Rush Enterprises Inc (RUSHB) 2006 Q4 法說會逐字稿

Good day and welcome, everyone, to the Rush Enterprises Incorporated fourth-quarter and year-end 2006 earning results conference call. This call is being recorded. At this time, I would like to turn the call over to Mr. Marvin Rush, Chairman. Please go ahead, sir.

Good afternoon, folks, and welcome to our 2006 fourth-quarter and year-end earnings release conference call. On the call here today are Rusty Rush, President and Chief Executive Officer, Marty Naegelin, Senior Vice President and CFO, Steve Keller, Director of Finance, Derrek Weaver, Chief Compliance Officer and VP of Legal Affairs.

Now, Marty 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 in the 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 our other filings with the Securities and Exchange Commission.

Now, we would like to give you an update on our progress. We'll talk about the fourth-quarter results. In the fourth quarter of 2006, the Company's growth revenues totaled 632 million, a 23% increase from growth revenues of 516 million reported in the same period last year. Net income for the quarter was 15.900 million or $0.63 per diluted share, compared to 12.6 million or $0.50 per diluted share in last year's fourth quarter.

Let's talk a little about the Truck segment. Rush's truck segment recorded revenues of 608 million in the fourth quarter of 2006, compared to 495 million in the fourth quarter of 2005. The Company delivered 3293 new heavy-duty trucks in the fourth quarter of '06, compared to 2809 heavy-duty trucks in the same period of 2005. Revenue from the Class 8 sales increased 56 million or 19% to 358 million in the fourth quarter of '06 from 302 million in '05.

We continue to aggressively develop our medium heavy-duty truck business, and our efforts are showing results. In the fourth quarter of '06, 1508 new medium-duty trucks were sold versus 831 medium-duty trucks in the same quarter last year. Revenue from medium truck sales increased 32 million or 69% to 78 million in the fourth quarter of '06 from 46 million in the fourth quarter of '05. The Company delivered 994 used trucks in the fourth quarter of '06, compared to 993 in the same period of '05. Revenue for used-truck sales increased 8.5 million or 21%, from 49 million in the fourth quarter of '06 to 40.5 million in '05.

Parts, service and body shop sales increased 15% to 103.7 million in the fourth quarter of '06 compared to 90 million in 2005. Gross profit margins on back-end sales remain constant at approximately 42%.

Let's talk a little about the construction machinery business. Construction--the Company's construction equipment segment recorded revenues of 18 million in the fourth quarter of '06, compared to 15.9 million in the fourth quarter of '05. New construction equipment sales revenue increased 18% to 13.1 million in the fourth quarter of '06 from 11.1 million in '05. Construction equipment parts and services sales increased 14% to 4.2 million in the fourth quarter of '06, compared to 3.7 million in the fourth quarter of '05.

Let's talk about our record results in 2006. I'm pleased to announce that Rush Enterprises achieved another record year for the third year running. Gross revenue exceeded the $2 billion mark, while net income exceeded the $50 million mark, the first time in the Company's history.

For the year ended December 31 '06, Rush gross revenues totaled 2.4 billion or a 26% increase compared to gross revenues of 1.9 billion reported in '05.

Net income was 58.8 million or $2.33 per diluted share, a 32% increase compared to net income of 44.6 million and $1.79 per diluted share in '05. It has been an extremely productive year for Rush in terms of acquisition absorption rate increases.

Let's review our major milestones in '06. For the first time ever, the Company sold over 20,000 new and used trucks during 2006, (indiscernible) 24% more than 2005. We delivered 11,799 new heavy-duty trucks, 4693 new medium-duty trucks, and 4005 used trucks during 2006, compared to 10,111 heavy-duty trucks and 2807 new medium-duty new trucks and 3677 used trucks in 2005. We continued to enhance our quality of earnings by improving our absorption rate to over 105% in '06 from just over 100% in '05.

Parts, service and body shop sales increased 20% to 411.6 million in '06 from 343.7 million in '05.

In March of 2006, the Company acquired the rights to the Peterbilt Hino franchise in Jacksonville, Florida. In September, the Company purchased its first Ford medium-duty truck franchise in Denver, Colorado. In November, the Company entered the important Atlanta truck market by making the largest medium-duty acquisition in the Company's history.

Let's talk a little bit more about absorption rates. We remain focused on increasing our absorption rate. The Company's absorption rate increased to 105.9% in the fourth quarter of '06 from 99.2 in the fourth quarter of '05. For the year ended December 31, '06, the Company's absorption rate was 105.2 compared to 100.4 for 2005. We expect to maintain or slightly increase our absorption rate in '07, despite the decrease in the Class 8 truck market, while keeping our eye on our stated goal of achieving an absorption rate of 110% by 2008.

Our success in 2006 can be attributed to a record year in Class 8 truck sales, significant growth in our medium-duty truck business, an improved absorption performance, expansion of our finance and insurance businesses, increased penetration in niche markets and market share growth in our medium-duty and construction equipment business.

