Rush Enterprises Inc (RUSHB) 2008 Q3 法說會逐字稿

Welcome to the Rush Enterprises, Inc. third-quarter 2008 earnings conference call. This 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.

Good morning and welcome to our third-quarter 2008 earnings release conference call. On the call with me today is Rusty Rush, President and CEO; Marty Naegelin, Executive Vice President; Steve Keller, Vice President and CFO; Jay Hazelwood, Controller and Derrek Weaver, our Chief Compliance Officer. Now Steve Keller would like to say a few words for forward-looking statements.

Certain statements we will make today are considered forward-looking statements as defined in the **** 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, 2007 and in our other filings with the Securities and Exchange Commission.

Now we would like to give you an update on our progress. Let's talk about the third-quarter results. In the third quarter, the Company's revenues totaled approximately $414 million, a 20% decrease of revenues from $522 million reported the same period last year. Net income for the quarter was $8 million or $0.21 per diluted share compared to $13.1 million or $0.34 per diluted share last year, our last third quarter -- last year's third quarter.

Third-quarter 2008 business segment results, I will compare these with the third quarter of 2007. The truck segment. Our truck segment recorded revenues of $392 million in the third quarter of '08 compared to $490 million for the same period in '07. The Company delivered 1350 new heavy-duty trucks compared to 1820 in the third quarter of last year.

Revenue for Class 8 sales decreased approximately $61 million, or 27%, to $162 million. Revenue from medium-duty truck sales decreased approximately $22 million, or 28%, to $54 million in the third quarter of 2008 with 919 new medium-duty trucks sold.

Revenue for used trucks decreased $11 million, or 21%, to $42 million for the third quarter of '08. The Company sold 936 used trucks in the third quarter of 2008 and 1032 in the used trucks in the same period of '07.

As expected, given this current volatile economic condition, both the Class 8 and medium-duty truck markets remained weak in the third quarter. Truckload carriers have been the most severely impacted. Construction-related truck sales have also declined dramatically on the East and West Coasts. The decline in these sales has been offset by some strong oil and gas markets in the central part of our leadership network. Our Class 4 through 7 truck sales remain consistent with the industry, which was down 41% compared to the same period last year.

Parts, service and body shop sales remained flat at $116 million for the third quarter. Gross profit margins on the back-end sales increased 6/10 of 1% to 41.7% in the third quarter of this year.

Let's talk about the construction equipment business. The Company's construction equipment segment recorded revenues of approximately $17 million in the third quarter of 2008 compared to $25 million in the third quarter of last year. New and used construction equipment sales for the same period decreased 40% to $11.7 million.

Though sales decreased compared to last year, our equipment center was able to outperform the overall Houston construction market, which recorded sales to contractors and other end-users, down 52% from the third quarter of last year -- compared to the third quarter of last year. Construction equipment parts and service sales were flat at $5.1 million for the third quarter of '08.

Let's talk about the absorption rate. We are on target to achieve our annual absorption rate goal of 105% despite the depressed truck market. During the third quarter of '08, our absorption rate increased to 106.8% from 105.1% for the same period in 2007. Our year-to-date absorption rate is 106.3%, up 1% compared to this time last year.

This quarter's absorption rate is proof we can perform in tough times. We made significant reductions in our expense structure and our people have worked extremely hard to control spending throughout the year without compromising truck service -- or customer service. The effort combined with our business model, our geographic product diversity has allowed us to weather this storm, yet be in strong financial position to pursue opportunities for growth.

We had some impact on the Texas hurricanes. With 18 locations in Texas, our truck and leasing operations were adversely affected by the hurricane activity throughout this summer, particularly Hurricane Ike in Houston and East Texas and Hurricane Dolly in South Texas. We were proud that our people remained committed to our business despite significant personal challenges. Dealership operations experienced business interruptions resulting from mandatory evacuations, power outages, restricted traffic and reduced employee attendance as employees worked to restore safe living conditions for their families. Although difficult to qualify, these storms obviously had a negative effect on our earnings in the third quarter.

