Rush Enterprises Inc (RUSHB) 2006 Q1 法說會逐字稿

Good morning. Thank you for joining the Q1 release earnings conference call for Rush Enterprises. As a reminder, all lines will be on listen-only mode and we will connect a Q&A session at the end of the call. (OPERATOR INSTRUCTIONS)

At this time, I would like to turn the call over to the Chairman of the Board, Marvin Rush, so that we may begin. Mr. Rush?

Good morning. Welcome to our first-quarter 2006 earnings release conference call. On the call today are Rusty Rush, Chief Executive Officer; Marty Naegelin, Senior Vice President and CFO; John Hiltabiddle, Controller of 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 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, 2005, and in our other various filings with the Securities and Exchange Commission.

Now we would like to give you an update on our progress, talk about the fourth quarter versus the first quarter results. In the first quarter, the Company revenues approximated totaled approximately $498 million, a 24% increase from revenues of $402 million reported in the same period last year.

Net income for the quarter was $11.6 million, or $0.46 per diluted share, compared to $7.7 million, or $0.31 per diluted share, in last year's first quarter. The Company began recording stock option expense in the first quarter of 2006, as required by Statement of Financial Accounting Standard 123(R). The non-cash pretax expense totaled $964,000, equating to $0.02 per diluted share in the first quarter of 2006. As these numbers demonstrate, the first quarter shows that the trend of increasing demand continues.

Talk a little bit about the truck segment. Rush's truck segment recorded revenues of approximately $474 million in the first quarter of 2006, compared to $389 million in the first quarter of '05. Unit sales of new Class 8 trucks increased 5.2%, from 2185 trucks in the first quarter of '05 to 2295 trucks in the first quarter of '06. Revenue from heavy-duty truck sales increased $35.6 million, or 15.7%, from $226.1 million in the first quarter of '05 to $261.7 million in the first quarter of '06.

Our focus on growing the Company's medium-duty truck business is showing results. Unit sales of new medium-duty trucks increased almost 43%, from 624 trucks in the first quarter of '05 to 891 trucks in the first quarter of '06. Revenue for medium-duty truck sales increased $16.1 million, or 49%, from $32.9 million in the first quarter of '05 to $49 million in the first quarter of '06.

Unit sales of used trucks increased 8%, from 980 trucks in the first quarter of '05 to 1058 trucks in the first quarter of '06. Revenue from used truck sales increased $9.2 million, or 23.6%, from $39 million in the first quarter of '05 to 48.2 million in the first quarter of '06.

Parts, service and body shop revenue increased 24%, from $79 million in the first quarter of '05 to $98 million in the first quarter of '06.

The Company's absorption rate increased from 96.4 in the first quarter of '05 to 100.9% in the first quarter of '06. The Company's same-store absorption rate was 102% during the first quarter of '06. 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 for 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 approximately $19 million in the first quarter of '06, compared to $11 million in the first quarter of '05. New and used construction equipment unit sales revenue increased 80%, from $8 million in the first quarter of '05 to $14.4 million in the first quarter of '06. Construction equipment parts, service and body shop sales increased 25%, from $3.2 million in the first quarter of '05 to $4 million in the first quarter of '06.

We will talk a little about acquisitions. In March, we reported that Rush purchased certain assets of Great Southern Peterbilt, a Peterbilt and Hino truck dealership in Jacksonville, Florida. This acquisition provides Rush with the rights to sell Peterbilt and Hino trucks, service, and parts in Jacksonville, and provides the Company with a fifth location in Florida. Jacksonville is a great city with a growing economy, and we believe that Rush Truck Centers of Jacksonville will be a great addition to our network of Rush Truck Centers.

Looking a little at the industry outlook, we remain very confident about Rush's prospects in '06. The new diesel emission law requirement that will take effect January '07 has accelerated new Class 8 truck demand, and we expect all of the production slots for 2006 to be taken by the end of May. The economy will remain strong and we are well positioned to take advantage of this climate of record demand.