Let's talk a little about '07. We know that there will be a sharp decline in the Class 8 truck market this year. We have implemented changes throughout our organization in the last few years to put Rush Enterprises in the best position possible entering 2007. Most importantly, we have added medium-duty franchises across our network (indiscernible) network in recent years. Although the industry expects medium-duty trucks sales to decrease approximately 15% in 2007, we expect to increase our medium-duty trucks sales in 2007, as this important facet of our business continues to mature. We also made every effort to have best-possible truck inventory going into 2007. We deliberately increased our inventory of trucks with engines built before the new emission standards went into effect. As always, we remain focused on increasing our absorption rate. We believe all of these things will soften the earnings impact that will result from fewer trucks sold--being sold in 2007.

Now, we will open it up for questions and answers. Operator?

(OPERATOR INSTRUCTIONS). Chaz Jones, Morgan Keegan.

Good afternoon, guys. Nice quarter. One question I had is, when we look at the pullback in the Class 8 sales in 2007, are you expecting a bigger pullback in terms of the fleet sales? I'm just trying to understand if there will be any type of mix shift changes in '07 and if there is, if that's going to impact margins at all.

Yes, I think definitely, Chaz. The truckload side is definitely going to feel it worse than the vocational side or the other market segments that we sell into. So there's no question that truckloads should probably be off, especially from the large fleet perspective, for the customers that pre-bought ahead of the engine emissions.

So I would expect--(indiscernible) giving you a range, truckload would probably be off, say, from my perspective, from a retail perspective, 50 to 55%, where maybe you might do it in the vocational market 30%, somewhere in that range.

Rusty, is that going to have any type of impact on the gross margin?

It's possible, Chaz, but obviously it's going to be a much more competitive environment out there so I would have to tell you that we will--we will take that as it comes because the margins will be very competitive for what business is out there.

Okay. Then can you give us any feedback maybe on initial pricing points in 2007? I'm sure you're probably in a tough position to answer that but I will ask anyway. Then, if you are seeing any type of incentive programs initiated here early on.

Yes, you know, there's definitely going to be some margin deterioration I think at the manufacturing level (indiscernible) would just say, but obviously that is a balancing act between cutting production and cutting margin as we go forward. I would tell you that it is going back and forth and you'll just have to watch the OEMs to see when it hits production cutbacks that you will probably-- you have seen some production cutbacks but I would anticipate the OEMs further looking at that further as 2007 evolves.

Okay. Then the last question, just maybe any feedback you could give in terms of expectations about the used truck market in 2007.

Well, our used truck market--as I told you on the last call, there's been some slight softening in pricing, but there has been no huge deceleration of the pricing. Pricing has not come down some large gross amount. So I think, you know, note during the wintertime, used trucks are normally--the used truck business is normally a little slower. Once spring gets upon us, March, we usually see a firming up of the used truck market. I do anticipate that taking hold this year as we go forward.

Okay. Do you have any expectation in terms of do you expect used truck sales to be flat or just maybe directionally, Rusty?

I would expect flat. You know, we were up slightly last year but I would expect flat to slightly up possibly. A lot of it depends upon the new truck side, because obviously you don't take used trucks usually unless you sell a new truck. So in most cases, so a lot of it will be dictated by the new truck activity that is out there.

Okay, I appreciate the feedback, guys.

[Jamie Lester], [Sound Coast] Partners.

Good quarter. Can you just talk about the debt being a little higher than I would have thought? If you could just aggregate the debt to how much of it is associated with the leasing operation and how much of it is real corporate debt? Then maybe it looks like there was some shift from more plan into corporate debt, so if you could just help me understand that, that debt number, that would be great.

Marty will give you those numbers. Go ahead, Marty.

Jamie, this is Marty. This year was a unique year in the leasing business in that we added, in that net debt number you see, $70 million in leasing addition. So that's a big year for us from a growth standpoint in the leasing company. That is, as you understand, dollar for dollar increase in debt and increase in asset on the leasing side of the books. So most of the long-term debt increase that you see is related to the lease units.

We also increased facility debt on all of our either expanding and/or new facilities by about 21 million. So all the debt that you see on the books is either leasing company debt and/or facility debt, and the mix is usually roughly right in the 50-50 range as to leasing and facilities. Right now, it's probably a little heavily weighted towards the lease units because of the significant growth we've had. So right now, it's running probably 60% leased/40% facility.

As far as floor plan, what you see on floor plan is kind of what you get. It is directly dollar-for-dollar related to the inventory balances that you see, subtracting out close to $70 million in parts that we have on the books.

As you know, we also said during the year that we were going to ramp inventory levels up so we could carry a larger inventory of pre-emission engines going into '07 to allow us to hopefully soften some of the sales impact because we anticipated it being a very desirable product going forward.

No, I think that's exactly the right thing to do, but you did lose me. When you say facilities, Marty, do you just mean corporate-level bank debt?

