Rush Enterprises Inc (RUSHB) 2008 Q4 法說會逐字稿

Good day and welcome to the Rush Enterprises Inc. fourth quarter and year-end 2008 earnings results 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.

Good morning, and welcome to our fourth 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; Derrek Weaver, 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, 2007, and in our other filings with the Securities and Exchange Commission.

Now we would like to give an update our 2008 performance. 2008 proved to be a tough year for the trucking industry and the overall economy. Class 8 retail truck sales in the US were down more than 50% from 2006. For the first time in more than a decade, parts and service sales did decrease also. Fewer freight miles allowed many fleets to continuing operating using excess truck capacity rather than repair or replace out of service vehicles.

Despite an unprecedented and difficult truck market it was a productive year for the Company. We achieved the fourth highest annual net income in the Company's history, and a record absorption rate of 106%, up 1% over last year. This was accomplished through significant reductions and consistent expense management throughout the year. Since November 2006, we've decreased our non technical work force by more than 15% on a same-store basis and consolidated dealerships in Arizona and Florida reducing overhead expense but maintaining coverage and service to those markets.

We continue growth in new regions in the new product areas. We completed two acquisitions expanding our footprint in North Carolina and added an international brand to the Rush product line for the first time. Continuing our strategy to leverage our asset base, we added a school and commercial bus network which offers the Blue Bird, Elkhart and Diamond brands to a large part of the state of Texas. 14 of our existing Rush truck centers in the state are now parts, service and body shop locations for our new Rush Bush Centers network. Additionally, we have completed an $18 million stock repurchase, which provides us greater flexibility in how we finance future growth.

Our balance sheet remains strong. The Company currently has $146 million in cash and we expect continued positive cash flow for the operations in 2009. Let's talk about 2009 a little.

Tough times for the truck market will continue into 2009. We expect the first quarter of 2009 to be the weakest quarter since the truck downturn began in 2007. Looking to the remainder of the year, industry analysts forecast US Class 8 retail truck sales to be about 132,000 units, which is down 6% over last year. We believe Class 8 truck sales could be as low as 110,000 to 120,000 units. Medium-duty retail sale for the US could be off as much as 15% compared to raises year in and the Houston construction equipment market is expected to be down about 30% from 2008.

Demand for Class 8 trucks should begin to increase during -- due to the age of vehicles in operation and impending 2010 diesel emission regulations. However, tightening credit for used truck buyers continues to reduce sales of those trucks. Lowering used truck values. Lower trade-in values have made new truck deals less affordable. Until credit is made available to used truck buyers on reasonable term we've believe that Class 8 truck sales will continue to lag but we're not in a prediction to predict the future of the credit market, we're hopeful credit will ease and lending to a wider range of customers will begin in the second half of this year.

Most of our performance this year was due to our people's ability to manage effectively through the challenging market conditions. We've made significant changes to our business model in response to the last industry downturn that began in 2001. Our model has proven successful in 2007 and 2008 down markets and I'm confident that it will prove to be effective in 2009 as well. The lessons we have learned during the downturn have made our people better operators and will make Rush Enterprises a stronger Company. Historically, market downturns create growth opportunities, which we have used to expand our footprint.

We are confident in our strategy and our ability to execute it. We believe a financially-strong profitable Company -- we remain a financially-strong profitable Company and if needed we're prepared to withstand an extended market downturn. We're also in an excellent position for economic recovery and we have credit available for acquisitions as opportunities arise. We're now prepared to answer any questions you may have. Operator, please review the procedure for asking questions.

(Operator Instructions) Our first question today comes from Jamie Cook with Credit Suisse.

Good morning.

Good morning, Jamie.

My first question, Rusty, could you talk a little bit about the margins on the new and used truck side? They were a little lower than I thought. A was just wondering if there was anything unusual there and how you think about that on a sustainable basis?

