Rush Enterprises Inc (RUSHB) 2007 Q1 法說會逐字稿

Good day and welcome to the Rush Enterprises first-quarter 2007 earnings results conference call. This call is being recorded. At this time I'd like to turn the call over to Mr. Rusty Rush, President and Chief Executive Officer of Rush Enterprises. Please go ahead.

Good morning and welcome to our first-quarter 2007 earnings release conference call. With us today are myself Rusty Rush, President and Chief Executive Officer; I have Marty Naegelin, Executive Vice President; Steve Keller, Vice President and CFO; [Jay Hazelwood], Controller of Rush Enterprises, Inc.; and Derrek Weaver, our Chief Compliance Officer.

Now Steve Keller 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, 2006 and in our other filings with the Securities and Exchange Commission.

Now we would like to give you an update on our progress. In the first quarter, the Company's revenues totaled approximately $531 million, a 7% increase from revenues of $498 million reported for the same period last year. Net income for the quarter was $13 million or $0.51 per diluted share compared to $11.6 million or $0.46 per diluted share in the last year's first quarter.

Now let's talk about the Truck segment. Our Truck segment recorded revenues of $505 million in the first quarter of '07 compared to $474 million in the first quarter of '06. The Company delivered 2030 new heavy-duty trucks in the first quarter of '07 compared to 2299 heavy-duty trucks for the same period of '06. Revenue from Class 8 truck sales decreased approximately $22 million or 9% to $240 million in the first quarter from $262 million in '06.

We continue to aggressively develop our medium-duty truck business and our efforts are showing outstanding results. In the first-quarter of '07, 1439 new medium-duty trucks were sold versus 891 new medium-duty trucks in the same quarter last year. Revenue from medium-duty truck sales increased approximately $27 million or 55% to $76 million in the first quarter of '07 from $49 million in the first quarter of '06.

The Company delivered 1077 used trucks in the first quarter of '07 compared to 1058 used trucks for the same period of '06. Revenue from used trucks sales increased $6 million or 12.5% to $54 million in the first quarter of '07 up from $48 million in '06.

Parts, service and bodyshop sales increased 12% to $110 million in the first quarter of '07 compared to $98 million in '06. Gross profit margins on the back-end sales increased to $43.1 in the first-quarter of '07, up from 42.5 in '06.

Let's talk about the Construction Equipment business. The Company's Construction Equipment segment reported revenues of approximately $21 million in the first quarter of '07 compared to $19 million in '06. New and used Construction Equipment sales revenue increased 16% to $16.7 million in '07 up from $14.4 million and '06. Construction Equipment parts, service and bodyshop sales increased 12.5% to $4.5 million in the first quarter up from $4 million in the first quarter of '06.

Absorption rate, we remain focused on increasing our absorption rate. Our absorption rate increased to 100.7% during the first quarter of '07, up from 100.9% during the first quarter of '06 and our same-store absorption rate reached 102.4%. This illustrates our commitment to implement necessary expense reductions while continuing to provide the highest levels of customer service. We expect to maintain or slightly increase our absorption rate during the remainder of '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 '08.

On the acquisition front, on March 1, we acquired certain assets of Advanced Transportation Insurance Services, Inc., an insurance and premium finance company headquartered in Laguna Niguel, California. This acquisition adds four locations to our insurance network and also allows us to better serve the insurance needs of customers located in the western half of the United States.

In March we also reported that Rush purchased certain assets at Allen-Jensen, Inc.'s GMC and Isuzu truck dealership in Waco Texas. We added our medium-duty and heavy-duty Peterbilt line of products and we are operating this dealership as a full-service Rush truck center. This acquisition complements our strategy to grow our medium-duty business and enhances our ability to service customers with a dedicated staff and a broad range of product and service offerings.

A little bit about the industry. As expected, new emission standards governing diesel engines went into effect in January 1 of '07. We continue to believe that Class 8 truck sales will decrease about 40% this year due to the transition to the new technology with a softening occurring primarily in the second and third quarters. We also expect that beginning in the fourth quarter of '07 and into 2008 and 2009, truck orders will strengthen as customers prepare for the pending 2010 emissions regulations.

Although the first-quarter Class 8 truck sales were down compared to prior year, this decrease was more than offset by a 61% increase in our medium-duty truck deliveries. We believe our strong levels of free emissions truck inventory, continued growth in medium-duty truck sales and focus on maintaining or slightly improving our absorption rate will help us outperform the industry and from an earnings perspective in a declining 2007 truck market.