We do expect a temporary decrease in truck sales in 2007, and more specifically, comparable truck deliveries in the second and third quarters of '07 to be down more significantly than the first quarter of '07. We expect truck sales to rebound in the fourth quarter of '07 and to be followed by strong markets in '08 and '09 due to the impending 2010 diesel emission standard.

We expect medium-duty industry sales in 2006 to approximate 2005 sales. However, we expect to sell more than 4000 medium-duty trucks in 2006, compared to 2800 in '05. While medium-duty demand in '07 is expected to decline slightly from the new diesel emissions requirement, we expect our medium-duty deliveries to increase slightly compared to '06.

Additionally, we remain committed to increasing our absorption rate to 110% by 2008. We believe by continuing to increase our absorption rate, we can maximize our profits in 2006 and soften the earnings impact that will result for fewer Class 8 truck sales being sold in 2007.

We are now prepared to answer any questions and answers you may have. Operator, please review the procedures.

(OPERATOR INSTRUCTIONS) John Barnes, BB&T Capital Markets.

Could you talk a little bit about the increase in SG&A expense. It looked like it was up as a percentage of revenue year-over-year. I could not really get a feel just out of your press release as to why that would be up, other than potentially acquisitions. But could you just address that a little bit?

John, this is Marty. Two things affected SG&A in the quarter. First, you had the first-quarter impact of the acquisitions comparably speaking from those that were not in the first quarter of last year. So the four acquisitions that we did in September of last year had the full run effect, and those are small stores, but yet they are not quite up to speed as to what a regular store would be from a revenue generation versus a SG&A impact. That is the first thing.

And the second thing is when you have widening margins at the truck sales line, your selling component of that expanded margin will result in higher SG&A percentage as a percentage of total sales.

All right, that's fine. On the impact to SG&A from the acquisitions, we should see that probably for another quarter or 1.5 quarters, and then we will roll over on that in September but we will still have the Jacksonville acquisition kind of lingering out there. So we should see SG&A come down a little bit?

Right.

Okay. Let's see. Could you talk a little bit about used equipment prices? We're getting a lot of questions as to how Class 8 used equipment prices are holding up.

John, this is Rusty. Class 8 used, I would tell you, are extremely strong. If you look, we were up roughly about almost $6000 in per-unit sales, which is about 15%, from year-over-year. So that will give you a little guidance as to what the valuation is. Valuations are still fairly strong out there, given the impending '07 emission issues and with production slots filling up. Obviously, late-model, low-mileage equipment is in demand and pricing is reflecting that.

Okay. Inventory levels of used equipment, are you having a hard time finding them? Is that why it is only up 8%, or do you think there is a good enough supply out there of this used equipment?

We are still having a little hard time. Remember when you look at used, you have to really understand where the used cycle is, look back three or four years ago and see what the market was at that time. And if you look back 2001, 2002, 2003 were all in the 170 range, 170,000 North American. Given the total market was in that range compared to where we are at now.

So obviously it is supply/demand issue. With freight being up like it has been over the last few years, last couple years in '04 and '05, used equipment is hard to come by, I will be honest.

All right. Medium-duty is one of the key components of our thesis on your stock (multiple speakers), and 43% growth in medium-duty unit sales is not probably sustainable. But what do you think is a sustainable number for you guys? Is it 15% or --?

I would tell you on a same-store basis, I would expect for the rest of this year, as we have stated prior, we would like to get to over 4000 or 4200 units this year. Remember there was some acquisitions that were leveraged onto some existing dealerships -- when I say, acquisitions of other franchises last year. But on an ongoing, same-store basis, I would expect around a 20% increase, John.

Okay. Then two last questions. Number one, on the absorption rate, is there anything that you're seeing in your business, and especially as the fleets -- some are deciding to run their equipment a little bit longer and get past this '07 thing, some are replacing obviously quicker -- are you seeing anything on parts and service that would lead you to believe that you can achieve your goal of 110% prior to '08?