No, we're talking--well, it's facility-level bank debt. It is bank debt, or financing of facilities, not necessarily bank but it is financing of dealership facilities, not brick-and-mortar here at corporate. It would be expansion of our dealership facility. Now, we do own our corporate building here but most of increase that you see is relative to additions in facilities.

Okay. I mean, I guess the floor plan financing was up 20 million from the third quarter, whereas the inventory was up 40 million or 44 million, so--.

Well, the other thing you've got to look at is look at Accounts Receivable, because a lot of times your receivables are a day or two lag on the sale of a truck.

And at year-end, on the last week of the year, there's always a huge push of trucks being delivered, due to favorable pricing from the customer's perspective with lending institutions.

What I will say is that our net equity, as I refer to it, in our inventories, which would take receivables plus inventory, minus floor plan, was up I want to say roughly 10 million if I'm not mistaken. But that's more of a timing event.

Okay, fair enough. When you--it seemed like parts and service revenues remained a little slower than people would have thought. Was there any deferral of maintenance of any sort that you could tell, or why do you think those may be a little lower than (multiple speakers)?

Well, always remember that the fourth quarter has the fewest working days in it of any quarter throughout the year, given holidays and the time of the year, and sometimes some inclement weather, we especially had some inclement weather in the Colorado sector this year in December, so--but you really looking at fewer working days, so that's why the revenue was off a little from the third quarter, I think about 1.9 million or so.

Okay. Then the last question is can you help me think through kind of what's going to drive the absorption ratio going forward? I would think that, to some extent, if people defer new trucks, they are going to be running their old trucks a little bit longer and maybe--obviously you would think there would be more parts in the maintenance business if that were the case. So could we see the absorption ratio actually increase in '07 or is that not the right way to think about it?

I hate to make that firm commitment. I will probably hold fast with what I've been stating throughout the year, and that's the fact that we look to maintain it with a possible slight increase. As to what's going to drive it, eventually we should start seeing, in '07, the effect of the medium-duty product taking effect. As you know, most of our stores are--that we've added, franchises, are added on a Class 8 yard, so you don't have--all you have is really some incremental costs; you don't have the whole facility ramp-up cost. But obviously you have to put product in the field. It has to age before you start reaping the real benefits of the parts and service side. So we look for that to be a big driver as we go forward. If you back over the last few years, going from when it was at 1700 to 2800 to almost 4700 units, and looking to push out hopefully pretty good numbers this year on the medium side, that should start taking hold.

Also remember, absorption has two numbers. It's a numerator and a denominator. So we have tried to put in place some good cost-control, expense-management measurements that we've implemented during the fourth quarter that will hopefully take even more effect as we go into this year.

So to answer your question--that should answer your question, but we also still feel we put a lot of heavy-duty product out. A lot of focus in what we've sold has been vocational business in the last few years. So that will also take hold, where we have a nice market share in our areas and especially from the vocational side.

What was vocational, say, three years ago, say in '03 versus '06, as a percent of the Class 8 mix?

Oh, I'd like to say that we used to probably sell vocationally around the 35, 30% range of our product. Now, I would tell you it's pushing 45% of the product we push out. You know, we've really focused heavily on the refuse side in the last year. The first of the year, we started our own (indiscernible) refuse division and put four people in from Corporate to focus on that. We've gone out and we hope to reap those benefits as we set up and got a foothold in that industry, got a better foothold in that industry over the last year and as we go forward. The acceleration in the oilfield, we had a very strong construction mixer business in '06, and we anticipate probably not as strong in '07 as what we had in '06, given the slowdown in some of the housing on the coast lines, but still should have very solid year in those areas. So, we have ramped it up by specializing and working on these market segments and having people that are focused just on that market segment, not more of a rounded salesman but a focused individual as the go out and attack the marketplace.

The last question, the dealership you bought in Atlanta--can you just give a few metrics around that and then speak more generally to what sort of returns you're looking at or hurdle rates you are looking at if you do acquisitions of that sort?

Yes, I guess the best way to describe--I'm not going to dive into all those details but I would tell you that Atlanta would probably be the biggest--as we said, the biggest medium-duty acquisition we've ever done. But it was also the best as far as quality of organization acquisition that we've ever bought. They represent four different lines, GMC, Hino, UD and Isuzu, and we are excited. I would tell you that we would anticipate, hopefully over what we did in the month and a half that we owned them, on top of that, in the end of the fourth quarter, that they would, from a unit perspective, bring 800 to 1000 units to the table this year. Now, that has to evolve as we get into the year, but that would be the thought process.

Okay, the final question--that was a little over 9 million?

Yes, that was from a cash outlay perspective; that's correct.

Is there an earnout associated with that?

All in--I mean we--all-in. You've got to remember because we the three acquisitions we did last year, there was a total cash, out-of-pocket cash of about $16 million.

Yes, but--sorry, is there an earnout associated with that acquisition?

No, no, it was strictly a cash deal.

