Rush Enterprises Inc (RUSHB) 2006 Q2 法說會逐字稿

Good morning. Thank you for joining today's Q2 earnings conference call. As a reminder, all lines will be on listen-only mode and we will conduct a Q&A session at the end of the call. (OPERATOR INSTRUCTIONS). I'd now like to turn the call over to the Chairman of the Board, Mr. Marvin Rush, so that we may begin.

Good morning. Welcome to our second-quarter 2006 earnings release conference call. On the call today are Rusty Rush, Chief Executive Officer; Marty Naegelin, Senior Vice President and CFO; Steve Keller, Director of Finance; Jay Hazelwood, Controller for Rush Enterprises; and Derrek Weaver, Chief Compliance Officer. Now Marty Naegelin would like to 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 filings with the Securities and Exchange Commission.

Now we'd like to give you an update on our progress, the second-quarter results. In the second quarter the Company's revenues totaled approximately $569.2 million, a 23% increase from revenues of $461.8 million reported in the same period last year. Net income for the quarter was $14.9 million or $0.59 per diluted share compared to $11.2 million or $0.45 per diluted share in last year's second quarter.

The company began recording stock option expense in the first quarter of 2006 as required by Statement of Financial Accounting Standard 123R. The non-cash pretax expense totaled $931,000 equating to $0.02 per diluted share in the second quarter of 2006. As these numbers demonstrate, the second quarter shows that the trend of increasing demand continues.

Let's talk a little about our truck segment. Rush truck segment recorded revenues of $543.9 million in the second quarter of '06 compared to $442.5 million in the second quarter of '05. Used sales of new Class 8 trucks increased 9% from 2,469 trucks in the second quarter of '05 to 2,695 trucks in the second quarter of '06. Revenues for heavy-duty truck sales increased $45.7 million or 17% from $262.2 million in the second quarter of '05 to $307.9 million in the second quarter of '06.

Our purpose on growing the Company's medium duty truck business is showing results. Unit sales of new medium duty trucks increased 74% from 681 trucks in the second quarter of 2005 to 1,185 trucks in the second quarter of 2006. Revenue from medium duty truck sales increased $26.1 million or 66% from $39.8 million in the second quarter of '05 to $65.9 million in the second quarter of '06.

Unit sales of used trucks increased 9% from 874 trucks in the second quarter of '05 to 954 trucks in the second quarter of '06. Revenue for used truck sales increased $5.5 million or 14% from $40.1 million in the second quarter of '05 to $45.6 million in the second quarter of '06. Parts, service and body shop revenue increased 21% from $86.3 million in the second quarter of '05 to $104.8 million in the second quarter of '06.

The Company's absorption rate increased from 104.4% in the second quarter of '05 to 109.5% in the second quarter of '06. The Company's same-store absorption rate was 111.1 during the second quarter of '06. Absorption rate is calculated by dividing the gross profit of the parts, service and body shop departments by the overhead expenses of all the dealerships' departments except for selling expense of new and used truck departments. While the Company's year-to-date absorption rate is 105.3 through June, we have an internal goal of attaining the absorption of 110% by fiscal year end 2008.

Let's talk a little about the construction equipment business. The Company's construction equipment segment recorded revenues of approximately $20.2 million in the second quarter of '06 compared to $16.3 million in the second quarter of '05. New and used construction equipment sales revenues increased 34% from $11.7 million in the second quarter of '05 to $15.7 million in the second quarter of '06. Construction equipment parts, service and body shop sales increased 7% from $3.9 million in the second quarter of '05 to $4.2 million for the second quarter of '06.

Let's talk a bit about the industry outlook. We remain confident about Rush's prospects in 2006. The new diesel emissions law requirements that will take effect in January 2007 have accelerated new Class 8 truck demand and, as expected, virtually all the production slots for 2006 had been taken by the end of the second quarter. The economy remains 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 '07. And more specifically, for comparable truck deliveries in the second and third quarter of '07 to be down more significantly than the first quarter of '07 deliveries. We expect truck sales to rebound in the fourth quarter of '07 and to be followed by strong markets in 2008 in 2009 due to the impending 2010 diesel emissions standards.

