Rush Enterprises Inc (RUSHB) 2008 Q2 法說會逐字稿

Good day, everyone. Welcome to the Rush Enterprises, Incorporated, second-quarter 2008 earnings conference call. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Mr. Marvin Rush, Chairman of the Board. Please go ahead, sir.

Welcome to our second-quarter 2008 earnings release conference call. On the call today are Rusty Rush, President and Chief Executive Officer; Marty Naegelin, Executive Vice President; Steve Keller, Vice President and CFO; [Jay Hazelwood], Controller of Rush Enterprises; and Derek Weaver, Chief Compliance Officer.

Now, Steve Keller will say a few words regarding the 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 risk 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, 2007, and in our other filings with the Securities and Exchange Commission.

Now we would like to give you an update on our progress.

Second-quarter results. In the second quarter, the Company's gross revenues totaled $455 million, a 12.5% decrease from gross revenues of $519 million reported in the same period last year. Net income for the quarter was $6.1 million or $0.16 per diluted share, compared to $13 million or $0.34 per diluted share in last year's second quarter. These results included a $5.4 million write-down of used truck inventory in the second quarter of '08 which reduced earnings by $0.08 per share.

If we look at the segment of the business, let's talk about the truck segment. Our truck segment recorded revenues of $425 million in the second quarter of '08, compared to $488 million in the second quarter of '07. The Company delivered 1,665 new heavy-duty trucks in the second quarter of '08 compared to 1,869 heavy-duty trucks in the same period of '07.

Revenue for Class 8 trucks sales decreased approximately $25 million or 11% to $201 million in the second quarter of '08 from $226 million in '07.

In the second quarter of '08, 979 new medium-duty trucks were sold versus 1,324 new medium-duty trucks in the same quarter last year. Revenue from medium-duty truck sales decreased approximately $16 million or 22% to $57 million in the second quarter of '08 from $73 million in '07.

The Company delivered 795 used trucks in the second quarter of '08 compared to 984 used trucks in the same period of '07. Revenue from used truck sales decreased $13 million or 26% from $38 million in the second quarter of '08 to $51 million in the second quarter of '07.

Parts, service, and body shop sales remained constant at $112 million in the second quarter of '08 and '07. Gross profit margins on back-end sales decreased to 42.5% for the second quarter of '08 from 44% in '07.

Talk about the construction and machinery business. Construction. The Company's construction equipment segment recorded revenues of approximately $25 million in the second quarter of '08 compared to $26 million in the second quarter of '07. New and used construction equipment sales revenue decreased 8% to $19 million in the second quarter of '08 from $20.7 million in the second quarter of '07.

Construction equipment parts and service sales increased 3% to $5.5 million in the second quarter of '08 from $5.3 million in the second quarter of '07.

Talk about the absorption rate. We remain committed to achieving our annual absorption goal of 105% in this depressed truck market. During the second quarter of '08, our absorption rates decreased to 105.4% from 109% for the same period '07. Our year to date absorption rate is 105.1% compared to 105.4% in '07.

Relatively flat parts, service, and body shop sales, coupled with a slight decrease in gross margins from these operations, and new store acquisitions, have put pressure on our year-to-date absorption rate. These pressures were partially offset due to expense controls measures implemented in the first quarter of the year. Our people have worked extremely hard during the first half of this year to contain spending without compromising customer service.

We will continue to pursue further expense reductions while maximizing our efforts to create incremental growth opportunities to help offset the soft new and used truck sales environment.

Talk about the industry outlook. As expected, Class 8 and medium-duty new and used trucks sales remained weak through the second quarter. We expect truck sales to remain slow through the remainder of '08. We continue to believe, however, that replacement cycles of vehicles purchased between 2004 and 2006, combined with impending 2010 emission regulations, will create increased demand for Class 8 and medium-duty trucks in 2009.

The current freight environment, record fuel prices, tightening credit, and overall challenging economic conditions throughout the Company hit used truck values particularly hard in the second quarter. Demand for used trucks rapidly declined, and valuations for used trucks have decreased approximately 15% to 20% since April.

Used truck valuation write-downs always will occur in dealership operations. These write-downs increase in magnitude when truck values decrease rapidly in a short period of time. We have adjusted our used truck values to better reflect these market conditions. The used truck valuation writedown reduced earnings by $0.08 per share.