All right, thanks a lot, guys. Congratulations.

Jamie Cook, Credit Suisse.

Good afternoon, nice quarter. The I guess my first question, you guys are talking about you have obviously inventory up, you know, the trucks with the '06 engines. I mean how long does that last? Can you talk about whether you have any orders yet of '07 trucks with '07 engines?

Well, of course I will take the inventory question first. Our inventories actually peak about the middle of December, and I would anticipate, from a unit perspective, that we would have enough pre-emission engines. Obviously, it depends on sales, but as I look forward, I would tell you to run us five to six months, somewhere in that range, both on the heavy and the medium-duty side, possibly as much as 6, a little over 6, 6.5 on the medium side. So as we told you earlier in the year, we were going to do this by design and when we accomplish that--and we do believe that was the right decision to make. Obviously, the next four or five months will tell us if it was or not. But as far as orders, of course we have orders, Jamie, as you know. But you know they are spotty; it's different in different areas. We've been watching it closely because it's evolving by the minute, by the day as this year unfolds in front of us. But we feel--obviously we've talked about, in the first quarter, we should be a good quarter, and then we really get in--because they are just starting to produce in the last week or so, because it was a run-out of engines as the pipeline bled on down. So the new emission engines are just being produced as we speak in the last week or so. So they will hit the field. But we have had different pockets of strength, and somewhere there hasn't been strength so far but I think, you know, our window is very narrow here as we look out, but there's availability of product. I do believe that, as we get through the winter, that there will be accelerated demand going forward, even though the second and third quarters will probably be, from a unit-delivery perspective, the softest quarters of the year.

Okay. I guess it's too early to tell at this point whether there's any customer preference for one engine versus the other.

No, I would not--you know, I would say no. I would say that our order intake is still running, from a percentage perspective, like it has in the past, the historical numbers. So obviously, it is heavily weighted towards Caterpillar.

I mean, could you take a stab--I mean, you talked about having five to six months of pre-emission engines. I mean, do you think you're better-positioned than the overall market? In that sense I guess there's an opportunity for you to gain share?

Yes, I think--I don't know if we will gain--yes, to gain share, percentage share obviously (indiscernible) smaller market, yes. I think we are positioned well. I think our inventories, from a Class 8 perspective, are in a little better shape I think than some of the competition, but we will see. As long as that demand I think is going to be there, it takes hold, which we believe it is taking hold right now as we are working our way through the first quarter, that it will be the right decision to carry that inventory forward.

Okay. Then on the acquisition side, can you just, you know, can you just give us an update on your acquisition--not on your acquisition strategy, whether there is anything you think that could potentially happen in 2007, and whether that could help earnings, you know, whether or not it could help earnings? Then I guess the other point is what are you seeing on pricing of acquisitions?

I'm sorry, what was that last (multiple speakers)?

Just pricing on the companies that you're looking at, the multiples that they are selling at, you know, have they come down at all?

Well, I would say right now, at this time, everybody is just finishing up the biggest run ever in the history of the business. There hasn't been a lot of activity, but it doesn't take but a couple of phone calls to get that started. I would anticipate that accelerating as we get into the reality of the middle of '07. So really nothing on the table that we wish to talk about right now but obviously we are always talking to folks.

Then my last question and I'm sorry, I hopped on a little late. Your margins in the new and used equipment and construction were slightly better than I had anticipated and up year-over-year. Was there anything unusual in that?

I think just really and truly, as much as anything, we had strong owner/operator sales throughout the year as some strong (indiscernible) trucks sales, and then obviously in a better year, in a stronger year when there's supply/demand issues, which there obviously was supply--not as much supply as maybe the market wanted--you are able to get a little better pricing.

What about on the construction side, though?

Jamie, this is Marty. It's pretty much in line with what we expected. We said for the year we would take slight margin deterioration to build our marketshare. Quite honestly, we took less than what we expected. I think, for the year, our margins were down about 0.7 point. I'm pleased with that because our marketshare improved dramatically.

All right, great. Nice quarter. Thanks, guys.

(OPERATOR INSTRUCTIONS). Peter Nesvold, Bear Stearns.

I guess, on the SG&A line, it came in a little bit less than at least I was expecting. How low can that line go as you trim some excess overhead as 2007 progresses?

Well, obviously some of the things that we started putting in play in the fourth quarter are starting to take effect there. In fact, a lot of things took effect. So I would hate to say, Peter, that it could dramatically lower than that. But remember, you've got to break it into two components. You've got a selling-expense side and a G&A side, because selling remember is the commissions off of trucks sales, and when trucks sales go down, you don't have commissions to pay, right? The G&A is more your overhead side. So I would tell you there's no question, the selling expense side is going to go down and the G&A side, we're going to manage--continue to manage and compress as best we can without affecting the overall back-end and operations of the dealership.

Roughly speaking, how does that SG&A line break down between selling and G&A?