We are now prepared -- well before we get to that, let me make a few personal comments I want to make before we get to the questions. When I look back at the first quarter, it is important to understand that we have executed what we set forth this last several years in the diversity of our earnings stream. If you look at the quarter and take it and break it into its pieces from my perspective, we sold 300 less trucks in the first quarter of '07 versus '06, Class 8 trucks.

You'd say -- when I spoke two months ago to you, I said that I expected similar deliveries for Class 8 trucks but we came up a little short. It doesn't mean we missed deliveries. That means there may have been a shift of deliveries around. But it's important to note that it was more than offset by 550 more medium-duty trucks than the first quarter of '06, raising absorption almost 1 point.

And one thing that wasn't noted so far, but our finance and insurance was up 31% over the first quarter of '06 due to our increased penetration rate and to the finance end of the trucks we sell and also the acquisitions we have done over the last 1.5 years on the insurance side of the business. As a result, our earnings were up from $0.46 to $0.51. These again are examples of how we have diversified our earnings base over the last several years and we are very excited about our ability to execute as we go forward.

What that I will turn it over to questions. And, operator, it is yours.

(OPERATOR INSTRUCTIONS) Jamie Cook, Credit Suisse.

Good morning, guys, nice quarter.

Thanks, Jamie.

I guess my first question, can you just talk about -- you talked about how you sold -- can you talk about the level of inventory you have left for -- with trucks with the 2006 engines how that impacts the second and third quarter? And then also the medium-duty truck business was much stronger in the first quarter. How sustainable is that throughout the year?

And then last, just second, third quarter any help that you guys could give us on how those quarters should play out whether one is -- the second is worse than the third or third is worse than the second? Any way you could help us on that would be appreciated.

Sure, Jamie. Well I think -- remember this is a different year we are dealing with here, obviously. We all know the year starts or ends from a year that was the highest of the highs; it's going to dip and as we go forward, were are all anticipating when does the market pick back up and for Class 8 and really Class 4 through 7 in anticipation of the 2010 emissions issues?

Let me give you a few notes here what we expect, what we can see at this time. Remember we have like everyone else in this industry a very narrow view, a very short view as to the future so but as of this moment this is where we see things. I expect Class 8 deliveries in the second quarter to be down anywhere from 10% to 15% from the first quarter.

We expect medium-duty deliveries to maintain give or take 5% from where we were in the first quarter. And this is as of this moment as I look forward. I expect our absorption rate, which was up 1% in the first quarter over last year's first quarter; we hope and expect to maintain a flat year over the second quarter of last year.

SG&A expenses are expected to grow along inflationary rates. And interest expense should start to decline as inventories decline. Now I know you asked specifics about how much inventory we had. Well as you can see from the balance sheet, inventories are only -- you've got to remember inventories are made up of not just truck inventories but also parts inventories. So it's important to note. But they are pretty flat with where we were at the end of the fourth quarter. They are down a little bit but they are fairly flat.

But we expect that to start declining much more rapidly because you must remember the old engines because we're on the end of the food chain, were still being built in through the month of January because they -- engine manufactures had produced them through December 31, and by the time they worked their way through the food chain, it was five or six weeks anyway into '07 before we went to new technology. So we were just getting delivery of those units still into late February and into the first part of March.

So, I do expect inventories as I said. We're slightly down from where they were in the fourth quarter but they will start to decline much more rapidly as we go forward and eat that inventory -- sell that inventory off as we go forward into '07.

Okay. And then just last, anything that you are hearing on the trucks with the 2007 engines, sort of the reception? And I guess what gives you confidence that things could possibly pick up in the fourth quarter? From a lot of my channel checks anyway, it seems like people are a little more bearish and think it could really be more of a 2008 story before you see demand for the Class 8 trucks recovering.

Yes, when it comes to the truck Class 8 side of the business, Jamie, I'm in agreement with you. It's going to the late -- I don't believe it's an early fourth quarter. I expect order intake to pick up into the fourth quarter which really if you get to actual deliveries rolls into the first quarter of next year you know. Because there is a time from component supplier to OEM to dealer to getting the truck prepared for delivery for whatever type of application it's going into and getting it sold and delivered into the hand of customer.