We remain committed to our strategy to diversify our earnings base, expand our geographical network, and focus on less cyclical niches and aftermarket business. We are confident our strategy and our continued efforts from our people will sustain our performance for the remainder of the year and beyond.

Talk about the stock repurchase program. As described in the press release, the Company's Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to an aggregate of $20 million in its shares of Class A and/or B common stock. We believe the purchase of our common stock represents an attractive opportunity to benefit the long-term interests of the Company and its shareholders.

Implementation of the stock repurchase program will also give the Company flexibility to issue additional equity securities in the future while complying with the ownership requirements and the dealership agreements with the various manufacturers it represents.

We now are prepared to answer question and answers for you. Operator, please review the procedure for asking questions.

(Operator Instructions) Jamie Cook of Credit Suisse.

Good quarter, despite a tough market. Can you guys just -- I mean, you gave some color on what you thought the 2008 outlook would be. But can you give a little more? I think last time you said heavy-duty deliveries would be off about 10%. Where you think that -- what do you think the new numbers are?

I guess, also, how big of a pre-buy do you think we realistically have in 2009, given the macro environment?

It's rusty. I would basically stick -- I said around 140,000 retail deliveries for US. I think this six months it is around 69,000. So it is tracking right on that, and I see nothing that's really going to change it right now, to be honest with you. The market really hasn't changed a whole lot in total. It is still a depressed truck market out there.

As far as an outlook, I mean I would tell you, outlook for an '09 pre-buy, we still believe there will be a pre-buy. But obviously the magnitude and the size of it for us, we're not quite sure where it's going to land out.

But it is nice as you look at some of the earnings reports coming out right now. Some of the freight companies out there, it's nice to see that they have stabilized; and maybe we are getting a better balance in supply and demand out there as far as freight tonnage goes. So that would obviously bode well for an upside in the marketplace next year for the '09 pre-buy.

I mean, any -- is it a 30% increase? Is it a -- I mean, I know I don't want to hold you to it. But I feel like you've been a pretty good indicator so far on what's happening. You have called it right so far, Rusty.

Well, I don't know if right is always good. But you know, you are trying to manage to it. I would say you're probably looking at 35% to 40%. If I was going to say, if we are 140,000 this year in the US retail deliveries, one -- I think [ax said] one-ninety.

I could believe that and probably even load it more towards the second quarter and out would be my thoughts.

Okay. Then could you just talk about, too, on the used truck market, could you talk about how you feel about inventory levels? Do you think used prices stay -- you said down 15% to 20%. Do they get worse, or you think they sort of stabilize here?

When I say 15% to 20%, Jamie, I would tell you our write-down -- which I am going to tell you. We have been in this business a long time, and every now and then you get this dramatic writedown in used inventory.

We have -- we took basically a 16% writedown is what we took on our own. Now, we believe we are marked to market, and the inventory should continue to move on out, and we will manage to the adjusted numbers going forward.

Now, we don't plan on any more writedowns. But anytime you're holding inventory and you get some dramatic reduction in valuation in the marketplace, it just happens. It happens for everyone.

But I would tell you 15% was probably more in line with what I see the industry or where the industry was at. As I said, we took a 16%, and we believe we are marked to market with what we've got, and we will manage to what we see the environment out there right now.

But that environment can change up or down dramatically. A lot depending on supply and demand and what's going on out there with our customer base.

Okay. Then, I guess, just a follow-up question, then I will let other people ask questions. Can you just talk about the pricing environment on new trucks? Are you seeing the OEs pass along price increases? If so, can you talk about the magnitude?

You are seeing some surcharges being put on some stuff that is already existing by some manufacturers. I really don't want to get into that all that right now; but you can talk to customers and find that out, you know, from commodity pressures.

I would tell you that most manufacturers are holding the line and not going out there and just trying to create a sales environment that doesn't exist right there. I don't see that going on really right now.

Most everybody obviously adjusted last year their production platforms to what they perceived the market to be. Now it's been more depressed than what we perceived; but they had already adjusted to somewhat depressed markets in their production levels. And they are maintaining that at this moment, from what I see.

All right, thanks. I will get back in queue.

Rhem Wood of Stephens Inc.