This is Marty. You've really got to take the gross profit derived from trucks sales, which should have been in the low 30 million range.

Yes.

(multiple speakers) 30% of it is going to put you in the low 10 million range. Now, one thing of caution is, as you look at G&A expense and SG&A in total, as you enter a truck market that declines, revenue declines, so SG&A as a percentage of revenue will go up in '07 versus what it is in '06.

There's no question.

There's no question about that. We're talking about sequential run rates of G&A expense at the dealership level.

Understood. But if I let's say took a $10 million sales expense and maybe had that come down 30% or so, in line with truck sales, and then maybe put kind of a PPI-type inflation on G&A as the year progresses, would that be a reasonable way of trying to approximate it?

You would be pretty close. The only thing you would miss out on was the full-year effect of acquisitions that occurred during the latter part or different stages of the year. Jacksonville occurred early; Atlanta occurred late; Denver occurred in the middle. You would have to layer those into the previous-year's quarter's G&A expense number.

Great. A cash-flow question--I was looking at how your cash-flow trended in the '01/'02 downtick. If I take both years and combine them, the free cash flow was about 35% higher than continuing net income for those years. What should I expect in '07? I mean, it looked like a lot of it was inventory in the '01/'02 timeframe, so maybe we'd see some of that again. But do you work down inventories in the first half and start to rebuild them in the second half of the year?

Well, as I look back at '06, Peter, if you truly look at, if you add depreciation back and then take the debt paydown, you've got about 52 million there, okay? Then you say, what were the acquisitions? The acquisitions took about 16 million, and at the same time, we also acquired about 6.5, 7 million of unfinanced dirt that we have yet to finance but that will eventually be financed. So that's how you get to the number that we--you know, a lot has a do with acquisitions and things like that. So, in reality, if we hadn't had any acquisitions, and had financed all the real estate that we purchased, we would have cash flowed over 50 million, instead of the 28, 29 million that shows from December 31, '05 to December 31, '06. So I don't know if that really answers your question.

I mean, the way I look at cash flow, I look at cash flow from operating activities minus CapEx, maintenance CapEx. I don't include acquisitions. You don't do dividends, so I don't have to worry about that or a debt repayment. And I include changes in floor plan financing because I view that as working capital. And on that basis, during a downturn, you tend to generate more cash because you are freeing up inventory. But I guess one thing that's unclear to me is, you know, you talk about working down several months of inventory early in '07, but I think a lot of us expect demand to start getting stronger towards the end of '07/early '08. So doesn't that mean that you have to start rebuilding floor plan inventory towards the end of the year in anticipation of a rebound in demand?

Peter, this is Marty. I think your analysis is pretty sound. What you'll find is that there's always equity in inventory. As much as we try not to have it, dollar-per-dollar as we say, there's always some equity in the receivable/inventory equation that's in excess of the floor plan. As the business accelerates, that number grows. As the business declines, into the summer of '07 and early fall, let's say, that number will decline and then it will be--if the fourth quarter is what we expect it to be, a better quarter truck delivery-wise, we will start eating it up again. That also combines with what your burn rate is on capital expansion programs. Our philosophy in the past and continues to be, in good economic times, we try to build-out facility space and get it online for our downturn, so that we can build revenue-creation at the absorption rate line at the back ends, right? That burns some cash because you've got tools, equipment, equity and dirt, those kinds of things, equity in your building. That's what we are doing right now. That was a good part of the cash that we ate.

Those projects aren't complete; they are still underway. So, they will eat some cash in '07 and we hope to bring a lot of them online by about the fall of '07 into the (multiple speakers).

(multiple speakers) really the first quarter of '07 to the first quarter of '08 we look for some (indiscernible) facility expansions that we will use the cash on during the first three quarters of the year to come online, and we will at such time place that debt on that that we have spent prior to that, as we get prepared for the acceleration in the market that we anticipate in '08 and '09.

Okay, great. Then the last question--as has been well-publicized, Paccar is going to private-label an engine in '07; it's going to break ground on its own proprietary engine in '07, start delivering it in '09. From a dealer's perspective, do the economics change at all? Are you able to capture more of the economics versus, maybe, a Cummins independent distributor? Can you just walk me through how that works--how that might work under the new scenario?

Well, you have to look at what they are doing. They are not doing the large liter, the 15-liter engine or 16-liter engine; it's going to be a 12 and I think a 9-liter engine. And that would really take effect really in '09 and 2010. So you know, long-term, from a downstream parts perspective, I would anticipate that would be good for that side of the business. It just gives a more captive customer. You will still be dealing with other engine manufacturers; it won't be all (indiscernible) Paccar (indiscernible) engine to meet all market segments as you go forward. So I don't know if that really answers the question. Plus, we have to watch it evolve in front of us. But long-term, there are benefits to having a proprietary engine.

What about the private-label engine that starts in early '07? I mean, granted it's medium-duty, so it gets less wear and tear, but does that change the economics at all to you?