I want to stick with the '08 statement that we made last July when we came out with that. I would tell you that we are always looking to achieve quicker. Obviously, achieving 100% in '05 ahead of our goal of in '06, we were proud of that.

But I would expect that we would -- '08 sounds -- I still believe the 110% in '08. I don't believe we will be able to achieve that in '07. It's possible if we have goal -- it would be around 103 this year, between 103 and 104. And I [would] expect a big expansion of that going between '07 and '08 myself, as the market ramps back up in the fourth quarter of '07.

Okay. Lastly, I would argue that the predictions for '07 are all over the map. Some have it just absolutely doom and gloom; some are saying it is not going to be that bad. There are enough carriers we talk to that are saying, hey, we are going to stick with our normal replacement cycle. Is there anything out that you see that suggests that '07 is not going to be quite as bad as some of the doom and gloom forecasts?

First, you have to understand your customer base, okay? We are not totally tied to the truckload side of the business. As you know, the vocational side of the business is a very large component of our model. And because of that diversification, that business is normally tied more to the general economic conditions than it is to industry conditions, which truckload seems to be tied more to industry conditions.

So I'm hoping the diversification of our customer base would allow us to not have the impact from total unit sales that the overall market has next year.

Okay, very good. Guys, nice quarter. Thanks for your time.

Chaz Jones, Morgan Keegan.

Maybe if I could start out here on gross margins, we saw a nice, healthy uptick on the truck sales side. Maybe if you could just talk about what's driving the uptick in gross margins and is that a sustainable level looking out at the rest of the year.

Obviously, I knew the gross margin question was going to come in this morning. Obviously, gross margins were up. I would tell you that really it's derived from a mix of business. When you understand -- if you look at the unit sales from first quarter of '05 to first quarter '06, you'll see they are only up -- what -- 5%?

I think a key indicator is to understand that really none of the truckload, no fleets, took deliveries in the first quarter. That is al more of your small (indiscernible), small type customers that we deliver in the first quarter. An example of that is if you look at the finance income line. It was up about 30%, which sort of indicates the type of business, because obviously we don't get involved in the finance side of the business on the larger fleets and truckload side.

So the shift in the business mix was the reason, more or less. I would not tell you that is sustainable. I would expect margins as we go on into the second, third, fourth quarter to be more comparable with historical margins over the last three quarters -- more in the 7 range.

But it was strictly a mix of business. We delivered -- I can tell you all of our larger truckload carriers, we delivered no product in the first quarter to.

Maybe just to tack on there, Russ, the finance certainly was strong here too. Is that something you expect to continue to be strong here or is that related to mix as well?

I would expect finance to remain strong like it has been, with just the unit -- the unit delivery percentage growth will catch up more with the finance growth as we go forward. I would expect it to remain where it has been.

Okay. And then maybe one other question. I think on the last call, we had talked about parts and service and kind of the growth outlook maybe in the mid-teens moving forward, yet we were, I believe, 26% here in the first quarter. Any changes there?

Remember, that included acquisitions. If you look at same-store, we were up only 21% on parts and service growth same-store. So not 26, but 21 on same-store. So I would tell you that we believe it's sustainable, especially when you look at the agenda that we have laid out going forward.

The medium-duty agenda that we have been undertaking over the last three years has really not come to fruition in the back end of the business as far as parts and service. Because you first have to plant the seed, and that is what we have been doing over the last 1.5 year, obviously, with the growing unit deliveries we have, is to get your product into the field.

And then as we learn how to leverage off of that product into the field and leverage it into our second shifts, which are our least efficient shifts in our shops, we look for that to be the catalyst actually to get us to that 110% in '08.

Great. That's all I had, guys. Nice quarter.

John McGinty, Credit Suisse.

Can I just get one number that I think I missed it. The Class 8 revenues, the unit sales were up 5% and what were the revenues up, Marty in the Class 8 trucks?