Rusty, could you talk a little bit about how the plummet in equipment values kind of compared to the last few cycles? And maybe the magnitude, the dollar amount for a three- to four-year-old truck?

Well, it depends on whose -- I'm not going to get into three- to four-year-old trucks. But I mean obviously when you look at the -- as you compare this back to 2000, which is a good -- 2000-2001 time frame, when the used truck market did take quite a substantial hit back then. I would tell you this was similar from a percentage basis.

If I remember right, actually the last time may have been just slightly worse. I want to say we probably took 20-some-odd-% out, and this time we believe the market adjusted -- like I said, we took 16% out of our inventory.

But as we go forward, Rhem, I don't want to sit here and peg three- and four-year-old trucks for you. I think the percentage guidelines would be across-the-board regardless of manufacturer or product or whatever. That is a good blended number.

When I said 15% to 20%, that was probably more -- you could say 14%, 13% to 20%. That is probably more unit specific. As you go in and write these inventories down, you do it on a unit-specific basis, and we blended out into 16% number, so.

Thank you. That was helpful. Can you also talk a little bit about what the inventories of new trucks on the lot look like now?

Inventory of new trucks? Our inventory is not bad. We feel comfortable with our inventory. I guess if you look at new truck sales, though, the hardest part -- when you look at the total sales we had, you really need to break it into its pieces.

Understand that the hardest hit part of truck sales from the first half of '07 to the first half of '08 have been the owner-operator, small operator type sales. Where if you look at our sales for that time frame, I think we are down like 23% or something like that, 24%.

The stock truck sales are down over 50%, okay? That has to do with the pressures from fuel, from credit, and everything else. So stock truck sales were weak.

But you still have to have the breadth of product to cover all the different markets that we try to sell into. That is one of the key parts about our model is that we just don't sell to over-the-road type customers. Yes, they are a piece of our business, a large piece of our business. But all the vocational businesses that we focus on allow us some flexibility in our model not to be tied just to the large truckload guys or just to the owner-operator type.

We try to -- we manage very keenly to being in specific markets and market segments. So the stock truck [trailers] and the over-the-road large fleet customer are the hardest hit ones right now.

Okay, thanks. Lastly, can you talk a little bit about the municipal and vocational markets? I guess those are slowing as well.

Vocational is slowing in some areas. I think you've got to look at where we're at, where we're located. Remember, three of your four, three of the five hardest-hit -- from a construction basis -- states in the US are in Florida, Arizona, California, Southern California, which all happen to be large markets that we're in.

So from that vocational side, from a construction side, we have taken -- Florida has been taking hits for over two years, a year and a half to two years now. California has had a difficult first half, and Arizona likewise. So those markets have been hit.

Now the municipal side I would tell you is running along pretty much what we call standard operations. I mean municipal has not been hit as hard as some of the vocational businesses had. But that is supported by governments and states and things like that, municipalities are. And infrastructure is continually having to be redone in a lot of our cities right now.

Thanks so much for the time. Appreciate it.

Andrew Obin of Merrill Lynch.

Just a question of the writedown. I guess maybe I have too pessimistic a perspective given the industry I work in. But financial firms have had a very hard time figuring out just how much to write down. How do you know --? I mean, What level of confidence do you have that this is the last writedown on used truck inventory, as opposed to this is the first of many of these small writedowns going forward?

Well, I guess you are going to have to put a little -- let's don't compare this to the mortgage industry here, Andrew. I don't have contingent liabilities out there. I am looking at unit specifics that I have in inventory right now, that I have a certain value on, that don't have a payment stream that I have to count on. So the comparison is a little tough for me there.

Now, what you do is you have to break it into its two pieces. I have an existing inventory there, and that is what we marked to market, where we felt it had to be marked. We marked it down 16%.

Then you're going to have to put a little confidence in us that we manage to that market and stay on top of that market as we go forward, as we trade for trucks going forward. We just have to have a heightened sense of the environment we are in.

And that doesn't preclude that something could happen, but we're not going to be managing that way as we go forward. So we marked everything we have in inventory currently to market. We don't have a whole lot of contingent trade packages coming in, which we do not have right at the moment. So we have to manage to what we see.

Now, that's not to say that we couldn't wake up one morning and the market go down another 10%. But right now we don't foresee that. But that is the risks of the unknown and that is the risks of the used truck market.