Slightly, slightly, but that's still to be seen. You know, the volume there is not as strong as it is for us obviously by any stretch on the Class 8 side. We're just starting to get them, so that will--as we (indiscernible) it from an inventory perspective, we will still be eating up our inventory that we have on the ground. So I will have a better feel for that as we get through into the middle of the year.

Okay, great. Thanks for the time.

Kevin Fogarty, DuPont Capital.

Thanks. I wanted to just explore a little bit more on Peter's question, on the SG&A. You know, it seems like you've improved the SG&A by about 200 to 300 basis points since '04, and maybe a lot of that is due to the record years of '05 and '06. I was just wondering how much we should think SG&A as a percent of sales might compress in '07. Then kind of what is your assumption on the heavy-duty pressure? I know you say, in the press release, down I guess 40 or 50. I'm wondering if you have any perspective on that yourselves, given that you are probably closer to the customers than anybody else.

Kevin, let's talk about the SG&A line (multiple speakers) give Rusty the second half of that question.

On the G&A line, the way you really have to model our business is not look at it as a percentage of revenue but look at it on a sequential run-rate and break it into two pieces, the selling piece, which is the commissionable expense on truck sales, so if you take truck sales minus their gross or their cost equals gross profit times about 30%, that's going to be the variable structure that you see going forward. So if truck sales decline X%, gross profit decline X%, the selling expense will decline correspondingly by 30%, right? The G&A side is more sequential to like a CPI growth index, in addition to whatever greenfield expansion we've got going. So if we are capable of managing store-related SG&A expense to, let's say, a 5% growth rate, you would take literally G&A, strip out the S part, compute it separately, take the G&A part and grow it 5% sequentially, and add it back to the S part and come up with a number. That number would then be a percentage of whatever your revenue is in that particular quarter.

Unfortunately, you can't just say it's either 9.8 or 10.2 or 13.4%. You know, it has ranged anywhere from the upper 9% range to as high as 15% in a true economic recession. So, you can't really look at it as a percent of revenue.

Yes, no, because I'm just looking at, just from '04 to '97, that range was more like 12 to 16%, you know, the average probably being in the lower teens.

That's right.

Then you really dipped down like 300 basis points in '05 and '06 on arguably record volumes.

Yes and of course (multiple speakers).

So I'm just wondering\. When you net out, you are a bigger company; you've got more leverage; you're going to backslide a little bit. I understand the math you shared with Peter, and the CPI and G&A, but I'm just wondering if you have an expectation of how much. You know, is this going to be 100 basis points of pressure in '07, based on your plan or--?

When we measure it, we literally measure it per-department, per-dealership. It's not a percentage in our head. If you see on the financial statements a percentage, we don't measure it that way. We measure it by department, by dealership, the absolute dollars.

Okay, all right. We will have to do the math. Can you give any perspective on the '07 pricing from your perspective?

Yes, obviously '07 pricing is up. I don't think it's up as much right now as anticipated. I do believe there has been a window for some purchasing that could go on until they cut production rates. If production rates are cut further, I would imagine that pricing will firm up.

Was anticipated price increases $6000-ish on a Class 8?

Yes, yes, and yes, some and depending on engines, yes. Some were in that range; some were possibly a little lower; some were possibly a little higher. Depending--you get into a big question of what models, what you had to do to get the model ready to accept the engine. Some models would accept--because there's many models we sell in Peterbilt trucks. Some would accept it for a little cheaper installation cost than others, given depending on when that model came out and whether it came out in the last couple of years and they've set it up for it or not. But yes, it's pretty much depending--it's across the board right now--it's all over the board right now, to be honest.

I know it's early, early stages here but you said it's less than expected. Who is sharing that absorption across the supply chain between you, the OEMs, and the engine makers at this point?

Well, I'm only privy to one side of that equation, so I wouldn't be able to answer for the other parties involved. So I couldn't tell you the other side of it.

I'd do believe that--I believe our margins will hold steady, but more due to a mix of business change. Like I talked about earlier on the truckload side, the last thing and possibly with the carryover we have of old engines, we being able to sustain our margin for the first half of the year, given what we see, selling more inventory stuff--stuff out of inventory with pre-emission engines.

You asked earlier about what I think of the market for the whole year. The same number we've thrown out there over the whole year. I do believe there will be 40% at retail and a little higher than that decline at the production side, whether 45 to 45, 48% on the production side.

Did you think we need a steady economy or a second-half recovery to get to there?

I don't think--well, there's no question if there is a fourth quarter rebound in everybody's numbers as things get back to a more normalized delivery rate. So, that always needs a steady economy. I think that's a pretty simple answer.

All right, thank you very much.

We are hoping to minimize those numbers, relative to Rush, due to the diversification of our customer base; I will say that. I really don't--I would expect--we have goals in mind of where we want to be as far as what type of downturn we will take from a unit-delivery perspective. They are less than the 40%, I can promise you that.

Yes.