Marty will get you that revenue right now. I will tell you this, that the average sale price, which is also indicative of the type of business we sold first quarter, was up $10,000 a unit over the first quarter of last year, John.

So the total revenue on the Class 8 new truck sales side was $261,740.

And that was versus --?

That was versus $226,133.

So that is like a 30 -- what?

About 15.

15% gain, okay.

Right. Now, the average unit price was $113,850, as Rusty just said, versus $103,500, call it.

Okay. And that is the function of mix and the price increase?

Correct. It's a combination of both.

When we are looking at -- are you taking any orders for '07 yet or are the fact that there have been no prices officially set by anybody means that nobody is just doing anything out there?

First off, you've got to have pricing before you can get a deal. So until such time that the pricing settles itself out. I would imagine once we get through May, John, I would tell you that we will start -- really, it will probably be third and fourth quarter, third quarter before we really hone in on '07 business next year. Because you will have a lag of deliveries that will probably fall into January and February.

Remember, we are on the end of the distribution channel. So just because production may end in December, normally we will have a 30-day lag between actual delivery to the end-user. And it could be longer than that depending on product and bodies and mix of business.

So I would expect we will probably get some hard '07 pricing, but I don't expect it until really third quarter. And I don't expect anyone to really worry about purchasing some '07 product until late third quarter, first of fourth quarter.

In terms of -- if we go back to 2002, PACCAR aggressively raised prices on the old engines before even the new engines came in. And it doesn't look like they have followed suit this year. In other words, the pricing appears to be more modest on the '06s, even though they are more valuable than the '07s because you're not paying $10,000 more per engine.

That is correct, John. I would tell you that I have not seen from an OEM perspective -- from all OEMs that I see and touch out there, I have not seen the increase to where you would think that they were going above and beyond what would be standard margins.

With regard to the '07 engines that are out there, we have more of them out there, they have been out there longer. What are you hearing from your customers that have the '07 engines in a testing mode?

John, that is a tough one because you're still getting spotty reports, because they are scattered. I would tell you I have heard nothing that would concern me, that we will be able to run equipment with -- I don't believe there'll be any problems with the equipment. They will figure it out from a technological perspective. I don't see that there's anything -- I have not heard any backlash of any -- you know, you hear a spot here and a spot there, but nothing that really concerns me.

Are you -- I think Volvo said $7000 to $10,000 per truck with the engine, that engine on top of the truck. Is that what you are assuming you're going to hear out of Peterbilt, too -- something in that same neck of the woods?

Yes, you are hearing that. That is pretty much standard industrywide. But remember that's cost, that is not price to the end user. And supply and demand, market will dictate what the price to the end user is.

Now, the consensus forecast for '07 is 210 down from 340, that 35, 40% falloff. You have in the past refused to do anything but tell us what the industry forecasts are. Would you talk about your planning volume for '07?

Well, obviously we're planning for '07 already. We have in fact moved our annual management conference up two months as we plan as an organization to prepare for '07. So I really don't want to get into the numbers I'm planning around for next year.

But I do believe, given a nine-month timeframe to plan for it that we will be able to structure this organization to execute the plan that we have been preaching for the last three years, about the diversification of the earnings stream and the quality of earnings process that we have put into the organization since the last downturn in the early 2000s. And we are excited to be able to execute that in '07.

You had said in answer to an earlier question that you thought if we take the parts and service revenue, the same-store growth was 21%, and you thought that rate of gain was sustainable this year, let's call it 20% gain.

What happens in '07 if new truck, the demand is down 25, 30%, or in other words, that the consensus forecast is correct -- what happens to your parts and service revenues? On the one hand, with fewer new trucks -- the trucks are still being moved. Does that goes up, does it go down? Could you just give us a hand with trying to understand what that revenue would do?

Sure. You bet. Obviously, we do believe we will have growth in that line in '07 regardless of truck sales. When you understand what parts and service derive from, yes, most of the business comes from customer business, but there is some internal business that we make from the delivery of trucks. So that would be off.