Industry outlook. Tough times for the truck market will continue. We believe weak freight environment, slowing construction markets, high fuel prices and tight credit markets will cause both Class 8 and medium-duty deliveries to remain soft through 2009. Industry analysts are forecasting 2009 US retail Class 8 trucks to be up 14% in 2009 to 160,127 units. However, we believe 2009's sales for both heavy and medium-duty trucks will remain relatively flat, possibly even slightly -- down slightly given current economic and market conditions. We have no reason to expect a strong pre-buy of Class 8s to occur in 2009. But we do anticipate some recovery late in 2009 given the impending 2010 diesel emissions regulations.

We will talk about Rush's financial position and our strategic plan. While there is considerable uncertainty in the financial markets, Rush Enterprises remains profitable and focused on growth for the future. Our balance sheet is strong. The Company currently has $144 million in cash and expects to continue the positive cash flow for the operations -- from the operations. All of the Company's material credit agreements remain in force. Additionally, the Company is in compliance with all debt covenants in its credit agreements. Finally, we believe adequate credit facilities are available to finance acquisitions and real estate purchases as opportunities arise.

We continue to implement our strategy to diversify our earnings by expanding the geographic reach of our dealership network, leveraging off existing infrastructure and to increase sales, service and new products and growing our less cyclical parts, service and body shop revenues. Recent evidence of this can be seen in the acquisitions of Blue Bird bus franchise in Texas. Rush Bus Centers provided us with additional opportunity for parts and service revenues, as well as entry into the school bus and commercial transit industries. We are in excellent financial position to pursue acquisitions that fit our long-term plans.

We would now like to -- are prepared to answer any questions you may have. Operator, please review the procedures for asking a question.

(Operator Instructions). Jamie Cook, Credit Suisse.

Hey, good morning. Congratulations in a tough market environment. Can you guys just sort of give a little more color, one, on what you are hearing from your customers in terms of their ability to get credit or finance these trucks? And then second, comment on -- I think it was last quarter where you guys had to take a write-down on used equipment. Can you comment on used equipment pricing and inventory levels for you guys at this point?

Sure, Jamie. As far as the credit situation when it comes to retail credit and getting customers getting financed, obviously, you have to realize it is more difficult in this environment. We, fortunately, especially for our smaller customers, have taken an approach and probably prepared for this fairly well and the fact that we have had to diversify where we [let] credit off, where we get retail credit financing.

So where we used to be historically probably tied to two sources more for 80% of our business, more than half our business is now being sent out to other banks and other financial commercial institutions that probably haven't been caught up in the big bank credit crunch. There have been others, more regionalized-type banks, some more local, regionalized-type stuff. So we have had a shift in where we have placed paper over the last -- really over the last 90 days to 120 days. But we have been able to provide financing to the smaller customer.

As far as the used truck inventory, our used truck inventory is in line with where we believe it should be and if you look at margins, they are back in line with historical margins in the 80% range. So we feel real good about 8.8% I think. So we feel real good about where we are at from a used truck perspective and we took that right-down in the second quarter after we had a one-time almost evaluation in the second quarter and we are very comfortable and we are on top of our used truck inventory and managing it accordingly going forward.

Allrighty, thanks. I will get back in queue.

Andrew Obin, Merrill Lynch.

Yes, just to follow up on Jamie's question regarding financing availability and residual values, have you seen any drastic changes in the past three weeks? And I apologize if you have answered that already.

No, I didn't answer that succinctly from a three-week perspective, Andrew, but, no, I haven't really seen anything in the last three weeks. We saw it earlier in the year; obviously, reflected in the second quarter. But currently, we believe we are on top of the used truck valuations and as far as rates go, no question rates are up, but financing is available, but it, obviously, is tiered to the stronger -- you have got to have strong credit to get financed, but rates are up, there's no question, from where they were 60 days ago.

Are you guys seeing a change in players who offer financing versus captives, versus banks, versus finance companies, versus new entrants? Could you describe to us what the landscape looks right now?

Well, I tried to address that with Jamie's question, but we have gone out and searched out more regionalized banks and other commercial institutions. I am not going to get caught up in names right at the moment, but that is why there has been a shift. If you look at our last 60 days of financing, 60% of it has gone out to what I would tell you was historically a 20% piece of our business. Okay? We have had to, obviously, spread it around given the environment we are in.

Okay. Thank you very much.

(Operator Instructions). Chaz Jones, Morgan Keegan.