So I would agree with what you said with those comments that it might be a little later than was originally anticipated. But from Rush's perspective, I go back to my comments at the end of the story, we can whether that. We still we believe we can do a pretty good job of maintaining even through that type of downturn on the Class 8 side of the business because I don't expect medium-duty to be hit that hard and I expect us to be able to keep our expenses at an -- really from an G&A perspective -- from an inflationary rate in lines with inflation.

And I believe you add all those up and we will continue to try to grow our parts and service because of some initiatives we have with more trucks that we've really driven by the amount of product we put into the field the last three years. Because remember your absorption rate is a numerator and a denominator but the numerator of course being the gross profit or revenue line which gross profit derives from is driven by a lot by how much product we have put into the field. And I think if you look at the last several years, we have driven a lot of product into our areas of responsibility. And because of the differentiation of our network compared to our competitions' because we have the contiguous geographic network of parts and service, I think will show extremely well for us as we go forward.

Okay. Thanks, I will get back in queue.

Sure, Jamie.

Andrew Obin, Merrill Lynch.

Good morning, guys. Just a couple of questions to follow up. You did have relatively flat year-over-year inventory. Would you disclose how much of that inventory is actually trucks with '06 engines? And I apologize if I missed that, just dollar value.

Without giving dollar values, Andrew, I would tell you it's 90%, okay.

Okay, okay.

That ought to give you -- you can take it from there. I'm not going to -- because -- you know absolute dollars. But that is a good figure to use right there. Still of the inventory -- remember when you see inventory in our balance sheet, there is stock inventory both on the Class 4 through and the Class 8 and there are units which will have new engines in them that are in the process of delivery.

We always have a large high in there -- from a stock perspective, it is more than 90% so you have to break that absolute. It's not absolutely 90% of what you see on the balance sheet because you have to break that -- part of that is the trucks with new engines that are in the process of delivery also. So if you want to get back with me later, Andrew, I'll try to get you a little more absolute number on that.

Sure. But the question I have I guess the idea in building this inventory was that come '07, '06 trucks, trucks with '06 engines would be more valuable on a relative basis.

Well --

I guess the question is do you find that you might have to discount a bit more than you were thinking before to move those trucks?

Well, we always anticipated OEM discounting on the new engines, okay. We knew that when people were talking -- I've spoken at many conference and we knew a year, a year and a half ago that when sales -- when order intake goes down that the first thing is margin is taken out and then production changes ours. So obviously there were some margin taken out and the '08 -- or should I do say '07 engine, '08 model year trucks that are going out right now. But I don't anticipate it to be a hindrance in us moving our '06 engine which are '07 models inventory.

Is there maybe possibly a little margin out of it at the street level? Possibly. But are our numbers in line with where historicals in the first quarter given and when you include that of the first quarter probably stock sales made up roughly those 2000 units stock inventory was roughly 700 units. Okay. But margin was not -- it is within 2/10. That is not much variable as far as I'm concerned.

So the truck sales margin should not be noticeably lower from a year ago?

I don't anticipate that in the second quarter, no, Andrew.

And the second question is just to focus on a positive news, margin improvement on parts and service business versus a year ago.

Yes.

How sustainable is it on a year-over-year basis versus a year ago? Do you think you can improve the margin?

No, I'm not going to tell you I can improve. I always said the high-end was 43 and that's where we were this year. So I would not look for us to improve it but I would think we could sustain it somewhere. Again that becomes and mix issue, Andrew. It depends on if parts grow more than service, you know. You got parts which run around 30 and you got service which runs 65% margin. So if one grows more than other, the blended -- the blend of that can be affected. But I do believe we can sustain within a point or so of where we are at currently, yes.

And just a final question on your Construction Equipment business. I think sales growth was I guess surprisingly strong given what we hear year about the residential market.

Right.

-- but margin you know was soft on an absolute basis. Could you just talk a little bit more about the dynamics in that market?

Hey, Andrew, this is Marty.

Hey, Marty. How are you?

I'm good. As we've talked about in the past, we are trying to build market share and push product into that market. So as a result, last year we dramatically increased our market share and quite honestly we only dropped margin about $0.07 of a point. In the first quarter of this year we are really getting aggressive about putting product out into that market so we took about a 1.5 points percent margin deterioration --

Okay.