Well, going forward, I would expect margins to remain similar to the fourth quarter, Jamie, as we continue to manage, competitions is much more competitive out there, and moving inventories is the key thing and obviously we do not expect the margins to go up at this moment, no. They will be more in lean what we we've seen as markets are going to continue to be weak going forward.

I mean, was it more focused on the used side versus new side and can you comment on your used truck inventories, how they compare relative to last quarter and just the magnitude of the declines you're seeing on the used truck side?

Yes, specifically to the used side, their margins were compressed more from quarter-over-quarter they were down 3.3%.

Okay.

And I think that's reflective of declining values that are out there in the marketplace at the moment but we are properly provisioned for that and I think that's reflective in the margins that you see currently.

Just the inventory of used trucks out there, do you feel comfortable with what you have? Or how it compares to last quarter?

Yes, I feel comfortable with it. Would I rather have a little less inventory? Yes. We could stand to have a little less inventory based on current sales but we do expect sales to pick up as we start moving into the spring time. That's historically the way it works. Spring time we start our sales as far as units, total units picks up. From a value perspective I believe we're just fine We're reflective in the lighter margins as you see.

Then you made comments in your press release in your prepared remarks, just sounds like the credit markets and it's tougher to get t financing. Can you just give a little more color on what you're seeing and how things have changed since the third quarter?

Well, obviously, the whole credit world turned upside down in the third quarter, as we all know, and it's just a lot tighter scoring boxes from scoring papers as far as credit scores and conditions. I think one of the key things, term and conditions have tightened as far as advances and the length of terms that finance institutions are willing to take a risk on. So it's a combination of all that out there from all lenders. Not just one in particular. So just creates a tougher environment for the small buyer. For every buyer. Not just the small buyer. For the larger buyer also.

All right, I'll get back in queue, thanks, guys.

We'll go next to Chaz Jones of Morgan Keegan.

Good morning, guys.

Hey, Chaz.

Could you talk a little bit about the conversations you're having currently. I guess with larger fleets. As it relates to their prebuy intentions to 2010?

Yes, Chaz. It's sort of a mixed bag to be honest with you. But I would tell you it leans towards no prebuy but I expect there will be some -- as we see -- as everybody gets better clarity as we get into this year and that goes from the the manufacturing side and the customer side, I think we're going to see some slight push towards the latter part of the year. Third and fourth quarter, late third and fourth quarter but I do not see anything out there right now. I think that's reflective in the order intake of the last couple months you've seen. 7800 last month and 8700 the month before? From Class 8 for all of North America. So far we haven't seen it. I do believe there will be a little towards year-end but I don't look for any great, great pickup in the market out there.

I assume you think a lot of that still rests within -- with where the economy is by the end the year?

Sure, no question. No question. I don't have to tell you what freight tonnages look like over the last few months, and we don't -- we don't anticipate seeing a huge prebuy. We do expect some type of bump in the late third and fourth quarter but nothing astronomical like what we saw in '06.

Then maybe just on the parts and service side of the business, are you seeing any signs that perhaps the PL guys are trying to forego maintenance as a way to, I guess reduce costs -- is that starting to show up in your business at all? And if it is is that a near term concern as it relates to margin there and the absorption rate?

I think it's not just PL you're talking about, Chaz. When you said I look, or as we go forward that there will continue to be more outsourcing over the long-term which will be beneficial to us, but currently in the environment we're in, everybody has cut back. And when you have -- when you have excess capacity, you can always fix something or repair something differently given the environment that we're in. And that's what you see customers doing. That's what we've seen. That is why you see the first year-over-year, quarter-over-quarter decline we've ever had in well over ten years in a parts and service revenues. We maintain flat margins in the fourth quarter, but we were off a little over 5% from a revenue perspective on a same-store basis. The reason -- obviously the most key component is the absorption number, as you know, it's the key ratio we run off of. We had to manage and we managed. I'm very proud of our people. They manage extremely effective. So we ended the year being 1%, up 1% absorption. But that came through straight management of the denominator. Are we at bottom from a parts and service perspective? I like to think we are but I need to see more. I need to look forward in the whole first quarter. Not just what I've seen in the first 40 days of the year. I need to look a little further. I would hope that December, November/December time frame was the bottom of the trough from a parts and service perspective and that going forward, we're going to see some pickup from a revenue perspective on that side of the business. But again, I want to see it over a 90 day period and I would say it started off a little better here as we got into January, but we just are going to have watch it.