Good morning, guys, nice quarter. Just wanted to ask quickly here on the outlook being relatively flat in 2009. Do you anticipate any marketshare shifts as it relates to the business? I think historically you have probably run 4%, 4.5% on the heavy-duty side.

No, I really don't. I would believe -- if you look at that -- if you run a 4% number off a 140,000 Class 8 US retail, that is 5600 units. So that is probably more or less in line with where I would project we are going to be this year, in that range and where we are going next year given a flat market.

Now, as far as how the year spreads out, I believe the year is going to be down in the first half, 10% to 15% and up, 10% to 15% in the second half of the year would be my best outlook as I look at it right now for 2009 deliveries. Obviously, there is immediate truck availability across the board. I don't care which manufacturer you're dealing with.

So it's going to continue that way, I believe, through the first half of next year. You will get some slight uptick during the second half. It just depends on -- we are not sure when it will start. There is a lot of things. We talked about credit, we talked about used truck values, you talk about replacement cycle will begin to catch up, you talk about engine emissions. So that is why I believe the second half will be up some, buy offset by being down in the first half of the year.

And also, there is one thing, remember, there has been fallout in the last few weeks as far as manufacturers go. So we might be able to pick up a little more marketshare that way, but that is our job and it remains to be seen as we go into next year.

Okay. And then on the medium-duty side, I know with the multiple acquisitions that you guys have done over the last 24 months, remind me, is that marketshare around 2% if memory serves me right?

Yes, I would tell you it is 2%, 2.25%, in that range. Depends whether you are looking a Class 4 through 7, Class 5 through 7. Depends on how you want to break it out. But yes, that is a good spot.

Okay. Maybe just quickly on the hurricanes, I know you guys, obviously, said that was tough to quantify, but would it be fair to say that that probably had a bigger impact on the, I guess, back-end side of your business from a service standpoint?

Sure, no question it did. When you are running on generators for over two weeks and you don't even get those hooked up for the first six days, your customers are severely impacted. Everybody is shut down with the streets and clean-up and everything else. But know I have to tell you, I am very, very proud of our people. The efforts they put forth, I can't begin to get into all those stories on this call, but bringing in their own generators, doing this, doing that. The effort put forth by our people in the Houston area and surrounding area was outstanding. Obviously, it had an adverse impact on our earnings, but I don't want to quantify it.

Understood. I just wanted to get a sense for maybe, Rusty, is there a potential catch-up impact in the fourth quarter or is that just trying to be too cute?

That is probably getting a little bit too cute would be a good way to describe it, Chaz. You have got to remember, in the fourth quarter, it's historically the hardest absorption month. We are going into the winter time. You've got fewer working days. You have all the holidays and parts and service is dictated by how many working days and working hours you have to turn wrenches and sell parts. So with the holidays, it is always a tougher quarter. November through February are always the toughest months we deal with, the winter time, from a back-end perspective.

But I am very confident that we will continue to maintain our goal of matching that 105% absorption or right around that area. We have always told you we thought we were there. We had hoped to be able to raise it faster than what we have over the last year and a half or so, but it has been a difficult operating environment and through the efforts of a lot of people in the organization, there has been a lot of expense work because it has been tough to grow the top line, but we have managed through it. That is what absorption is -- a numerator and a denominator -- and I'm very proud of where we are at.

For the quarter, we were 108.6%, which puts us up a point for the year. That is outstanding. It hasn't come from growth of the top line, which is unfortunate, but it has come through some great management on our part. And you have got to remember, if you look at same-store G&A expenses, you break out the Company, (inaudible) gas is one thing because that is obviously tied more to sales, more commission, more variable. The G&A portion of our Company from third quarter last year to third quarter this year is down 6.2% and down 5.6% year-to-date. That is the G&A piece. That is what has allowed us to maintain that absorption rate, folks.

Yes, and clearly, obviously, very impressive absorption rate in the quarter and seasonally, I know it is probably one of your better quarters. Have you guys taken that a step further, I guess, in terms of maybe proactively identifying other levers that you could pull on the cost side if we continue to kind of trend down here over the next six to nine months?