-- and sales were up quarter-to-quarter 22%. And the market is declining in Houston Texas. So our market share is improving nicely. We obviously have a balancing act as to how aggressive we get with pricing. We're not going to just throw pricing away but, yes, what you see in the financial statement is reflective of our desire to grow marketshare over there.

On the smaller side, is a more aggressive financing terms by Bobcat -- is that an issue in the Houston market or --?

No, because we don't really have a [skid steer] line. We're more in the heavier stuff than the skid steer stuff.

Thank you very much.

Kevin Maczka, BB&T Capital Markets.

Gentlemen, good morning.

Good morning, Kevin.

Question on pricing to start. Can you maybe comment on your average selling price for your heavy-duty, your medium-duty and your used trucks and kind of how those are trending?

Sure, Kevin. Let me pull that sheet here. If I'm not mistaken, last year in the first quarter, the average sales price of a Class 8 was $113,850. This year it's $118,314. So up about $4800 per unit. On the medium side of it, now medium actually is down but I'm going to tell you that is a mix issue. When you're representing five, six different lines, it depends on which ones grow the most. Medium is down from $55,000 to $53,000 but again that is a mix issue and I'm not going to break it down by manufacturer, etc., as to where it's at but that is strictly a mix issue there.

All right. And then a question on the margins if I could. You touched on it a little bit but can you just say a little bit more about the truck margin close to 8% here? Is that -- it sounds like you're looking for that to maintain maybe not quite at that level but not drop off much going forward.

No, I mean -- that again is a mix issue as much as just a margin issue. Remember depending on how many fleets you deliver or how many stock trucks you sell because there are definitely -- fleet business is by far the lowest margin business, but I wouldn't anticipate the fleet business being a part of our business as much going forward over the next at least in the short -- in the near future -- over the next couple of quarters.

So, I do believe that the inventory off the yard and the other sectors that we sell into will support those comments that I made earlier because I don't believe we will have the mix of fleet business. So I think if you take quarter-over-quarter comps, I would not anticipate a whole lot of deterioration.

And then just one more if I could on the inventory. When do you think you will sell your first '07 unit?

First '07 engine?

Yes. Yes given that you've got such a big inventory of '06 --

That is just the inventory side. I'm selling many of them right now, many sold -- when I say many, I don't want to say many but I am selling both at this time, okay. Orders for customers what we call IPD or in process of delivery units; those are ones which are roughly 75% or better of our business normally. And again that changes depending on how much fleet -- how many fleet transactions are going on --the percentage does.

But going forward, I would tell you that that explains -- we're selling plenty of those. Out of inventory we're selling '06 engines to owner operators and small operators. So that is a mix going on that you will see probably through the second and into the first part of the third quarter.

All right, gentlemen, thanks for the time.

You bet.

Chaz Jones, Morgan Keegan.

Hey, guys, good quarter.

Thanks, Chaz.

All of my questions have been asked. Maybe I could ask a few a different way. On the 2000 heavy-duty units that were sold in the first quarter, could you give us a sense, Rusty, what the percentage of '06 versus '07 units was? Or engines was?

Well, remember as I said, we're on the end of the food chain. Peterbilt -- [that car] was really the first to go into -- start building '07 engines but they still had -- I don't want to get into the exact timeframe -- but they still built out the engines that they had on order, they were in shipment at the end of the year that were shipped from the engine providers in through the first part of the first quarter. So I would tell you that the majority of them of course were '06 engines.

Okay.

It's the second quarter where we really start -- because remember a lot of times because of bodies and make up of delivery and all the things that have to go into getting it to the end user, there is anywhere from a two-week up to six, eight weeks before -- by the time it gets to me and the time I get paid for it by the end-user because I'm getting it prepared for you know getting it prepared to put in service in whatever industry they might be in. So the majority again, the vast majority of trucks delivered were '06 engines.

Okay. And then the inventory question that kind of keeps coming up. I think in mid February you said five to six months of '06 engine (multiple speakers) --

I still buy into that. That would be -- when I say that from mid-February five to six months puts me to July to August, right?

Okay, yes.

I believe and you can say well maybe you shouldn't have carried so much but I still believe that there is going to be -- there is still sufficient demand and judging by our March stock inventory sales which were in line and fairly strong, we haven't seen much deterioration. You always see a little seasonality during the winter time and so I believe that that will continue on through the summer. Historically we have better stock sales as the weather warms up.

There seems to be a lot of talk on the truckload side about some excess capacity out there, demand being softer. Is that having any impact on used truck pricing?

