Rush Enterprises Inc (RUSHB) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Rush Enterprises third-quarter 2010 earnings release conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Rusty Rush, President and CEO.

Good morning and welcome to our third-quarter earnings release conference call. On the call today with me are Marty Naegelin, Executive Vice President; Steve Keller, our Vice President and CFO; Jay Haselwood, Controller for Rush Enterprises; and Derrek Weaver, our General Counsel.

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 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, 2009, and in our other filings with the Securities and Exchange Commission.

Now an update for the third quarter. We're very pleased to report the strongest quarter of financial performance since the recent downturn began. Our truck dealership, parts, services, and bodyshop revenues increased 38% compared to the same time period of 2009.

This resulted in a third-quarter absorption rate of 109%, the second-highest quarterly absorption rate in the Company's history. We expect to our backend operations to remain strong throughout the remainder of the year.

Class 8 new truck deliveries increased 58% over the second quarter of 2010. This is the highest level of new truck deliveries that we've seen in nearly two years. Although encouraging, we question whether or not this uptick is sustainable until we see improvement in sectors like new housing construction and manufacturing, key factors that drive freight.

During the quarter, our new medium duty trucks sales were negatively impacted by production delays from certain truck manufacturers in introducing their new models. However, Class 8 used truck sales and values are expected to remain strong for the foreseeable future.

During the quarter, the Company sold the assets of its John Deere construction equipment business, including its Rush Equipment Centers in Houston and Beaumont, Texas, to Doggett Heavy Machinery Services. We also acquired a Ford and Isuzu dealership in Dallas, which will broaden our product offering and continue to replace the lost GMC franchise revenues from last year.

We are pleased with the performance of our recently acquired international franchises in both Utah and Idaho. We will continue to look for opportunities to expand our network with these manufacturers.

Now for an industry outlook. Industry experts currently estimate US Class 8 truck retail sales for 2010 to be roughly 109,000 units, up nearly 13% from 2009. Current industry projections for US Class 4 through 7 retail sales for 2010 are in the 113,500 units.

The age of the fleet and current fleet capacity utilization indicates that parts, service, and bodyshop revenues should remain at the much-improved levels that we have seen in the second and third quarters. Higher used truck values and increased backend revenues experienced for the past two quarters are strong indicators that an industry recovery is taking place.

We are encouraged by the uptick in new Class 8 truck sales this quarter and believe we are seeing signs of confidence returning by some customers.

Industry experts are forecasting 2011 US Class 8 truck sales to be 178,000 units, up 63% over 2010, and Class 4 through 7 truck sales are to be up about 15%. We believe that as general economic confidence returns, we will see strong truck sales markets in 2011, '12, and '13.

We are very proud of the Company's performance this quarter. Our balance sheet remains strong, and the Company has continued to generate positive cash flow. We continue to evaluate opportunities to extend our contiguous network of dealership locations into other parts of the country.

Thanks to our employees, we remain a financially strong and profitable Company. We are now prepared to answer any questions you might have. Operator?

(Operator Instructions) John Barnes, RBC Capital Markets.

Good morning, guys. Rusty, in looking at the absorption rate during the quarter and factoring in the acquisitions that you made, can you just give us a little bit of an idea of where the absorption rate might be for your same-store footprint and then how that compares to the acquired locations?

Sure. I would tell you that the same same-store absorption rate actually, John, was just a hair over 110%. When we factored in the acquisition, it drove it down about 1%.

But we are pleased so far with the progress of the acquisition from an absorption perspective, given we are only one quarter into it. But it is definitely up over the historical, their 2009 number, in our first quarter of operating the acquisition.

But there is still room for improvement obviously there.

All right, very good. Then I've asked you this before, but I'm just curious. As you're starting to see maybe some more new equipment being sold, the ticket size in your parts and service, have you still seen an increase in that? Or does that begin to moderate a little bit as you start to see more new equipment being sold?

Well, so far we have not seen so much of an uptick in ticket size. It has been more volume of tickets, to be honest. It's slightly up, John, but not enough to be that meaningful.

The biggest driver is the amount of tickets that are being written. More repairs. Whether they be probably basically the same size repairs, but just more of them as utilization of the equipment in the country has gotten stronger.