I will just throw one more in. How do you think your mix of customers compares to the overall industry? You mentioned TL, truckload and vocational.

We are heavy on the vocational side, I can tell you that, heavier than most, you know, heavier than most.

Can you ballpark what that is?

It would be hard--I don't know if I want to ballpark everybody else's. I sort of ballparked ours earlier in the 45% number what we would consider vocational. When you look at what the vocational market truly is, whether it's cranes, whether it's oilfield, whether it's mixer trucks, whether it's refuse trucks, all the other sectors, there's many--I can sit here a long time and give you many market segments and vocational encompasses. We focus on that. We have focused on it for years and we believe that is a much more consistent piece of the truck purchases done in this--that are done in this country is the vocational side. It will be more economy-driven than truckload will. Truckload will be heavily--it will be economy driven, too, but it can also be driven more by industry conditions, such as this free buy for admissions.

Got it. Okay, thank you very much.

(multiple speakers) many more miles than most vocational trucks, obviously.

[Bob Zales], LMK Capital Management.

A couple of questions--are there more trucks that you could take, '07 trucks with '06 engines?

No, all '06 engines are--they have finished producing.

But there's none in inventory within the OEMs that are still available?

Not the OEM that I deal with, sir.

Okay. Then, you've offered a couple different figures with respect to the downturn in '07, vocational mid-sized and heavy-duty. The heavy-duty truck business that you're in, the Class 8 trucks, help me understand, when you distill that down, you think that business looks down how much, '07 over '06?

Well, for the industry, I think retail--now remember, we are talking about retail sales numbers, I think it will be off 40%. I think that's--if you look at [Axe] numbers, where they started the year and where they are at now, they are in that same range now. They started with a lower downturn earlier in the year but I think the range they are at now is in line with what we've been saying all year.

Right, and some of that will come out of inventory that you've built up during (multiple speakers)?

Right, correct. Some of that will come out of inventory and that's why I (indiscernible) retail will be not off as bad as the production side.

I guess just the follow-up question I had to that was, you know, we are in a situation where the fleets within the truckload carriers are the youngest they've been in some time, and we also had--tonnage statistics at least in the fall of the year were just awful. You've been in this business for awhile. Does the 40%, from your view, encompass the emission downturn as well as these other factors?

Yes, I do believe that 40% number for me at the retail level does encompass all of that. I've taken that into account, and that's actually why I was a little more bearish on that 40% number earlier in the year, but I still stick with it. I think there will be some rebound. I don't--housing, housing has a big drive on a lot of our customer base, on some of our customer base, so I do expect that to get better towards the middle part of the year as we look forward.

You know, there are many factors that go into it and you asked for my experience level and understanding of what I see out there. I'm pretty comfortable with the number that I speak about.

Okay, thank you. Nice job, and nice planning for '07.

Thank you very much. We hope to execute.

(OPERATOR INSTRUCTIONS). Jamie Lester of Sound Coast Partners.

A quick follow-up--can you just explain what you meant by the investments you made kind of playing out through the fall? Then just talk about kind of--are all the expenses of those investments going through the expense line now or the CapEx? You made some comment, switching it over (multiple speakers) on balance sheet. Just walk through those from a financial and an accounting perspective? Thanks.

Jamie, what we're talking about is facility expansion. A lot of our facilities are, at some point in time, at an absorption rate level that maxes out for that facility. And so individually, you look at it and you say I want to grow that facility, and I don't grow the front office but the secretary (multiple speakers) you're growing the service department; you're growing the base.

So whether it be relocate or whether it be add-on or whether it be supplement with a different facility down the street, and maybe take a piece of the business over there, we look at any alternative that we need to grow the business inside that market. Traditionally, we do that in the time frame of a high market so that that facility is up and ready to go when it's time to take advantage of the growth before it. So that's what we're doing right now, is adding on facility space in a number of our locations. Right now, that's a capital expenditure. The overhead expense of that facility will not take place until the facility is open. So, obviously, what we would expect is that the incremental gross profit derived from the revenue created from the expansion more than offset the expense and you maintain or slightly grow your absorption rate going forward.

Now, make no mistake. Every time you open a new facility and it's much larger than the old one, your obstruction rate will go backwards for a short period of time. But your absolute dollars will increase. So it's a balancing act on absorption. You know, some of our stores are very highly absorbed and some are not so highly absorbed. The ones that are not highly absorbed are in the growth stage process. The ones that are peaked out, we need to grow some more to create some more absolute dollars. So from an absorption-rate standpoint, that's kind of a magic measurement stick for us.

Sure, if we stopped expansion, we could maintain (multiple speakers).

--a much higher absorption rate, quite honestly.

Yes. But to get to the higher, eventually you have to make those investments, and you don't just turn a light switch on.

Yes, otherwise you become pretty stagnant in your market.

But what do you think the theoretical maximum is for the absorption rate? Assuming you were to stop expansion, where could it go in a steady-state environment?