Not currently, we had a strong -- I just back from the American Truck Dealers convention. I got in late last night out of San Diego and so I was with a lot of other dealers, met with all of them in the country that came. And most folks I talked to still saw pretty strong used truck activity out there and that is what we are saying.

So that may be a reflection of people not wanting to -- in the other maybe the second and third secondary and third markets where Class 8 trucks as you know have like four to five lives, people not wanting to dive into the new engine technology and just looking for more used, which keeps values on used up.

Assuming that demand stays somewhat compressed from the truckload segment, I recognize that you have very high exposure to vocational and other areas out there but the longer that area maybe stays subdued and the potential for the first quarter -- or excuse me -- the fourth quarter maybe not seeing as a quick of a rebound. Is that an opportunity for you to maybe go in and see some acquisitions out there from a dealership standpoint if maybe things are going to be weak a little bit longer?

It is possible. But I was just with about every dealer in the country over the last four days. And '05 and '06 were outstanding years for anyone in this industry. So most people feel, as we said all along for the last three years, that it's a speed bump, okay. And this was starting in the first of '04 through '09; this was a five out of six solid growth years in front of us.

And we still believe that the latter half of '07 is a speed bump and in the process and as people eat up the excess inventory that is out there, and there's no question there is some excess, probably on the yards of some of our customers, okay, at the moment. But as that gets taken in to the food chain as they roll out old units or if we get some demand back up and GDP gets right and we start to see freight tonnage start increasing like we all hope it does, then that will take care of that excess inventory which will take care of the excess capacity and then we will wake up to the knowledge that the 2010 emissions regulations and as they become more in focus and we understand what they truly mean and as customers understand what they truly mean to their operations post January 1, 2010, I do believe we are going to see strong maybe a little later than we anticipated as we talked about earlier in the call, but still extremely strong demand sometime rolling I believe sometime in the first part of a '08 rolling on through the end of '09. And that's what we believe.

Okay, then last question. Are you seeing the OEMs being any more aggressive in terms of incentive programs for '07 trucks?

No, I don't think there is any question. There's moments and it depends -- as you watch backlogs shrink and expand, that drives those initiatives all the time in my 25, 30 years in this business. So, yes, there are times they will go out and be more aggressive. But I think it's sometimes more related to more specific transactions.

Okay, that is all I had. Great quarter, guys.

Thanks.

Kevin Fogarty, DuPont Capital.

Just a couple of questions. Number one, I was wondering, how much did OEM incentives help you in the quarter on the gross margin basis? And secondly, can you just put a little more color on the very impressive uptick in medium-duty volume? I know you talked about it, but can you just maybe flesh that out a little bit more about what is driving that? And then lastly, do you have a backlog number?

Well, I do have a -- as I said I try to give second-quarter guidance as far as our down 10% to 15% in Class 8 earlier in the call. So I think as far as I said, we have a short window so it's really hard for me to look out. I've got -- sure I have orders out in the third and fourth quarter but I do not want to talk about them at this time.

As we continue to work -- you must remember -- I can still get a truck built and delivered in this quarter at this moment. So we are aggressively out pursuing opportunities every day. On the medium-duty side of the business, it's a combination of things. Remember, we started this process well about four years ago. We really didn't get started until about 3.5 years ago by the time we got of growing our medium-duty business. At that time we were 800 to 900 units. We knew from our understanding and we hired a gentleman who was an expert in that field and we worked -- started at that point going forward. And we knew the medium-duty business was a different business than Class 8.

We differentiated and we could use the same yards and leveraged off that same asset base except for incremental costs of the sales force and carrying costs. From the backside of the business, we added a little bit of incremental cost but other than that, we knew -- we believe we knew what it took, to increase that business.

So as we added over 40 different franchises in the last couple of years, that is the real driver and most of them were leveraged off that existing asset base. Yes, we put a couple of standalone deals and then I guess recently just in the fourth quarter when we did the Atlanta acquisition of Fouts Brothers, that was an outstanding acquisition. If you look at the -- and I don't mind talking about it -- if you look at the uptick in deliveries, 272 of those deliveries were through our Atlanta acquisition. But it was very accretive to the earnings of the organization at the same time.