Okay. Class 8 trucks, a couple questions there. Number one, was there anything one-time that would have influenced the number of trucks sold in the quarter? Or was this just a nice recovery pace into a more robust Class 8 cycle going forward?

Well, I guess if you want to strip the acquisition out from of a truck sales perspective, the new acquisition was 129 units. Okay? So that puts you in about a same-store of 1,154.

So it was up. A lot of it timing, but some of it a little bit stronger.

I would say it was two things. Timing, obviously that can change, 100 here or there and which quarter they fall can have an effect. But also sales were still up (technical difficulty).

Okay.

So if that gives you -- it's sort of a convoluted answer, I understand. But things are better, but we are still seeing hesitancy on the part of many operators to go ahead and pull that trigger. But the pressure continues to mount and the pent-up demand, as we continue to run at these rates, continues to get stronger.

So when it does break loose and we are looking -- going to be looking real closely at the next 90 days of order intakes, the October, November, and December numbers. Especially I am looking at the November-December numbers for some indications of where we are really going to be next year.

Yes, that was my next question. I have seen some data lately suggesting that's there's still a number of order slots available in the fourth quarter. Then it looks like first and second quarter there's still a fair number of order slots available.

Are you concerned at all that you go back into a lull like we just had and then it gets more explosive in the back half again? I mean, is there going to be a greater degree of cyclicality here until we get back into a firmer economic backdrop?

Well, that's the issue. As I said earlier, I'm a little hesitant to say here we are, this is it. I just -- some of the confidence levels out there in spite of the dynamics -- you know, most businesses the dynamics are pretty good. Look at the earnings reports you're seeing out there. Most everything indicates that truck sales should already be picking up.

At the same time, I would tell you that people are just a little hesitant as they look out, not necessarily at their own businesses, but look out around them. What they hear and feed all the time I think has had way too much influence on people's purchasing decisions.

But the pressure of their own, as the fleet continues to age, will continue to mount. I can't sit here and give you an exact time frame. I've been saying all year long I looked for a fourth-quarter pickup.

So if it gets pushed out a little, the pressure will just be stronger on the customers to go ahead and purchase. But I'm telling you, there's some hesitancy out there, just not -- but it's not driven by, I don't think, totally, mostly by their own business. I think it's driven by the overall economy and listening to a lot of folks tell them what it's going to look like in 2011 and '12.

No doubt. Last question. On the used truck side, can you just talk a little bit about availability of used equipment and the quality of used equipment? Just it seems like the prices on used equipment have popped up a little bit.

But the longer the cycle goes, the older the equipment being traded in gets. Are you seeing any change in your used equipment business?

Well, the business still remains strong. There's a few drivers. Obviously when you look at the used, obviously a lot of it has to do with supply side. You have got to look back three, four years and that typically tells you what supply is.

Now taking into account that lives have been extended out, the equipment we are receiving is higher mile. There is no question about that. We are trading for a lot higher-mile equipment than we typically would.

And until sales pick up, that is only going to continue to be that way, because we are trading for a lot of trucks that basically sold in '06 that are four years old and coming on five years old once we turn January 1 of this next year, a lot of them. So the equipment is higher mile and that's just the case of what we are trading.

But given the increase in new truck prices over the last eight years, that also drives it. Because the spread between the used values and the new that gets so large that that will continue to drive used truck values up.

But you asked about supply. Supply is not that -- obviously it's waning. I would continue to believe that supply will continue to be an issue on the used truck side as demand continues to remain strong, given the cost of new trucks, technology that's been put into them, throughout the emission changes of the last decade.

All right, very good. Nice quarter, guys. Thanks for your time, Rusty.

Tim Denoyer, Wolfe Trahan.

Good morning, guys. A couple questions. About how much of the improvement in your Class 8 market share of US retail sales -- I'm getting about 4.5% in the quarter. It was up from 3.1%. Can you say how much of that was due to Peterbilt did pretty well nationally; I think they gained about 50 basis points.

I'll give you a same-store basis. Same-store basis we were about 4.1%.

Okay, cool. Where do you expect that to settle out with the new acquired stores? I mean it's been more like 4.1% over the past several years. Do you think that goes up 20, 30 basis points?