That's helpful. I guess without showing your hand, could you comment as far as the acquisition front's concerned. Obviously, you guys have made mention to it in the release in your prepared remarks about given your balance sheet and the buyback that you've done how that positions you for acquisition opportunities, but I guess is there a specific segment that you're seeing more opportunities or that look any more attractive than the others?

Chaz, I'm not going to get too detailed in my response to that question but I can tell you this, as I've talked to the organization around here. We've been looking. It's been a pretty slippery slope from an operational perspective and we've been looking for the by the trough. Once we get to the bottom of the trough as I've told the folks around here, we'll we'll get our feet set and solid and there will be that inflection point and at that time when we reach that inflection point and we know we're there we look forward to acting on acquisitions and things like that but I'm not going to tip my hand, as you would ask, as to any more specifics than that, but I do believe, I like to believe we're nearing that point.

Maybe one house cleaning question if you don't have it, I can follow-up offline, but do you have the breakout as far as revenue is concerned for the heavy, medium-duty and used in the quarter.

Yes, you want the quarter, Chaz.

Yes. Just for the fourth quarter.

For the quarter, the Class 8 truck revenue was, call it $150 million. I'm going to round these for you. The medium duty was $55.5 million, and the used was $27 million.

You said $55.5 million for medium, Steve?

Correct.

Thanks guys, nice quarter.

Thanks, Chaz.

We'll go next to [Joe Biden] of Atlantic Equity Research.

Hi, guys how are you doing.

Good morning,.

Just have a couple of quick questions. As far as your policies on inventory write-downs is that generally speaking after six months that you would write down the used vehicles or?

Well, it's an ongoing, I mean yes, we have an internal policy that we adhere to on a five-month policy, so yes, no question and that's reflective in the margins. Talk about options versus--. Yes, well, we have a -- if you want to get real detailed on how we operate. We have an internal auction where we auction off a truck. If one store has had a truck for five months then it goes to auction to all of the other trucks and we make sure it's at least auctioned down to current values. What the value is at that time. That's how we internally internalize it. After four months after that we never allow a truck to stay inside of our system more than nine months.

Okay, and so did you have any write-downs this recent quarter or?

Well, I think that's reflective in margin as as we continue to manage our operational system. We're on top if it, it is allowing us to manage. Yes, there's always -- that's just an ongoing thing. It's been a part of our business for years, we may not talk about it all of the time but that's always reflective in margins.

The other question is do you think given what is going on in the economy are you going to be cut down on non essential times like the corporate jet or things like that or any thoughts on that?

Well, I think it's obviously reflective in all of the expense cuts as you see. So the answer is, look at the expense cuts, loo at the margins, look where G&A has gone down to. We couldn't have maintained absorption on things like that if we had in fact every expense truck, okay.

Thank you.

We'll go next to Bill Armstrong of C.L. King and Associates.

Good morning, with the credit restrictions you're seeing on your customers is that pretty much concentrated in the owner/operator? Are you seeing the larger and medium size fleet operators also having trouble financing truck purchases?

I think they're two different animals. I think they both have issues. Your larger, higher, grade A credits the issue is more margin. More rate than it is anything, but there's been a lack of funds, especially in the fourth quarter. I see some of that loosening up a little bit for those guys but rate is still an issue but they're just going to have to adjust to what the rates of the marketplace have changed to. From the owner/operator and small guy, yes, it's a different issue. It's more terms, conditions, rate, it's everything that's effecting them a little harder no question and the appetite is not out there. The credit is not quite as good so the appetite is less from the lender's perspective for that type of business.