Then the other stores and as we continue to grow that organization -- we've been in the heavy-duty truck business for 40 plus years. We have a very mature outstanding organization, the best in the industry from my perspective and I might be a little biased in that. But we take this medium-duty business and as I said it takes an incremental sales force. So we continue to mature that sales force and it matures every day and gets better and better. That is why I've always said for the last year that even if the medium-duty market is down 15% to 20% in '07, I expect our same-store basis, now this is an internal goal, mind you, but I have the pressure on everyone. I expect our medium-duty business on a same-store basis to grow 10% this year plus any of the acquisitions that we did later last year and any that we might do this year.

So, you know, we're excited about it and it's coming through. I think it holds true in the first quarter. I expect it to hold true in the second quarter and we will make the investments necessary to make that come to pass. Because as we push this medium-duty product out, I think you have to realize medium-duty trucks don't run as many miles as Class 8. So as we push them out, we will start seeing an incremental parts and service business.

We have yet to really even see -- have an effect from that incremental parts and service business in the trucks that we have put out over the last couple of years. But as this thing snowballs and accelerates, we will start to see the effect in the parts and service business and that will be a key driver for us in our absorption rate going forward in '08 and 2009 and 2010. I'm very excited about those possibilities.

So, medium-duty will stay up, the acquisitions will be accretive and add to the total but I expect same-store to be up 10% in spite of a declining market.

Got it, okay. All right. And on the OEM incentives, did you get any boost to your gross margin in the quarter?

No, nothing more than average, nothing more than the usual.

And as we go through the year, as the backlogs fall and the OEMs have to make decisions, do you expect your incentives will improve as we go through the quarters of this year?

I don't necessarily expect incentives to improve. I expect them to get production rates in line with markets, you know, and that is always -- it's always -- OEMs are always, they go as long as they can as hard as they can until they have to cut production. But I do believe they will get production in line which will in turn get their pricing and costs in line and the market will adapt to it. That's what history always shows.

Any time you over -- you push too many incentives into one area, all you are doing is shifting a market around and not allowing the market to level out. And I think we're going to be at the stage in the second and third quarter that we will -- they will get production rates in line with what the market is. There will be some incentives, of course, but there always is.

So, everybody keeps -- let me make one comment real quick. Everyone is focused, and I understand that because I have a lot of industrial analysts and transportation analysts that follow us, a mix of. Everyone is so focused on the deliveries. But when you talk about Rush, as I said earlier, it's not totally just the deliveries of Class 8 units. I don't mind answering all the questions. We will continue to. But when you speak about Rush, it is the diversity in the earnings stream that we have worked on over the last several years -- I want to say for the last six or seven years but really getting into the medium-duty business 3.5, 4 years ago driving these absorption rates, tying them to contiguous geographic network together to differentiate ourselves from the competition.

I do believe that those things will show through as we go into this year not just everything driven by Class 8 deliveries.

Okay, thank you.

You bet.

Peter Nesvold, Bear Stearns.

Hey, Rusty, can you hear me?

Yes, I got you, Peter.

Great. I was going to ask about incentives but I think the horse is dead so I won't kick it again.

Thanks, Buddy.

So maybe a couple of questions here kind of odds and ends. There was a press release a couple of months ago about and ERP implementation and I'm curious how far along are you in that process?

Sure.

What do you think it's going to cost and what do you think the expected benefits are going to be from that roll out?

I'll tell you what. I could answer it but since Marty is sitting next to me and he is over that, I will let him start and I'm sure I will have something to add to it. So go ahead, Marty.

Good morning, Peter.

Hey, Marty.

We expect that project to be somewhere in the ballpark of about a $12 million project. We've spent $5 million in the first quarter buying software and beginning the implementation process. Let me talk a little bit about what we're going to do with the implementation and where we are.

The first several months we have been blueprinting and if you are familiar with that, it is basically a process, a system process evaluation where you bring in your operators and you evaluate what you do, how you do it and how your new software affects it. And you basically build the system. We were very careful in building the team that blueprinted this initial process. Rusty and I and our other senior executives were very involved in the selection of the players from both a corporate level and a field level so that we had a very good mix of corporate desire, system requirements and field desire system requirements that were blended into blueprinting this phase.

Our implementation strategy will be to put our leasing company on first. We will never roll it into a leasing company which is as you know about a $40 million business. Not to use of wrong term, but we're going to kind of use them as a guinea pig, make sure we do it right. All of our operators from the stores were involved in the design of the system that will roll into the leasing company. The leasing company does about 85% of what a truck store does.

