it and we deliver it. There's a process that's a 30 to 60 day process at least there, okay, that you go through to get to the end-user. I would expect there to be a little bit of an overhang there but that is yet to be seen but I'm sure there will be some.

Okay, that's all I had, look forward to 2006.

Thank you, Chaz. We look forward to 2008 and 9 along with 6.

John McGinty.

You are not saying your first-quarter is going to be flat or under pressure were you Rusty? Just want to get Marty back there on --

No, not in the least. That was not the comment at all. The comment is you'll see deliveries; deliveries will be nice but you will even see them ramped up even more as we go through the year. You're going to see backloading throughout the industry, John, you know that I think.

Where are your orders? Are you guys now full for '06?

No, given what we have in front of us and understandings we have with our manufacturers we are not full at the moment, no, sir. We've got a nice order bank but we are not full.

But you are into the third-quarter at least?

Remember, John, its spread out over the year; it's hard to say. You follow me because a lot of (inaudible) 07 is being backloaded, some of the big fleet deals are backloaded.

Have you gotten your fleet deals negotiated yet?

The majority of them, yes. There are still a couple that we are working on but the majority of them, yes.

When we look at '06 for a new Peterbilt comparably equipped, I mean and that's the hard part, are we talking 3, 4, 5%, what kind of price are we getting in '06 versus '05?

Well, I would tell you probably in the lower end of what you said there, John.

The 3, 4% kind of range.

Yes, because there has been some cost increases. But customers understand what those are and willing to pay that and I think that will be pretty much in line with whatever the component cost and raw material costs have gone up.

You don't think that as we move toward the end of the year and we begin to fill out those slots in '06 and those '07 trucks get closer that there might be a little bit more of an increase?

I would imagine that as you go towards the end of the order intake cycle for '06 as we go forward, which most people believe I think it will be pretty full by the end of spring --

Right, but there will be some jack up in prices?

There might be that last 10% or so.

And is your manufacturer still trying to balance and trying to favor one engine over another in terms of pricing?

I really don't want to get into that John, I would leave that up to him to answer.

Like he's going to say that.

That's manufacturer stuff, I can't answer it, I don't know the number.

Final question, you're looking at all these acquisitions, you are looking at all the medium-duty from all over within your territory, where are we in terms of class 8 acquisitions? Anything outside of the existing boundaries?

I would just say, keep tuned, okay. As always, John, we have -- you know, you sign letters and things if you're working on something so I would just say --

Fair enough. Thanks very much.

Mr. Rush, it doesn't appear we have any more questions at this time.

Great. We thank you for your participation this morning. We look forward to talking to you at the end of the first quarter and have a wonderful day. Thank you very much.

This call has been concluded.