How long do you think it will take you to get rid of your existing used truck inventory?

Well, if you look at the inventory levels, it's about what we are selling in a quarter. So you're not going to sell every one of them in a quarter; you are going to trade for some and move in and out.

But I would imagine we are selling right now -- our deliveries were down to basically what we've got in inventory currently, around the 700, 800 unit mark.

The other question, would you say you were conservative as you were marking down your used truck inventory?

No, I would say I marked it to market, Andrew.

Okay. Thank you very much.

Chaz Jones of Morgan Keegan.

Rusty, I wanted to focus in on -- I think at the beginning of the year when you gave your outlook on the heavy-duty market, you kind of thought the year would play out maybe 40% first half of the year, 60% second half of the year. Then when you talked about the retail sales, it sounded like you thought that would be split more evenly, 50-50. Is that a good way to kind of think of it?

No. You know, six months will make you a whole lot smarter, Chaz. So you know, Jamie said earlier about you were right on. Like I said, six months will make you a lot smarter about other things.

So I would tell you I don't see that uptick right now. We were hoping for that at the first of the year. But given the state of the general economy, and I don't think I have to digress into those details, there has been a lot of our customer base that has been affected. There's been a lot of this country that has been affected.

I do not see any big upswing the remainder of '08. I just do not see it. I do not see the driving factors out there in any of the industries I look at.

Now I see things are troughed, which is a good thing; because once you are troughing, there is only one direction to go from there and that's up. It is just a matter of how long you tread water in that trough.

So, it's a timing issue that continues to get pushed out. But every day that passes is a day closer to we start that, we start ramping back up into what we would consider more normalized run rates as far as truck sales and things like that go.

But I don't foresee it -- and really like I said earlier when I was talking to Jamie -- till really the first part, if we get anything, in the second quarter of '09, first quarter of '09. Maybe. We will see.

But it's nice to see some better earnings reports. I'm not going to say better on a comp year-over-year, but in line and people meeting consensus and some exceeding consensus from our customer base level. So that is nice to see right now, and hopefully that will start a trend line as we go forward, and that will be indicative of what is going on in the overall economy as we come out of 2008, is my opinion.

One follow-on to that, I know the track order backlog, as you guys reported, picked up from the end of '07 to the end of first-quarter '08. How has that changed here at the end of the second quarter?

I'll be honest with you, it's probably tricked down a little bit, okay? As far as the backlog of Class 8 that we have. I don't look for any big upswing. Sometimes you get one deal that falls -- just depending on when it gets delivered timing-wise, getting them rigged up, etc. -- it might fall one quarter or another quarter.

But you're looking for numbers nothing much different than somewhere between first and second quarter. Obviously when you can still get a truck and deliver it in the third quarter, there is still some unknown out there as to what our deliveries will be.

Okay. One other question I had. Just kind of strategically, have you guys contemplated maybe making any further diversification in terms of product sales?

I know you look out -- or look back three or four years ago. Medium-duty market has been a real success for you guys in terms of growth. Are you exploring any other product alternatives out there to maybe leverage the network or model?

Obviously, we are continuing to explore things like that, Chaz. But I probably -- this is not the place for me to talk about that right at the moment.

We are continuing to work around our model, understanding that we are a service provider first and then a product provider second. Service sells trucks and service, sells products.

We will continue to build out our model, our service model, across the South from coastline to coastline. Because we believe that allows us the quality of core customers that we have.

We will continue to look for more products to distribute to commercial customers across this space. There is no question about that.

During the second quarter, as you know, we took on the Charlotte area; we took on two stores in Charlotte, a Peterbilt Hino Isuzu store, and also a Navistar store, which was our first Navistar store, and that is in Charlotte.

So we will continue to look at other products also that we might distribute. There's other things we are looking at, Chaz, at the moment.

Okay. No, that's fair. Maybe two quick follow-ons. In kind of looking at what your expectations are for 2009 as far as the heavy-duty market, and kind of where you are today, my question would be -- is looking at the absorption rate, not necessarily that that is dictated by the truck sales.

But I know you guys threw out a target of 110% in 2009 several years ago. I know you are going to hold your Company to it. But maybe if you could update us there on what the outlook is.