I would like to believe that the third quarter is indicative of the future. And that would (multiple speakers) as far as the acquisitions we currently have done, yes.

Yes, okay. It does seem like the third quarter seems to be a seasonally strong time for your market share, just looking historically. Is there any reason for that?

Check I think it's just seasonal. I mean our customer base -- obviously from a parts and service perspective the second and third quarter are always stronger. There's always seasonality there due to working days, etc, the miles that folks are typically running, the part of the country we are in geographically where it's extremely warm in the South from a parts and service perspective.

On the truck side I think it's just timing as much as anything.

Okay, great. Can you give a sense of the incremental units on medium duty from the acquisition?

Yes. The incremental I believe -- let me pull it -- was 73 units.

Great. The production delays that you mentioned on medium duties, is that ongoing? Or can you give us a little bit more color on which OEM or --?

(multiple speakers) I mentioned on past calls that there would be a lag with a couple of our OEMs as they introduce products, had some onboard diagnostics that they had to get right. And they started delivering in August, okay?

But we had a lag there of maybe 60, 90 days prior to that as you ramp your inventories. So what was delivered in August, probably not a lot got sold into the third quarter.

Now our inventory levels are getting back to more normalized levels. So we should see hopefully an uptick from a unit perspective. Not huge, but an uptick nonetheless in the fourth quarter.

Yes, great. Going back to used trucks for a minute in terms of the -- can you give a sense of the pace of used truck price increases? Clearly in the first half truck prices, used prices, were going up pretty quickly.

Is that -- do you expect that to moderate? And in terms of inventory do you think that could have -- your new and used truck margins pull back a little?

Tim, I'll tell you the average used truck price in the second quarter, just to give you something to work with, is about $39,878. In the fourth quarter the average unit price was $41,564.

Oh, third quarter, excuse me; I don't mean fourth quarter. I want to apologize there, $41,564.

So you can see a slight uptick from quarter to quarter sequentially. Yes, it wouldn't surprise me if it continues along those slight uptick levels right there, in that range.

Okay.

(multiple speakers) that's also, Tim, sometimes that can be mix-driven, too, depending on which markets you're selling your used into.

Yes, sure. Okay. Just the last question on Ford. You mentioned you acquired a Ford and an Isuzu. How many Ford franchises do you have at the moment?

Well, we currently have three. We've had one for a while. In the second quarter we added one in Oklahoma City, as we notated. We have added one in Dallas, as we have said in the third quarter.

And we will continue -- well, it was the fourth quarter we closed, I apologize. We did it here in October, but just recently.

But as we go forward we will continue to look for more opportunities to add some Ford franchises.

Are those mostly the truck franchises? Are you getting into more light vehicles a little bit as well?

No, no, we will stay on the commercial side of the business there. We will stay in the commercial business.

Okay, great. Thanks very much.

Chaz Jones, Morgan Keegan.

Good morning, guys. Rusty, I wanted to focus a little on the absorption ratio. I was trying to remember; I think before the last downturn you guys had a goal of getting the absorption ratio -- correct if I'm wrong -- it was like 112% or 115%. Wasn't it somewhere in that range?

110% was always our goal prior on an annualized basis, not on a quarterly. Remember, the second and third quarters are seasonally our best quarters. Typically fourth and first are the toughest quarters absorption-wise.

But 110% was our goal. Obviously dropping down to 96% last year was painful.

Right.

But we are extremely excited about where we are at. You've got to reflect back in '08 on an annual basis we were 106% if you remember, and that's where we (multiple speakers).

Right. So do you still feel -- I mean obviously I would think you feel pretty confident about getting to 110% as there's a lot of things internally that have happened since then. Is there a new sort of threshold that you think the absorption ratio can go to this cycle?

You really want me --? A lot has to -- if you'll remember (multiple speakers). Yes, of course I feel confident of getting to 110% here in this cycle. There's no question about that.

Sure. What would I say? I got 115%.

But let me step back and let's think about the business going forward. As we look at future acquisitions, remember, just like the one we just took on, if they ran in the low 90%s last year, I've got some work to do just to get them up to the level of the 110%. So they could be a drag on the overall absorption level if we were able to pull off a few more acquisitions here in the near term.