So on a go forward basis, after we get the leasing company up and running which should be by this fall, late fall, already winter time, we will put in the back office side from an accounting perspective. Once all the bugs are worked out of both of those we'll start rolling it into the stores on the truck side probably the beginning of '08 and most likely on a geographic basis, meaning a group of stores -- say four or five stores at a time. And it will take us through the end of '08 to get that accomplished. And that is our strategy.

I think it's important to note that this industry has been vastly, vastly underserviced when it comes to business systems historically. It is not a large industry, it's not the car business. We took a look at the platform we've used for the last 15 years and we were really driven to make a decision going forward as to where we were going to be. We were at that critical point in time. We spent eight months last year with a team and hired outside people in this trying to understand where we needed to go and again, just like when it comes to operational strategies or geographic strategies, we determined -- or I for sure decided we have to continue to differentiate ourselves from our competition.

So we chose this path fortunately there was a provider that is working on being very large in this industry and in the construction equipment and possibly other industries this sector. And we have teamed up with them and I think with an extremely strong integrator. And as Marty said, you can hear all the horror stories and stuff from other people but we have spent a lot of time, a lot of effort and I can promise you it has got executive commitment from the top to get this done with involvement. And with involvement from the field. Huge involvement out of my field organization.

We are taking it in a pretty methodical slow process as Marty illustrated to you a moment ago. And we will work through this over the next couple of years but we are extremely excited about the information that we believe we be able to pull from all the data, from all the -- from all the stores that we have going from coast-to-coast to continue to differentiate ourselves in that area of the business from our competition. But it is a two-year process and we are committed from the top and with our providers to get this done.

I want to make one other point about the whole process, Peter, and I know Rusty will chime in here. We very much are an organization that has evolved over the last decade specifically in geographic expansion and personnel expansion and systems expansion. And we want to take this as an excellent opportunity for us to sit down and evaluate from a business process standpoint everything we do in our organization and see how we can enhance it and better improve what we do from an efficiency perspective. That is one of the big deliverables that we expect to accomplish out of this system design.

Being that said, obviously we don't want to promote too much cultural change within the organization because you can only bite off so much. So this isn't like a two-year project and it goes away. It will be a constant evolution. But we really do believe that by picking this provider and picking our integrator which is an extremely important aspect of the whole project, that we can better improve our efficiencies as an organization.

And Marty, how does that $12 million -- so you spent $5 so far -- how does that trend over the next couple of quarters? Is the $5 million in 2Q and then $2 million in 3Q or have you seen the bulk of the spending initially and then maybe it's more back-ended?

Yes, that is exactly right. The initial purchase was made in January of this year of this year, which you then start your integration process. So from here on a go-forward basis, the $12 million will be paid out pretty much ratably over the next two years.

Okay. And how much of that is capitalized and how much of it is expensed?

It's all capitalized.

It's all capitalized. And when your ERP salesperson came knocking, what do they promise you or guide you to in terms of the payback? Financially -- what can you quantify?

Peter, that is a difficult question to answer.

I'm sure you ask them that though and I'm curious what they said.

You know, I don't know, Peter, that you can sit down and honestly do a time and motion study and determine exactly what your ROI is going to be. Our provider, the system provider is more interested in best practices with their software. Our integrator is more interested in the business process side of the equation. We are working through that today. You've got to understand was not just as simple as an ROI calculation to say well we're going to spend $12 million and it's going to generate this ROI.

The platform that we are on today is going to be (inaudible) in the not too distant future. We felt like from a hardware perspective; therefore we felt like it was critically important that not only we move toward a different system but that we moved toward a system that does employee best practices. So from an ROI perspective, what is the payback? Is it 18 months? Is it two years? Is it five years? You know we are working through that right now, Peter.

And one last question. Rusty, you mentioned financing and insurance up 31% year-over-year. You've done some acquisitions there. What kind of residual risk are you taking in those areas?

None. Less than we have, less than the little historical residual we've ever taken, okay. We are an agency. When he comes to the insurance side, I am not the underwriter. I am just an agent. But because I build a team and I have people all across the country that are agents either working in offices, possibly working out of their houses, selling insurance under our branded name, using that, using that from a marketing and a sales perspective, that is from the insurance side we are not taking risk.

Okay, so you are just booking basically an origination fee and maybe some kind of servicing fee?