We expect medium duty truck sales in 2006 to approximate -- we expect medium industry sales in 2006 to approximate 2005 industry sales. However, we expect to sell more than 4,500 medium duty trucks in 2006 compared to 2,800 in '05. While medium duty demand in '07 is expected to decline slightly due to the new diesel emission requirements, we expect our medium duty deliveries to increase compared to 2006.

Additionally, we remain confident -- 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 trucks being sold in 2007.

As far as acquisitions are concerned, in March we reported Rush purchased certain assets of Great Southern Peterbilt's Hino dealership in Jacksonville, Florida. The acquisition provides Rush with the rights to sell Peterbilt and Hino trucks and parts in Jacksonville and provides the Company with its fifth location in Florida. The integration is going well and the Rush Truck Center of Jacksonville is proving to be an excellent addition to our network of Rush Trucks Centers.

Currently we have nothing definitive to report at this time as it relates to new acquisitions. However, we remain committed to our goal of reporting $5 billion in annual sales within the next five years. We're now prepared to answer any questions you may have. Operator, please review the procedure for asking questions.

(OPERATOR INSTRUCTIONS). Chaz Jones.

Good morning, everyone. Congratulations on a nice quarter. A couple questions here. I was curious if Rush has seen any deals yet for 2007 trucks or are there any fleets trying to negotiate early in what might be a weaker market and trying to get a better price yet?

Well, Chaz, I'll tell you we're really just in the beginning throes of working on that at the moment. As you know, the orderbook pretty much totally filled out here in the last 60 days. So I would tell you we're in the beginning throes of negotiating those deals. But obviously timing is everything. And as far as from a customer's perspective, it's still fairly far out there.

If you look out we're still talking about really looking infield from the middle of February on. As you know, there will be a little bit of overrun in engines and overhang in engines that will carry us probably through the first five or six weeks of '07 build. So I would tell you that we're slowly getting moving -- moving forward on that.

Okay. Maybe a better question next quarter.

Yes, I think timing wide that would be right.

Okay. Historically from the publicly traded truckload carriers that have reported earnings so far, I think it's pretty universal that there's a driver shortage. And I was just curious maybe if you could comment on are you seeing any cancellation in orders from carriers who maybe were planning on buying more equipment but because of the driver situation maybe are reevaluating that?

Chaz, I can tell you from our perspective we have seen basically zero of that going on. I think the overriding conditions and the new emission laws will override any factors regarding drivers.

Okay.

From our perspective anyway.

And then one last thing and I'll let s somebody else have it. Just in the medium duty business, certainly very strong growth there. Is that growth proportionate across all your brands or is one brand having more success on your platform than another?

That's the exciting part for us, Chaz, is the fact that it is pretty well balanced across really the four brands or five brands that we do represent. As you know, we have Peterbilt franchises, GMC franchises, Hino franchises, UD and Isuzu. And I can tell you it's pretty well balanced across the board with the later additions that we have added over the last two years obviously gaining ground at a quicker pace.

But it's actually balancing out nicely across the board, across all brands. Because remember, medium duty is hitting price points. It's a whole different way of sales as far as going to market with products. So it's much more of a price point than there is any brand loyalty involved in the medium duty truck business.

Okay, great. And then one last one -- I apologize. Do you still have a bias to using cash for acquisitions?

I'm sorry, say that again.

Is there still a bias to use your large cash position for future acquisitions?

There's always deals to look at, Chaz.

Sure. Okay, great. Keep up the good work, guys.

[Jamie Cook].

I guess my first question -- nice job on the absorption rate. But I guess as I look at 2007, if sales go down dramatically how should we look at that?

How should we look at the absorption rate?

Yes.

Obviously when you look at absorption rate and you look at -- and there's a numerator and a denominator when you're understanding absorption. And in the numerator in the gross profit line, yes, there is an effect from Class 8 sales going down. But when you look at the internal work, the internal gross profit -- total internal gross profit generated in parts, service and body shops is roughly 10% internal. So internal work, that is the work in updating trucks, predelivering them, getting them ready.