But then you look at more new trucks in the field so your warranty should be up; your warranty labor sales, your warranty parts sales will be up, along with customer business. Because as soon as deliveries slow down, obviously the age of the fleet increases. So that means the existing fleet out in the country ages, which demands more parts and service.

And we have been successful, even in declining markets earlier in this decade, of sustaining growth in the teens. From an absorption perspective, you've got to remember -- absorption has a numerator and a denominator. That is the expense side. So managing both sides of that equation is the key to running a successful dealership when truck sales are down.

So I wouldn't say that we would be able to maintain growth on the absorption side to the levels that we have maybe in '05 and '06. I don't know that we can maintain those levels, but I am very confident that we will still be able to get that 110%, whether we do 103 this year, maybe 105 next year and jump to 110 in '08.

I'm very confident that with the mix of business, the continued focus on the medium-duty business -- remember that -- the volume of medium-duty -- medium-duty business is tied more to general economic conditions than it is to industry conditions. So as long as we had a decent general economy, the medium-duty business will not see the hit that the Class 8.

And that is another thing to differentiate between now and five years ago, is the volume that we will continue to push through. That is why we expect medium-duty deliveries to grow slightly in spite of engine emission issues, as we continue to execute our plan, and in '07 we expect them to even grow.

Okay. Final question, on the construction equipment business, you had a very solid gain in revenues and an improvement in -- I'm sorry, a relatively flat margin, if I'm looking at these numbers correctly. And what I guess I'm trying to understand is I have heard this throughout the country, that Deer is out there doing some discounting, even though demand is phenomenal. Could you talk to why in the world there is anybody discounting on the construction side when demand is up 30, 40%?

Very simply, John, in our market, we have not performed at market share averages of the average North American dealer. John Deere has asked us to step up our market share performance, and in an effort to do that, we have taken discounts on some equipment in that market.

And as a result, our market share has improved, our unit deliveries have improved, and we have managed to maintain profitability. Does it look like you're giving away some equipment? For lack of a better word, maybe so. But you are just taking discounted margin on that incremental business to get to market share.

But do you think it is sustainable? In other words, you are not the Rush truckstops in the construction business. You are the poor Volvo dealer out there going up against Rush.

Unfortunately, you're right. We are not the [Cat] dealer, are we?

I did notice that.

At the end of the day, can we maintain a 20% market share or get to a 20% market share in our territory. (multiple speakers) believe we can do that.

Really?

Is it going to require us to widen the product offerings and take less margin on an absolute per-unit sale on some equipment? Yes.

And I cheated. There is one final question. Acquisitions, anything known?

Go ahead.

Acquisitions?

Always looking.

Okay, thanks.

Andrew Obin.

This time they let me on the call. That's good.

We checked to make sure we put your name in the hat today.

I have a question in terms of the business mix. It was more owner-operator business earlier in the year. Just my impression -- just having come back, I guess, a month ago from the Mid-America Truck Show -- is that owner-operators were going to wait until the last minute to buy their trucks.

And I was just wondering are we seeing them coming to you earlier or -- because I would have expected that it's the fleets who would do most of their buying early in the year and then have owner-operators stick them with a nice price increase towards the end of the year.

Is that something that we've seen with Rush, something very Rush specific, or is that sort of broader industry trend -- owner-operators coming early?

I would look at it as specific to us, Andrew. I'll give you two reasons that I see for that. If you look at our inventory mix and where we were 24 months, 18, 24 months ago, we used to be heavily weighted in our inventory, our stock inventory mix, towards the over-the-road type truck. We were probably 75% over-the-road and 25% vocational.

We have moved our mix around as we have seen general economic conditions very strong over the last two years, to stock more vocational type trucks. So we have seen a huge increase in owner-operator vocationals out there. And you wouldn't maybe call them owner-operators per se under the standard old terminology, but they are small companies that are in the dump truck business and in the haul business, the bulk hauling business. Things like that help drive that mix or that volume that we had going through the first quarter.