You got it. I get a booking fee, I get a piece and without diving into percentages, yes.

Okay, good.

Obviously we deal with many different underwriters.

Thanks, guys.

You bet.

(OPERATOR INSTRUCTIONS) [Bob Sales], LMK Capital Management.

Hi, a couple of questions back on the medium-duty. You answered a fair bit of them. But I assume your biggest line in the medium-duty is the Peterbilt?

Yes, it would be still the most deliveries that we do but there is -- the other are rapidly approaching it.

Got you. And then how much of your medium-duty business is vocational?

Well, I would say that the majority of the medium-duty is vocational. I mean almost all because it is all going in -- it depends. When you say vocational, you would give me your definition of vocational, I think I have this --

Well I'm thinking of off-road construction or specialized equipment as opposed to medium-duty delivery trucks.

I would tell you that when it gets in just to that sector if you're going to rule out the box trucks, the reefer trucks, the landscape stuff, the restaurant business, all this different type of staff, probably the 30% range. Somewhere in that area goes into that side of the business.

Got you. And then you sort of answered this last question. But when you said that if the market grew 15% to 20% --

What market?

The medium-duty -- if the market -- if the medium-duty market shrank 15% to 20% you would still have a goal of up same-store sales. Can I take that to mean that you think the medium-duty market probably does indeed shrink 15% to 20% in '07 over '06?

Yes, no question.

Okay. Great, great strategy there too. Well thought out and it looks like you are executing it excellently.

Thank you. Well that was a big focus of ours to leverage. We still have to use that -- I don't how many times in the last four years, were you going to leverage off? Remember our asset base -- you know, there is one thing I have now -- I'm just going to talk off the cuff a little bit. There's one thing I've learned over the last couple of years that when we do an acquisition you're always thinking about what does that acquisition bring to me? But you know what, because of the contiguous geographic network and the huge amount of commercial customers that we have on our books, we bring more to that acquisition sometimes than it brings to us.

Because when you are working inside of lanes, you sometimes lose sight of what you bring to it and you're always thinking about what it brings to you. But because of our customer base, they automatically, when we buy say a store in Waco, my friend, we go all the way from Dallas up through Oklahoma City straight on down to Laredo Texas to the border. I think we have seven, eight stores based along that line along that freeway. That is a lot of Rush customers that drive through Waco Texas.

Rusty?

Yes.

Just one last question. If you looked at last year, year and a half of the acquisition you've made that have helped the medium-duty area, do you think the opportunity in the future for acquisitions is bigger than what you've done looking at a review mirror or will it start to taper off?

I would say it's similar to the rates that we've been acquiring them at. I don't see it slowing down really. Not for the next couple of years. I think we have opportunities with some of the OEMs that we represent where we don't represent them in areas that we already have a Class 8 franchise. As we showed with the Atlanta acquisition, we can do a standalone in a large market. I don't anticipate many more of those because it has to be an extremely strong big market like a Los Angeles or a Dallas or an Atlanta. Those are the only areas that I see doing a stand-alone.

But I don't anticipate -- you always have to have a willing seller, it can't just be just a willing buyer. So as those opportunities show up which I believe they will continue to show up maybe not at the same fast pace of last year but I would anticipate them still to continue to show up on a pretty regular basis as we go forward.

For people that have an exit, who may be getting ready to retire and need an exit strategy and they are in an area that we are in, I would imagine we would be the first phone call they would make.

Great job, thanks.

Thank you. And then I want to finish my comments before you got back to me a minute ago. You've got to understand when we do these acquisitions we are bringing more to that acquisition sometimes than they are bringing to us. So as I started to explain to you about Waco, when you have stores in Laredo and San Antonio and Austin, and then you've got Waco in the middle of them and you have Dallas and you've got Ardmore and you've got Oklahoma City, all of the customers of those other stores all of a sudden become a customer of that Waco store. If they run that route, if that is where they are -- if that is the business they are in travels those routes.

So, it's important we have sort of we have focused on that for last couple of years that contiguous geography and continuous expansion of a customer base inside that geographic network is extremely important in this commercial business that we represent.

At this time we have no further questions.

Okay. Ladies and gentlemen, I appreciate it. We thank you very much and we look forward to talking to you with the second-quarter results probably sometime in July. Thank you very much. Bye-bye.

This does conclude today's call. You may disconnect at this time.