So say you have a 35% downturn or so; so you're talking about 3.5% of gross profit. If that was truly the case -- now I'm going to tell you, it doesn't -- given the makeup of the mix of our business, I'm going to tell you it's not going to be that strong. But then that's offset by the growth that we're having in the medium duty internal work that comes in play when you're talking about updating medium duty trucks and getting them ready for delivery, for sale.

And if you look at the mix of business, the oilfield is extremely strong right now and we anticipate that remaining throughout '07. And obviously we're located in the energy sector so we're pretty confident and excited about that going forward. And because of the diversification into other vocational markets I don't feel that you'll see that strong of an impact. Will there be an impact? Yes. But our continued growth on non proprietary parts sales, our continued growth of the medium duty side of the business, we look for more to more than offset that along with some expense control that goes in place anytime you're entering a period like '07 where you're going to have a downturn in Class 8 sales.

Okay. And then my next question -- can you just talk a little bit -- when you look at -- I don't know if I'm reading too much into your press release versus last quarters, but it sounds like you said '07 will be down significantly -- down more significantly and that wasn't in the press release last quarter. So I'm just wondering if you're any more bearish on 2007 than you were last quarter and if so, why? What are you hearing from customers?

Well, I just have to believe that you're talking about a 35 to 40%, that's just how we're modeling. We've been modeling for well over 90 days now, modeling for '07 to be prepared as an organization. And if the market is better than that then we hope to prosper because of that. But we're not going to model in it what we believe to be overzealous numbers, I'll be honest.

Okay. And then when you -- have you heard anything more about the engines out there that they're testing for '07?

No, everything I hear has been pretty positive from a Caterpillar perspective and from the competition's perspective, but for sure from the Caterpillar perspective. Everything I hear has been pretty good.

Okay, and then my last question and I'll get back in queue. I'm not sure if I heard you correctly. Did you say in 2007 you expect your medium duty truck sales to be up versus '06?

We anticipate that. We anticipate overall about a 15% market decline. But you've got to remember, we're a much more mature organization from a sales perspective on the Class 8 side. So we're still growing. We're still improving. We're still getting better every day at how to go to market with the Class 427 product. So we look forward not to have huge increases like we've had the last couple years, but to at least maintain maybe a 10% increase if we're able to hit somewhere between 4,500 and 5,000 units this year. We'd like to have at least a 10% increase from a delivery perspective of -- and that is outside of any -- anything that we might pick up along the way between now and then.

Okay, great. Thank you very much.

You bet. Same store basis.

Jan Lowe.

Would you say typically your third and fourth quarters are always your stronger quarters versus first and second, would you say that would be exaggerated more so this year because of the oncoming deadline?

Will, I would tell you, when you look at the mix of earnings, usually our third and second quarter are our strongest two quarters I think if you look back historically. Historically we do have some seasonality in our earnings given the diversification. It goes three, two, four, one is usually how it goes to be honest with you -- third, second, fourth and first.

Right. I was just saying that three and four is better than one and two?

Well, if you want to combine the two I'd have to look at it but, yes, probably so. Three and four combined, but if you look at it historically seasonally it's been three, two, four, one. I would expect deliveries to accelerate. But you've got to remember, when you get into the fourth quarter you run into less working days which has a direct effect on the absorption rate from the parts and service perspective with more vacation days, less working days to produce revenue.

And what's going to be rather different next year is next year is going to look totally different than probably any year we've ever seen from a quarterly earnings perspective. That's my -- as we go forward I hope that we don't get too caught up in viewing '07 on a quarterly basis. We understand how '07 -- we believe how '07 is going to flow. It will be different than the past, but at the same time, I think you have to look at the whole year.

Right. But I'm just focusing on this year for now. Do you think that the third and fourth quarter this year will be kind of stronger than historically it's been just because everybody is booked up and everybody wants to get some truck this year?

Well, from a truck delivery perspective, yes, I would agree with that. I would expect things to accelerate and I'm not going to get into the earnings side of it, I'll let you all model accordingly. But from a truck delivery perspective, yes, deliveries will accelerate the in the third and fourth quarter.

Okay. And would you also say it's true that -- oh, I can say for fact that it's true is over the last four years the third and fourth quarter has historically been about 62% of your earnings for the year versus the first and second have been about 38% which I guess you would agree to. You kind of said that it goes three, two, four, one. So three is better than two and four is better than one.