Okay. Medium-duty truck sales a little over 900 units. It looks like that was a little bit better than you were expecting? Is that correct?

What you need to understand in the medium-duty numbers is inside that 903, were 165 buses. So I would tell you that is -- it is more in line when you strip the bus piece that we've acquired which is going very nicely for us by the way, out of there, then I think you get more reflective of the true class 5 to 7 business.

That's helpful. And just, on the industry, what were the unit sales for '08 for heavy/medium-duty. Do have that handy? I know heavy was -- we look at US retail deliveries 139,000 and change. From the class 5 through 7 I'll have to pull that for you.

4 through 7 in '08. 5 through 7 was 137,000, 4 through 7 was 174,000.

We look more 5 through 7 because those are the the market we play in more so it was 137,000, Class 8 was 139,000 US retail deliveries as I think as you look you can take those and take the comments from the press release and take it from there.

Got it. Thank you.

You bet, thank you.

(Operator Instructions) We'll go next to Gary Lenhoff of Ironworks.

You've addressed most of my questions. Steve, can you tell us what you expect total CapEx to be in 2009 and broken down between equipment for lease and buildings and such?

Our expectation in '09 for routine CapEx is roughly $10 million for the year. That is to replace our normal items. We've estimated between 20 million and $30 million in what we call special projects and that includes a few significant dealership properties that we have in there and the additional expenditures related to the SAP project and then the final piece would be lease and rental additions for our truck leasing and our deal lease franchises and that will be in the ballpark of 30 million to $35 million. So all in you'll be in the roughly 70 million to $75 million range.

Steve, this is Marty. Address financing of that.

On that last piece of the leased truck. That's a cash neutral CapEx because we borrow dollar for dollar on those trucks, and then on the piece there's some timing issues of the special projects in the real estate. Generally what we do is we finance 80% of any real estate properties we do. When we have large construction going on you may not, it's tough to financing in the same year as the cash flow. But ultimately you can expect us to finance about 80% of what we spend on real estate.

Add one last thing on the real estate side, add what our recent experiences have been on financing.

We are able to package about five properties, some are refi and some are newer properties we've purchased in the fourth quarter. We started the process in September/October, right in the middle of a credit crunch with new lenders. People we haven't done business with in the past we were pleased that we got credit approvals quickly at pretty attractive rates to finance about $15 million worth of real estate. So I think with our balance sheet we're still in favor with the lenders and have available credit.

That's helpful. Have there been any changes in the terms of your floor plan financing the last six months? Has in any of your vendors tried to help you out or accommodate you or your customers in any way? Have you seen any tightening, et cetera?

The answer is no. Everything is solid in our floor plan.

Great, thanks, guys.

We'll go next to Tom Fogarty of Silverstone Capital.

I was concerned about potential market share shifts in Class 8 as we come to 2010, depending on differences in the powertrain technology. I'm curious if you have, EGR versus SDR, I'm curious how you're thinking about that?

Well, as you know there's only one manufacturer that's going with EGR. Everybody's going to be going to SDR. With Cummins announcement that they will be using SDR. PACCAR, Volvo, Daimler, they'll all be using SDR and Navistar is staying down the EGR path. So the proof will be of all that, is when the technology is out running full force. I'm very confident in our suppliers at the PACCAR level and I'm very confident in Navistar also and I'm sure in their EGR. From the PACCAR perspective, the Peterbilt side obviously we have a lot more Peterbilt dealerships. I'm very confident in PACCARs engine that they're bringing over from Daf from Europe. The exposure they've had to the engine and the engine market over in Europe has been quite wide and the results are very favorable and the engines, the test engines that are running currently in North America we've heard nothing but great results about them and I'm sure Cummins engine will be the same. I feel very confident in our engine platform. The engine platform of our major supplier as we go forward.

Terrific, thanks.

We'll go to Joel Tiss with Buckingham.