Let me jump on; let me answer that. It depends on what size store you are, in many regards, and what kind of market you're in. There's a lot of very small market, small stores that have very high absorption rates.

We've got stores that can run 140 to 150%. But the absolute dollars (multiple speakers).

But the absolute dollars are not as great as a big store, so a big store--you know, we pretty much think 125-ish, somewhere in that range.

Yes, I would say somewhere in the 120s would be max.

Yes, in the 120s, I think the midpoint. So you know, at that point, you are humming up at that store and you need to seriously consider adding onto that store to get more gross dollars out of it.

If you believe that the market will support it. You know, you do your study and figure if the market will support it. Then you would add onto it and expand. That's what we've been doing for years now, and that's why you've seen the growth from 79% in 1999 to 105 now. So it's just a consistent effort. It's not something you're going to go out and wave a magic wand on. It's a consistent effort and a consistent understanding of how to build absorption through a step-by-step process. That's what we're in the middle of and you had said what is the max and we throw out this "I don't know exactly what the max is as we continue to grow", because our footprint differentiates us a lot from our competition, because we have a contiguous footprint across the southern part of the United States where, as I've said, which differentiates us from other people, we believe, because of the solution we can provide to a customer, you know, as far us from a truck service need. So the future will tell but we believe very strongly in what we've undertaken over the last few years with the change in the organization. We will continue in that effort going forward.

Do you think there are enough organic and outside--or do you anticipate, if there is some sort of a shakeout midyear, do you think there might be--that there will be kind of enough places to put your excess cash to work? If not, what's the next use for the cash?

Well, there will be some of that--there will be acquisitions I'm sure, going forward. I can't sit here and name them to you and wouldn't anyway right at this moment. But I know they will appear on the radar as we go forward. That will not use all our cash; there's no question about that. We are continually exploring ways to deploy that cash in a better fashion than what it currently is. That's really how I'd like to leave it right now.

Okay, great. Thanks a lot, guys.

Kevin Fogarty, DuPont Capital.

Just a follow-up, I just want to understand your demand for '07 engines. Just maybe correct my math if I'm wrong here but it sounds like if you have about six months of inventory--

I would say five to six, depending on what demand here is in the spring.

five to six, so you did 12,000 heavy duties last year, and let's say you do, you know, 8 this year. Then that would mean you roughly have 4000 '06s available, roughly, give or take, which would mean you would only need 4000 '07 engines--I mean 4000 '07 model trucks for the full year? Just ballpark--I know you don't give guidance but is my thought process correct on that?

You're a little off there because I think you're mixing medium with heavy as you look at it also. But we also have--remember, we look at Class 8 trucks in two different fashions. There is true stock inventory. What you see in the balance sheet is more than just true stock inventories, what we call IPD trucks. That's in-process of delivery. When you remember that we are on the end of the food chain, so we have orders that were built out with the excess engines through January that we even carried over in January. So if I look forward to this year, obviously I think the heaviest delivery quarters will be the first and fourth quarter; there's no question the first quarter will be fairly strong with deliveries. So, you know, I don't know if your thought process is exactly right. Your numbers are probably in range. If the market is off 40, we want to be at least--we would like to be less than that. We anticipate being able to do that with what we see in front of us, given our carryover of IPD and given our stock inventory. I would want to say that we would probably, hopefully, sell more new engines than what you mentioned, though.

Okay, fair enough. On the medium-duty, you mentioned the Atlanta dealer providing maybe 800 in '07?

We would hope so. Again, you know, I'm throwing these numbers out. It is a little tough this early in the game with these engines just hitting the street, so you know you have projections and you have thoughts, but you know, it's very fuzzy view out past 60 days, let me tell you right now, in this industry. Trucks (multiple speakers).

Yes, I know. There's a lot of uncertainty. I appreciate your guidance as it stands.

The question I have on the medium-duty, as you mentioned, you want to grow that. What does that mean for organic growth? Like, let's say you hadn't done that acquisition, do you still think you could grow that had you not done the Atlanta acquisition?

(multiple speakers) most people predicting the medium-duty market will be off 15 to 20%. We predict that we believe that we can maintain flat to up (multiple speakers).

Flat to up volumes, including the dealership? That's not organic.

Without acquisition, okay? Without acquisition. We sure better deliver more without acquisition coming on in the fourth quarter and other things that (indiscernible) because remember, that organization, that part of our organization is not as mature as the heavy side, the 8 side of our business. So we are on a learning curve there, but we're getting better every day in the field; we're getting better across the board from parts, service and body to sales, all across the medium side of the business, because we are learning that business, learning it over the last three years. I'm pleased with the progress we made and I know we have plenty of room for improvement in front of us.

Okay, great. Thank you very much.

That is the end of our question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Rush for any closing or final remarks.

Thank all of you all for listening. We look forward to hearing from you if you've got any questions. If not, we will talk to you next quarter. Thank you. Good-bye.

That does conclude today's conference. We thank you for your participation. Please have a good day.