So I would tell you that I would say -- and we were so strong. Remember, we're moving out old year model product at the same time this first quarter. We wanted to make sure as year models changed, most manufacturers changed their year models back in February. So we were very cognizant of the fact of trying to move out the old year model stuff to get in the new.

Do you think more vocational is also an industry trend or is it once again Rush-specific, given that you are guys in the South?

I would tell you that it is specific to us. You will continue to see a lot of vocational out there, but we have really focused on it. How many times have you heard me talk about it, Andrew, as that mix of business -- that is the side of the business we want to be on. We want to be on all sides, but we have focused extremely hard -- and you can tell by our inventory mix -- on that piece of that segment of the business.

And segmentizing -- not just -- I'm not just saying vocational, but segmentizing it into even breaking it down into smaller pieces, other than that and focusing on it, and the sales effort that we have had working strictly on certain segments and having experts in the field, sales experts in these certain arenas, to make sure that we execute on it. And I think the results are showing up.

Thank you very much.

(OPERATOR INSTRUCTIONS) Mr. McGinty.

I just wanted to follow up on Andrew's question and your answer to it, Rusty. When we look at the fact that the margins were up because it was non-fleet business, I think the natural thing is to think owner-operator. Could you give us, of the Class 8 trucks, what percentage of those are vocational and where that is versus what the norm is?

Yes, I would tell you that as much as anything, we probably -- I have not dissected the first quarter, Andrew, in segmenting about. So I don't have the numbers right in front of me. But I can give you my feel for it. My feel was that we were probably in the high 30s to 40% vocational type, which is above. And that percentage goes up -- remember, as truckload goes down, as fleet goes down, the percentage rises, right?

So again, there's two issues there. The volume was not as strong. The unit volume will be stronger later in the year, no question.

What would vocational -- if we looked at '04 and '05 on average, across the average, what would vocational normally run as a percent of your Class 8 trucks?

It still runs anywhere from 30 to 40%. And that is probably more driven by the truckload demand -- it's driven by two things. Truckload demand plus our increase in actual, absolute unit sales on a same-store basis. So I would say it is between 30 and 35 and now it is pushing 40.

When you pick up American Truck in the Nashville -- did that change or was about the same or does it make a difference?

No, they were more over-the-road. But we have focused -- again, we have brought our operating model to them, which they did a lot of things extremely well, as we talked about when we did the acquisition over a year ago. And they were great in the over-the-road, owner-operator type business.

But we have tried to bring our expertise and market segmentation and going after the vocational business, and I can promise you the results are showing up there. We are very pleased.

Excellent. Thanks very much.

Peter Nesvold, Bear Stearns.

Maybe just a quick 50,000-foot question. I know you are Peterbilt dealers, not Kenworth dealers. But when I look at the medium-duty builds between the two nameplates, Peterbilt has been really strong the last three quarters, up about 28% year-over-year. Kenworth is actually down 17% over the last three quarters.

Is there any reason that you can elaborate on why Peterbilt seems to be more successful right now in penetrating the medium-duty market?

You know, there's really no product or anything I can attribute that comment to, Peter. But I can tell you, obviously I think a better dealer network. I have to look at ourselves and look inward and the execution of our sales model and our sales philosophy in attacking that market.

I think because we have been able -- remember, our medium-duty sales are not all Peterbilt, okay? You have seen all those additional nameplates that we have added over the last two years as we try to touch the breadth of product in medium-duty. Remember, medium-duty is a price point. Brand does not mean as much.

So that is why we have gone out and gotten more nameplates over the last two years, which has allowed us to grow our infrastructure, to continue to put more resources towards the sale of product. So I think breadth of product -- as we tell our manufacturer, Peterbilt, the breadth of product allows us to absorb the cost side of that to build the infrastructure, and it benefits all nameplates. And I think our execution is proving that out with all the manufacturers we represent.