So we do have also on top of the fact that there's going to be more trucks going out the door third and fourth order this year than typically in the quarter that the third and fourth order is usually about 62% of your income versus first and second, 38 per say?

In this business that changes -- it's a very cyclical business. You have the look at the last couple to look as the cycle started. I don't think you can use that as a basis going forward. Marty?

I think when you're modeling the equation I really believe that you have to model by revenue category and I think we've given enough guidance that we believe certain revenue categories will grow at certain rates. We put that into our Q's and our K's so that people can model efficiently.

Additionally, we've said that we expect deliveries in the second half of the year to accelerate so that this year, whether it's 62% versus 38% blend rate, you just can't look at historical averages and say therefore take the first half of the year and say it's 38% any the rest of this is going to be 62%. I would caution anybody that's modeling not to use that approach. I would Just say based on revenue categories, based on sequential SG&A growth rates, this is what the model should look like for the second half of the year.

Okay. Fair enough. I've done that the way you've just suggested and I just come up to a number that's significantly higher than what's out there and I'm just wondering what I'm doing wrong and it's unclear to me.

I'm not sure I can answer your question.

Okay. And because that's also important as to what is the kind of base I'm using as I look into 2007 and I'm going to model a 40 or 50% drop, so it's going to be off of what base?

I think that's the point we're trying to make about '07 is that you have to look at it quarter by quarter in the industry light that the first-quarter deliveries will be a spillover per se from '06, soft second and third quarter was accelerating fourth quarter.

Okay. Now because you generate a significant amount of free cash flow and you want to make a fair number of acquisitions, what would be the best time do you think to pick up some opportunistic acquisitions -- understanding the cycle, this year is going to be a great year, next year is not going to be so great. Do you think if you're buying other dealerships do you think next year is going to be a big purchase year?

I'm going to let Rusty answer some of that question, Jim. But at the end of the day you have to remember that you have to have a willing seller and a willing buyer.

Obviously given the right circumstances we're a willing buyer. But I think when you view '07 you can't view it like when we doubled the size of our footprint in '01, '02 and '03. That was an extended period. This is more or less a speed bump is how we view '07. And given the robust '04, '05 and '06 years, I can't say that I believe the same type of opportunities that we saw in '01, '02 and '03 will exist in '07 -- especially given the impending diesel emission in 2010 which we believe will drive outstanding years in '08 and '09. But there are always opportunities out there, we're always looking.

Okay. Thank you very much.

Gregory [Macosco].

If you could, with regard to the absorption rate, could you give us some idea of the spread across the different locations for the 109 average?

Well, the spread across the locations -- you remember, let's go back to last year. Remember when we bought the ATS acquisition and I said they were running roughly 80% and I had challenged them to pick up 10 points or second year inside the rush organization as I got into the rush culture. Well, they're achieving that. So we're very excited about where they're at and achieving those types of absorption growth rates. They have been extremely strong really across the board. I don't really see one area -- what's that, Marty?

Yes. What's the range, the high and the low?

Remember, you've already got some stores, remember, because we're constantly doing acquisitions. Some stores are more mature than others. If you look at a store that was already running 120% then it's really capped as far as -- it's not capped, but its rate of growth is capped, so it might pick up 2 points this year. They may be up to say 122. But you take a store that last year was a new store, some of these new medium duty stores that we're bringing on or relocated stores such as Nashville that in the first quarter was off 5 points to what it was prior year, but this quarter it's up a couple or three points and gaining and accelerating quickly as it moved into that new facility back in October.

You can look at some of the stores that are across the energy sector in Oklahoma and Texas and they've accelerated extremely nice this year. So there are different drivers in different areas, but really and truly it's across the board. Some areas more than others depending on the maturity of the location. But when you talk about being 5 points for the second year in a row we're really excited about that. I can't sit here in and guarantee that we'll be up by points in '07 given the decline in deliveries.