That is difficult, Chaz. Customer service is number one. Our Rush [coin] and the things we carry and the beliefs that we have in our organization and how we go to market and customer service is number one. So you have to be very, very careful when dealing with those expenses that you don't impact -- don't impact the things that have gotten you to where you are at. So I don't really want to answer that and say, yes, we can keep cutting. We will deal with the environment as it comes.

Understood. And then last thing here, I know you answered the question as it relates to inventory on the used truck side. Do you see any inventory adjustments, I guess, on the new side that are going to be material one way or the other in the coming quarters?

No, I will tell you that we are probably flat with where we are going to be. There could be a little movement, but we are about where we need to be. We could possibly use -- be down a little bit from where we are at, but not much, not materially, Chaz.

Okay, great.

Rhem Wood, Stephens, Inc.

Hey, Rusty, good afternoon.

Good afternoon.

Just a couple questions. Can you talk a little bit about how many of those alternative vehicles you are selling and the tax rate there? I know it is kind of offset in the G&A line, but could you talk about how many you are selling, how many you think you can sell?

Well, we are hitting it on a few different fronts. We are hitting it with the Class 8 trucks, especially out in the West Coast area. That will accelerate as we go forward. There is no question. We are also in the -- on the bus business with propane buses in Texas. So there will be more of it, but, remember, we are limited by AMT, alternative minimum tax, rules. So there is a limit as to how much of that tax we can pass on depending upon earnings and tax laws. But it will accelerate some over the third quarter, but I would not look for it to be -- it is going to accelerate really in the next year. You will see more of it next year as we go forward. I don't want to quantify it for you right now because we are just working through it.

But you have got to take the approach that that is truly a margin. It is not a tax savings. I don't want it to be -- I saw a note out this morning that it was more credit -- well, they save taxes. But we take a hit in the SG&A, as you said, to pass through those partial tax credits with municipalities. And because of our size, it gives us an ability that a lot of dealers don't have because they can't pass through that tax credit. So it gives us an advantage when it comes to dealing with municipalities and we are excited about it and we believe it will accelerate going forward. We are working a lot of deals right now on that type of green initiatives, on those type of green initiatives and I just can't quantify it for you at this moment.

Okay. And to go back to the financing for a minute, are you seeing any difference between the stuff that you guys are financing yourself and what is being the customers finance through other outside vendors?

Okay. Remember, make sure you understand, we don't finance anything ourselves.

Right, you are passing it on.

But if you're asking about large fleets who go out and acquire, no question that market is tight, but there is credit there, it is just expensive right now given the volatility in the markets. Has it gotten tighter? Yes, it has gotten tighter. But the rates are up across the board, whether you are a small guy or a big guy right now. It doesn't matter what size operator you are, you are affected. But if your credit is -- if your credit is good, you can get financed.

But I think those rates -- I hope they -- as LIBOR started to settle down the last week or so -- I was looking this morning -- hopefully that will have an impact on some of those rates as we go forward, but I am not here to guarantee anything, but credit is available. It is not as readily available as it was, so your marginal players are really out of the credit market to be honest with you. That is where the issues come in right now.

Okay, thanks. And then just real quickly to go back to the absorption ratio, that is going to come down a little bit in the fourth quarter, right, but you guys are going to exceed the 105% for the year?

We plan on it. That has been our goal all along. Typically, it is a little tougher in the fourth, but we are not through the fourth quarter yet, so I don't put anything past our people.

Okay, thanks for your time. I appreciate it.

Todd Maiden, BB&T Capital Markets.

Hey, guys. Sorry if I missed it, but I just hopped off another call. I heard you talking about inventory valuations and it sounds like things have flattened out there since the drop we saw last quarter. Is that the case?

Yes, that's the case. We are monitoring it very, very closely at all times. You have to -- obviously, when you trade for vehicles, you have to build them and then trade them and put a number on a trade -- on a used vehicle prior. So we have shortened the length of what we will give numbers are good for going out so we can try to be on top of the market as best we can. If there is some sudden shift, we hope to be able to catch it quicker than we did, obviously, last time and we think we are doing the best job we can and I think margins reflect that. They are normalized in the third quarter with historical margins. I think that is where we are at as far as that issue.

All right. And then how long do you think it would take for you to work through your current used inventory?