Okay, then just one other quick question. The medium-duty industry orders in March, 35,000, clearly the pre-buy is on. But that is actually just truck orders; I guess it was closer to 40,000 for all of 5 to 7. I think three months ago, a lot of us did not really expect much of a pre-buy in medium-duty.

What has changed in that market? And do you think this is a short-term blip or do you think this really runs for another five or six months? Because there are a lot of production spots left in medium-duty truck this year.

You bet there are. And I think it will continue to -- I'm not going to say it's going to stay at those levels of 35,000, but mid 20s. Mid 20s to 30,000. I would expect it to maintain that over at least the next 90 days to 120 days, Peter. Because obviously that segment of the market receives the information after the truckload segment. Because trucks are not their business -- a typical medium-duty customer, trucks are not their business. It is an asset that gets goods to market, it is not a revenue-producing asset.

So the lag in understanding of the emission laws will catch up and that allow us, I believe, for good order intake over the next few months. I agree with that.

Does that cause you any concern when you look ahead to '07? Clearly, you are in a real growth stage right now in medium-duty. You are doing a great job acquiring dealers and adding new nameplates. But are we setting ourselves up for a double whammy in '07 if --?

No, I don't think so, I think, because it is still going to be driven by general economic divisions. When a man is trying to get his furniture to market or his produce to market and his truck gets aged and breaks down, he is going to purchase that piece of equipment regardless of emission laws or anything else.

So I don't believe you'll see the impact. Where you're talking about 40% hits on the Class 8 side, we look for maybe a 10% hit on the medium side of the market next year. And we think because of our continued growth on that side of the business, we are still not hitting on all eight cylinders, trust me, on the medium-duty side of the business. This is an evolving sector of our business model.

So as we continue get better at that, we believe that will more than offset next year and allow us to at least remain slightly ahead of deliveries of where we are at this year in '06 -- we will be able to run down those deliveries in '07.

Eight cylinders? I thought you guys were an in-line 6.

Well, it depends on which --

Thanks for the time, guys.

I guess I used an old phrase and I should have used that.

[John Harrigan].

This is Joe Harrigan. Good morning. I was just calling -- you had mentioned earlier about ATS. Is that acquisition completely bedded down now? Are those stores running at the same rate as the Rush stores or is there still some room for improvement?

Oh, there is still room for improvement on certain sides of the business, certain profit centers, such as the parts and service side. We're making nice progress, but we're nowhere near what we believe will be the goals that we will achieve from an absorption perspective. They still run underneath the absorption of a typical Rush Truck Center.

But we made a lot of investment last year in the ATS acquisition. And actually, I don't like to talk about ATS. To me, they are just part of Rush now. But when you do break those components out, we have made progress. We're nowhere near meeting the standards from a parts and service absorption perspective.

But we have made a lot of capital investment. The brand-new state-of-the-art store in Nashville; taking Fort Worth from a parts-only store to a full-service store. We're currently trying to take Abilene from a parts-only store to a full-service store. All the investments that we have made are going to continue to drive the back-end numbers. From a sales perspective, they are doing an excellent job. They always have historically and they have continued that since we acquired them.

Okay. Just secondly, on the medium-duty side, are there any particular brands or products that are doing particularly well? Is your strategy evolving there at all to focus on fewer medium-duty brands or are you still happy (multiple speakers)?

I think if you look at the brands that we have taken on, we have been pretty -- we knew originally we had a plan in place, and we have stuck pretty close to that plan as far as the brands that we have represented. I think we have made progress on fronts on all of them. There has been growth in every model that we've represented on a same-store basis.

Okay, so there's not any particular line or lines that are (multiple speakers) most of your growth?

No, because if you look a medium-duty customer, it's price point, it's not brands. So touching that breadth of product -- because a Class 4 and 5 product is not a Class 6 or a Class 7 or a large 7, which is called a Baby 8. So you need that breadth of product, each of these different brands play stronger in different arenas there.

All right. Thank you very much.

At this time, we have no more questions.

Thank you very much. We look forward talking to you next quarter.