What we do is we maintain and, as we've preached for the last five or six years is that we can maintain it or grow it slightly in a year that might be off 40% in Class 8 truck sales, especially given the fact that we're really seeing minimal impact from our Class 427 deliveries on the parts, service and body side. We're just out pushing that product in the market and have been for the last three years. So we really anticipate picking up a lot of parts, service and body shop opportunities in that market as the sales that we put out in the prior years mature and the trucks get older in the field.

What is the lowest, is [ATFX]? That was 80% last year? Are there any at 80% this year?

A couple of the new medium duty stores that we have going on stand-alone such as in Dallas or Orlando or in Fontana and Los Angeles, yes. That's opportunities.

So yes, obviously. So there are a number of 80%'ers out there?

There's a few. A number might be -- what a number is is probably too strong a number to say, but there are a few. Anytime you're growing. It's a balancing act. Absorption is a balancing act between growth and being stagnant and maturing and standing in place. We're about balancing both sides of that equation as we go forward. So we're excited about the acquisition -- you take a Florida acquisition back from 2003, their absorption, my friend, is up 25 points since we took them over. But that occurred over a three-year period.

So if you look at our acquisition track over the past it's been a pretty steady progressive type acquisition, it's not all at one time. So we do believe there's plenty in the pipeline to facilitate future growth in the absorption rate.

So looking at '07 from what you've said, it's conceivable that on an average basis '07 could perhaps be slightly up as you march towards that 110 goal in '08?

That is correct. We believe it can be flat to slightly up. Maybe not a 5 point increase. Say we end up this year -- we're running 105 now, say we can control that, keep that up at 105 or somewhere close to that give or take a point, we would hope that we could maintain or grow that a point or two in '07 given the dynamics of what we've put in place over the last couple years.

We've been preparing for '07 with this medium duty growth and everything. We've had continued facility expansion. We've a lot of facility expansion going on right now and that doesn't mean in sales offices, that means in shop space. And shop space is what produces revenue from a parts, service, bodyshop perspective and also growth in our mobile technician and our mobile maintenance side which is incremental because it doesn't take shop space. So we've got quite a few different drivers to press this agenda forward.

With regard to the parts and service, could you just give us some color on outsourcing by the fleets and your customers? Is an accelerating, increasing or is it growing because of the growth of the overall fleet and your --?

No question it's accelerating. Remember, we are truly a distribution service organization and as we go forward we're going to continue to leverage off of this existing asset base by pushing more services and products through this existing network that we've built. We've built a different network, a contiguous geographic network across the corridor stretching between the Atlantic and Pacific oceans that our competition truly does not have.

If you understand how to differentiate yourself from your competition and how to take advantage of it to better suite a customer's needs, especially at a consolidating customer base that we see across all sectors of the marketplace, whether it be the truckload side, whether it be the vocational side, which includes refuse which includes mixer business which includes oilfield business which includes bulk hauling, logging -- all these different -- crane, heavy, different -- all specialized type, you see consolidation in all those markets and we provide a solution to a service problem that's different than anybody else can.

We don't own one, two, three, four, five stores. We have well over 50 locations across the South. So when you're a Rush customer we can give you the same answer in Tampa, Florida that we give you in Los Angeles, California; we give you in El Paso; we give you in Oklahoma City or Ardmore, Oklahoma or any of these places. So that differentiates us from our competition and from a service perspective. Because, see, at Rush we believe that service sells trucks, trucks don't sell service.

Finally then, if you could talk about inventories in the parts and service area, how were they and what were the turns at this point?

If you want to look at turns currently, turns with cores in, we're running in the high fours, mid to high fours and that's with cores in. And I don't want to digress and get into understanding inherent cores and dirty cores about inventories. But that's what we're running from a parts perspective. Truck sales are running I think at about a six rate right now.

And so I think that's up sequentially, is that correct?

No, I would say it's flat.

Okay. All right, thank you.

We've got about a $60 million parts inventory.

Jamie Cook.

Sorry, two more quick questions. One, are you hearing anything about the pricing of 2007 trucks with the 2007 engines? And I guess pricing, what the OEMs are saying and then at the same time what you think will get past the line of customers?