Hi, how are you doing.

Fine, thanks.

I just wonder if you can just give us a little sense of what you're hearing from your customers, how long can they hold off on buying new trucks and keep everything going?

Joel, that's the $1 million question. There's one thing I do understand, I know we're closer to them buying then we are from when they stop buying. I know we're closer to that inflection point when the market does pick up. There was a lot of trucks sold from '04 to '06. Those trucks are aging. We're now in 2009. We're getting to 3 to 4, running up to 5 years, the age of the fleet continues to expand and get -- as the fleet gets older. So I'm very -- it's just the economy. I think there's no question in my mind. I personally, my personal opinion is 2009 is going to be a pretty -- 2010 rather, excuse me, is going to bounce back for us over '09 if we can just get some stabilization in the economy. As you know our industry usually leads into a recession and it leads out of a recession. It's a very key indicator as to what the overall economy is going to do but I still think we're looking to get a little bump later in the year. If the economy could flatten out, I would hope that could ride on through 2010. I'm not talking about going back to numbers of '06 or '05 but just some more normalized, get back up to the 180,000, 200,000 unit range from a Class 8 perspective and I don't know if that is stable right now. 2010 is a long way off and there's a lot of uncertainty out there, but I know that industry dynamics will dictate that it should. I think the key again is the economy.

Okay, thank you.

You bet.

And we'll go next to [Rhem Wood], Stephens, Inc.

Hey, guys. Just a couple of quick modeling questions. Could you give a little help on how to model the tax rate and the interest expense line going forward?

We'll let Marty work on the tax rate here.

Hey, Rhem, this is Marty. What we're trying to do is on the tax rate give you a picture of what this credit on these liquid natural gas trucks do and unfortunately it's hard for us to predict exactly when they're going to be ordered. When they're going to be delivered. And when the tax credit is going to occur. That's a significant influence to our tax credit and we're going to have to address that with you on a quarterly basis. Steve can talk to you in regards to normalized tax runs.

I can tell you it would have been 37.5% for '08, were it not for the alternative fuel tax credits that are operational in nature that we ran through it which would have been consistent. About consistent with where we were within '07. But those ebb and flow quarterly based on how many of those units we deliver and they can be significantly dollar amounts. So I guess I would tell you to model it at 37.5% unless we tell you otherwise and then we'll just have to give you some flavor for the tax credits as we go forward.

Then one last point on the tax credit issue is that it is important to understand that the difference between that normalized 37.5% and what we do report, that lesser amount, is debited back or increased G&A expense. As we get a credit, and the tax issue, we rebate a large percentage of that credit back to the customer in G&A expense. So it is operational in nature and it does reflect in our income statement, higher G&A expense as a result directly of having less tax expense. And we've tried to quantify that in the press releases.

Thanks, and the interest expense line?

In interest expense, obviously it's going to be driven largely -- we've talked about inventory levels right. That's our big driver on interest. It's going to be largely driven on what LIBOR does. Right now we're enjoying very low interest rates because of the LIBOR plus small margin spread on our floor plan inventories that has led us to lower interest rate levels, but as LIBOR moves up, interest will move up. This quarter we've experienced declining interest rate environment and we expect that, at least from the people that we have talked to, to extend into the middle to latter part of '09. So we would have looked for some interest expense relief on a go forward basis.

Outside of floor plan, Rhem, we have about $85 million of real estate-type related debt and you can figure that is in the roughly 6%ish range from a budget perspective on interest expense.

Okay. Thanks, and then lastly, what was the absorption rate in the quarter?

Quarter was 1032.9. It was 1 point up over the fourth quarter of '07, Rhem.

Great. Thanks for the time. Appreciate it.

You bet.

And at this time we have no further questions in queue.

Okay, folks. Thanks for listening. If you got any questions, please give us a call. Have a great day.

That does conclude today's conference, ladies and gentlemen. Again, we appreciate your participation today. You may disconnect.