Well, right now in this environment, given -- you know, parts and service sales have been hurt, too. It's the first time I've seen in years that we've had some flatness and even slight deterioration on the top line of parts and services. Our customer base has suffered immensely.

But from absorption, when we do it picked back up, I am still shooting for 110%. Unfortunately, the markets didn't turn out like we thought they would in -- '04, '05, and '06 were fine. The speed bump in '07 rolled into '08 and obviously made it a little -- made it tougher to raise that absorption rate.

But as you are taking on new stores, putting in new stores all the time stuff, in an environment like this, it is also a balancing act. If we just sat with a mature organization, did not try to grow, and just worried about absorption and percentages, we would roll along at that.

But you are eventually driving absolute dollars in top line, and you do that by continuing to open new locations, which we continue to do. We open two, three, four a year, depending on the year. Continuing to update your facilities, which we have a lot of CapEx continuing, always scheduled out. But that is just typical of what we are doing all the time behind the scenes, to help support that service growth down the road.

It would help if we got a few truck deliveries, you know? So your internal business, when your truck deliveries -- remember I have told you all before that 10% of our gross profit from parts and service comes from the delivery of trucks, whether it is rigging them or doing different things.

So when your truck sales are off 50% or whatever, and that equates -- you can equate that to a 4 to 5-point hit in gross profit right off the top because of truck deliveries being down. So you have to be aware of that.

Chaz, I'm going to jump back to one thing I didn't mention. When you talked about building off of other things we are doing, we have gotten into the school and commercial bus business also in the state of Texas. As we go forward, we are looking at that as a possible opportunity for growth. We will continue to evaluate that, but that just happened in the last few weeks, so.

Okay.

Okay?

Last question quickly, and I will let somebody else have it. Just in regards to the repurchase program, obviously you think stock is attractive here. But should we read into anything for what that might say about the acquisition market, or maybe your outlook in terms of the market saying staying a little tougher here a little longer than you had suspected?

No, I wouldn't read anything into it other than what it is, Chaz.

Okay, great. Appreciate the commentary, Rusty.

(Operator Instructions) Todd Maiden of BB&T Capital Markets.

A couple quick questions. You know, I guess while we're talking about some of the acquisitions that you've made recently, what are you seeing right now as far as the multiples? I know you guys are out there at least looking in the market. What are you seeing right now? I got to imagine they are starting to come in line.

Well, I would tell you that activity is picking up; but everyone still wants to sell off of '05, '06 numbers. You know? That is what it's all about. So the longer that this goes on, I would imagine that will continue to come more in line.

But we don't really talk about specific acquisitions. I know you didn't ask a specific question. But we will continue to look for anything that fits into our model from a distribution, from a truck dealership perspective. And also, as I mentioned earlier, from other commercial products, such as buses, that will fit inside our transportation model of what we do.

So I know I'm not answering your question specifically about multiples, but I really can't shed a lot of lot light on that at this moment.

Right, but you would say that there hasn't been any precipitous drop?

No, no. There is not any precipitous drop, unless you get a one-off case of someone being in deep trouble here. But it may not fit. Remember, to fit our model of contiguous geographic footprint across the South, our opportunities are fewer than they were five or six years ago because we've continued to do this and acquire over time.

So. You know, the PACCAR network is a well-capitalized network, and most truck distribution arms right now are fairly well capitalized. Their dealer groups are, so they can weather a storm. So we will just see how long this one lasts and take it from there.

All right. Good enough. Then we talked a little bit about the Class 8 '08 outlook or remainder of the year outlook. What about Classes 5 through 7? I know I think, on the last call we talked about maybe 20%, 25% year-over-year declines. Does that feel right?

Yes, I would tell you our deliveries are probably pretty flat with first, second quarter, the outlook for third quarter is.

Okay.

So yes, in line. We're in line with where we -- I would look for our outlook -- and you can take it from there and figure it back from there -- would be pretty flat first, second, third quarter.

Now that obviously is subject to change, as I said, because product is available. But at the same time, that would be our outlook right now for the next quarter.

Okay, great. All right. I appreciate it.

At this time there are no other questions in the queue. I will turn the conference back to Mr. Rush.

Well, folks, thank you for listening. If you've got any questions, please give us a call. We'll talk to you later or next quarter. Have a good day.

That concludes today's conference. We thank you for your participation. You may disconnect at this time.