So that heading makes the work, makes the hill even taller to climb. Okay?

Right.

So you have to -- if you want to look at same-store, you better believe on my old stores I would have a 115% goal. I'm not going to guarantee it or not promise that to you. But obviously internally, operationally my folks know that.

Understood. Then just looking at the absorption ratio, you sound pretty confident that parts and service business will stay up here in the fourth quarter. But you kind of alluded to this -- typically your absorption ratio would drop some in the fourth quarter. Am I reading that wrong?

No, it definitely drops, obviously from the revenue side. We -- it typically as I said from a revenue perspective you've got four less working days. So you are talking about gross profits pushing $3 million less if you maintained the same average that you had in the third quarter.

I would look for our daily averages to be similar to the third quarter, because we measure everything on a daily average of working days. When you've got so many holidays involved in the fourth quarter, so we are going to be four working days less when you look at that, because of holidays in the fourth quarter.

So that is definitely a drag on the gross line. Hopefully we will be able to work with our expenses to help a little and maybe a little offset that. But offset that a little bit. But it's typically a little tougher in the fourth quarter.

Okay. Then the last thing. Just broader picture in terms of the customer base. You indicated here I guess the last couple quarters that oil and gas has been pretty strong --

Correct.

-- from a customer standpoint. Could you just maybe hit in terms of where the relative strength and weakness is? Oil and gas, truckload, vocational, municipal? Just across your customer base.

Yes, oil and gas has been -- still remains strong. There's no question about that.

I would tell you that the refuse business has been pretty good.

Construction business, no. There's not many houses being built out there and not a lot of commercial construction going on either. So the utilization from a concrete mixer perspective and things like that out there in the marketplace is still very, very weak.

Truckload? Spotty here or there. You almost get into customers and where you are at with specific customers.

Dry van we expect to get better. I know as we look forward, I think anticipating purchases from some of our dry van customers that we've talked to -- will definitely be up in calendar 2011.

So, I mean, without going through every sector, I mean it would take a while here to go through every sector. But at the same time we just need, as I mentioned earlier, we are still not even doing replacement, guys. We're not even meeting replacement demand.

We are tracking -- what are we? We're about 79,000 Class 8 US retail deliveries through nine months. We did about 30,000 in the third quarter. You tag on another 30,000 and you're at the 109,000 number I gave you.

Remember, that is a bottom three-year in almost the last 30 years. So it's -- the pent-up demand continues to grow every day that we run at these levels. So we just need a couple other things to grab hold.

And I'm telling you, a lot of it is confidence. Not confidence in their own businesses, but confidence in what they see from an overall economic outlook. Okay?

So hopefully maybe there will be a catalyst in 12 days that will calm some people's fears of the future down and allow people to focus on their own businesses. That's something that I'm hoping for.

You and me both. Well, great quarter.

Brian Sponheimer, Gabelli & Co.

Good morning. Got just a couple questions here. You mentioned timing helped in the quarter. Was that maybe June sales that were delayed into July, or October sales that were pulled back into September?

Probably June that may have been delayed into the third quarter. And it's not necessarily delayed, it's just a matter of timing. You know? It is more timing than anything else.

It wasn't -- I wouldn't call it a delay. I wouldn't use that term. It's just timing sometimes.

But I would hope that we will be able to run at rates from a truck delivery perspective -- oh gosh, I say this -- but in the fourth quarter similar to the third. Okay? So I would look for -- to remain relatively flat, I hope, as I've looked at projections for the fourth quarter.

As long as timing doesn't get out of line with any issues at year-end, which sometimes there can be year-end issues. But typically most people would prefer to get it done for tax purposes prior to the year-end. So I wouldn't look for it to be a drain.

But similar unit deliveries we are planning on for the fourth quarter from the third.

Okay. Of the 1,200 or so heavy-duty trucks you sold in the quarter, do you have any stats about mix, 2010 engines versus 2007?

Say that again? I apologize.

Of the 1,200 heavy-duty trucks you sold in the quarter, do you have any stats about the mix of EPA 2010 engines versus --?

No, I don't have that here for you. But I'm going to tell you the majority were. Okay? The majority of trucks that we delivered in the quarter had to be 2010-compliant.