Well, it takes less than a quarter given how much we have. We didn't take any more used [rates]. We stopped doing business. We have got about 700 units and you saw what sales were. What were there? Around 800, 900, I think, this quarter. I don't have it right in front of me right now. But they were 919 units. That tells you pretty quickly how fast we could move through it if we stopped taking -- but we are not going to stop taking trades. That is the not the way this works.

Okay, all right. And then you talk about the pricing a little bit from the OEMs. Have you started to see that level or ease at all? I know we saw some pretty big pass-throughs there in Q2 and beyond that, but has that started to ease at all?

I think there is some easing, yes. There is no question because the environment is supply and demand and when there is not as much demand, supply gets cheaper. So you can try to create a little demand. So that is going on. It's a moving target really right now, but I wouldn't tell you it is trending up.

Right. And what type of lag do you typically see there?

I'm sorry. Lag --?

Well, from the time I guess in this past go-round where commodity prices eased? Typically, how long does that trickle through to you guys?

It usually takes probably 120 days or so, but I would tell you -- I think you're going to see -- because of demand being down, you have to -- margins have to go down with it on all sides, us included. It starts from the manufacturer to us. Our margins are down year-over-year. Our Class 8 margins are down and that is probably reflective at manufacturers' margins too. We are down 1.8% from third quarter last year to third quarter this year in margin.

All right. And then last thing, I know you were talking about revenue within the different truck types. I think the Classes 5 through 7, it was $54 million in revenue for the quarter. Used was $42 million. What was Class 8?

Class 8 revenue for the quarter, give me one second, was $162 million -- $162.5 million.

All right, great. Thanks a lot, guys.

Gerry Heffernan, Lord Abbett.

Hey, good morning, guys. Hey, Russ, I was wondering if you could review for us, if you would, the floorplan financing, who does that, what the status of that is and where you think that might be going. And exactly, if you could real quick, just a real elementary run-through of the dynamics of that and what would happen if the OEM manufacturer that you are getting the trucks through were to say, you know what, we need to put through some incentive program, we need to cut the value of these trucks that are sitting on your floor.

Okay, Gerry, as far as the floorplan, we have a signed long-term agreement on floorplans. So we are fairly comfortable -- everybody -- it's in the K that you can look at, and the Qs as far as where we have our floorplan. We are very comfortable. As we mentioned in the release, we have reviewed all that.

We take floorplan -- I think it is important -- I am going to speak a little bit to the balance sheet real quick. It is important -- you've got to understand about floorplan. We view floorplan as a trade payable, okay? And we take that out when we look to debt to cap because you buy a truck, you sell a truck, it comes on and off. It moves on and off. It is a constantly flowing, constantly flowing. So when you take that out, like I said, it's an interest-bearing trade payable.

When you take that out, our debt to cap ratio is 33.7%, which we are, obviously, very comfortable with. If you take a look at the equity, we have $418 million in net worth in the Company, of which tangible equity is $275 million, of which cash and investments is $152 million of that, cash being $144 million.

If you look at -- balance sheets -- everybody is scrutinizing them hard and trust me, we have been managing ours as well as we know how. We have equity of $418 million of equity. That is 40% equity to assets. So if you look at where the stock is trading at, it is trading right at tangible book value. So those are some of the things that we have been measured and monitoring. We have met with our providers. We have talked to basically all our credit facilities and we are very comfortable with where we are at and we still believe, as we said, we can get funding. Rates are going to be a little higher at the moment; we understand. But funding is available when it comes to real estate and these types of things right now.

As far as the manufacturer, it would move -- if (inaudible) passed on huge incentives, then it would move floorplan down. Okay? We would ebb and flow, but we don't see those types of -- have not seen those types of huge incentives because usually they are towards the customer. They are not necessarily towards us. So it happens at time of sale, not necessarily at time of purchase from our perspective.

Okay, great.

Does that help answer what you were looking for?

Yes, it does. Thank you.

(Operator Instructions). It appears there are no further questions at this time, so I will turn the call back over to management for closing or additional remarks.

Thanks, guys for listening to us. If you have got any questions, give us a call. We will talk to you one of these days before long.

Thanks, everyone. Appreciate it. Bye-bye.

That does conclude today's conference. Thank you for your participation. You may disconnect at this time.