Sort of like, remember, Jamie, last year when everybody thought that our '06 orders -- are they going to show up? Remember in the fall when we weren't getting them and everyone thought -- but it was a matter of a pricing game. Yes, I know what manufacturers want. As I've long said, I know what the cost is but that doesn't necessarily mean what the price to the end-user is. And I think over the next 90 to 150 days we'll hone in on a price that we will get to between the customer and the manufacturer.

I would imagine that some margin will come out from the manufacturing side. I don't see any way that it doesn't to keep the lines running. Because obviously when you look at the sales of the last three years, the decline in the average age of fleets -- what are fleets? In '02 I think we were at about a 28-month average and closed last year at about a 17- to 18-month average life and we may be close to 14 or so when we get to the end of this year.

So the desire -- obviously the demand has been taking care of. So until we get to some type of pricing on -- between manufacturers and customers and us in the middle as the distributor, I don't see that happening until really late into this year into the first part of next year, to be honest with you.

But you're still -- are you still hearing for the cost 7 to 10,000, the actual cost?

I don't think actual cost to the end-user will be that high. No, not at all. I don't think your cost is even that high-level loan pricing to the end-user.

And then my next question I just wanted to talk a little bit at your margins on the construction equipment business were down a little and I was just wondering what's driving that. Is pricing in the market more aggressive? If you could just comment on that?

Jamie, this is Marty. We mentioned last quarter that we were chasing market share in our Houston territory. Our market share is up quite nicely in that territory at the request of our manufacturer. As a result we have chosen to take margin -- slight margin deterioration, that is by design.

Okay. And how should we look at that going forward? Should that continue to decline the margins, just in terms of modeling?

I don't think it will continue to decline. I think that we've taken the deterioration we want to take and we'll go forward at current levels.

Okay. Thanks, guys.

David [Grasso].

Regarding the productions spot availability, you had mentioned the production spots are pretty much spoken for already for '06, how about into '07 that still have '06 engines in them?

There's still some availability there. And we're working that out probably over the next 30 to 60 days. But it's not large. Remember, this is just -- because we're on the end of the food chain, remember. We're on the end of the distribution. So it depends -- the engine manufacturer can build blocks and build engines until December 31 and obviously then it has to go to the OEM, then it has to be distributed; build and distributed to us and then distributed down onto customers. So there are still slots that we are working on selling in January and February, no question.

And from your experience in late '02 when there was call it stockpiling, whatever it may be, a decent amount of pre October '02 engines that still were able to be sold beyond that date. How does it feel this time versus that time in the sense of engines being stockpiled or call it what you want just still into '07?

I think that's the wrong terminology. I don't see the stockpiling. I think there's a natural distribution chain and I think four to six weeks of build going through January to the first part of February is just normal. I don't see that as stockpiling. And I think you go back to 2002 I know from my manufacturer's perspective, (indiscernible) a strike going on at that time at one of their plants.

So we had some extended deliveries out into that, but there was obviously mitigating circumstance that caused that's so -- circumstances that caused that to happen. So I do not agree with that terminology of stockpiling at all. I think it is just a natural distribution.

And regarding the decision by PACCAR that no longer offer the CAT engine in North America for medium duty starting in '07? What's your take on that regarding market reaction to it customer wise. It's now obviously going to be a PACCAR branded engine but built by Cummins. How should I be viewing that customer reaction wise?

I think it's a little early. This has just taken place in the last three to four weeks. So I think you're a little bit early to ask for customer reaction to that. Obviously it's in line with some of the verticality you see going on across the board even if it's just a branded. But I really have no reaction from a customer perspective for you.

How about your reaction just knowing different customers' preferences over the years and what you're hearing about the ACERT versus EGR? What's your take on it as a business person and somebody changing a product you have to sell?

Well, I think the majority of what they sold already from a medium duty perspective was Cummins branded already from PACCAR's perspective. I think it was like a 65-35 or something along those lines type of split already leaning towards the Cummins side on the medium duty product. So I'm waiting to get customer reaction myself. My perspective is we'll see how it works out.

Okay, I appreciate it. Thank you.

At this time we have no more questions.

Okay, folks. Thank you very much. Look forward to talking to you in the future. If you've got any questions please give us a call. Have a good day.

Thank you. This call has been concluded.