I don't have those numbers in front of me. Be happy to -- I can ask my sales guys if they've got something to measure that by, but we really haven't measured that. No, sir.

Okay. I guess anecdotally then, what are your customers saying about the new engines, both the EGR and the SCR options?

I have heard good things on both sides. Okay? So I have not seen any big red flags come up from an operational perspective on either technology. So I guess I would tell you they are performing as expected.

Okay, great. Just one last one, kind of same breath. To what extent do you think that there's some hesitancy from your customers about being early adopters on either engine technology or that being a potential holdback on sales right now?

I would've said maybe 90, 120 days ago that was an issue. Now, I think it is accepted. It is the world we live in, and it is accepted that it's the technologies that we will be going forward with.

And I don't believe that those are the issues that are holding back truck sales. I think I've mentioned twice on this call already what I feel the issues are, and I don't think they are industry-driven.

I think they are outside of the industry as much as anything that are holding back truck sales from picking up. As I mentioned to the last questioner, I'm hoping in 12 days we get something that everybody gets a little more comfortable about the future as we look forward into the next couple years.

Okay, outstanding. Thank you. Nice quarter, and we will see you in a couple weeks.

I'll see at your conference November 1.

Robert Kosowsky, Sidoti & Company.

Good morning, guys. I was wondering if -- your thoughts on if ACT is right for next year and we have this big 60-something-% ramp-up, would you expect parts and service to fall next year relative to third quarter's pace, obviously taking seasonality into account?

No, I would not. If you look historically, it has never fallen even though we ramped up. Our internal work -- remember, when you sell trucks, you just don't take them from the manufacturer and deliver them direct to the customer. There is typically -- especially when you are so heavily vocationally oriented as we are -- there is more internal work generated that will more than typically offset any loss as you see as the fleet age comes down out there as a whole.

So if you look at the last cycle in '04, '05, '06, we continued to ramp our absorption even though new truck sales went up. And a lot of that has to do with the mix of business, how we go to market, how we go after different sectors of the market. Not just the truckload business, but focused on the vocational pieces of the business and a broad perspective across the network.

What that also brings into play is you get more warranty sales. Obviously warranty sales typically are -- we enjoy warranty sales, obviously.

So those two factors -- internal work, increased warranty sales -- more than offset typically the age of the fleet coming down and maybe some of your customer pay tickets.

That's helpful. We've also seen I guess two step changes. The second quarter was much better than the first quarter, and third quarter much better than the second quarter.

Do you see the opportunity for another one of these step changes looking into the 2011? Obviously taking seasonality into account.

No, I would tell you we are right where we are going to be, right now. I would not look for that at the moment. I wouldn't count on that.

Okay. Then can you talk about the increase you've been seeing in SG&A? Like what's driving that and what happens if truck sales start to ramp up in '11 and '12 too?

Sure, let's think about it. First off, you got to take SG&A and break it apart. Okay?

Because S is typically associated -- because that's the commissions on truck sales. So as truck sales ramp up, your S is going to go, because that is a variable cost component. Okay?

If you look at G&A, that is how we really look at it. Looking at SG&A, S is going to go up. When truck sales go up, count on S going up with it. Because typically somewhere in the 30, low 30%s of truck gross profit is a commission. Well, around 30% the way we look at it. 30% is commissionable of truck gross profit.

Now G&A is the part that we really manage, because that's the part that's tied to the parts and service operations. Understand that as you go forward we typically -- as we increase the gross profit in parts and service, understand G&A will increase.

This is parts and service. You are turning wrenches. You're delivering parts and things like that. So that does accelerate as you go up.

It cannot remain flat. It's just physically impossible for it to remain flat.

The important piece is what you keep of the incremental gross profit dollar. We have an internal goal of trying to keep between 55% and 60% of that internal gross profit dollar from a parts and service perspective. So far we have able to accomplish that this year.

Because if you look at G&A sequentially, okay, it was up 3.2% on a same-store basis. Yet margin was up 8.5% or so, so we accomplished the goal that I just mentioned. So that's how we measure it, if that helps any.

Yes. No, that helps out a lot. Then just two other questions.

Do you see any kind of market share pickup on the parts and service side that is driving some of the volume growth?

No.

Or has it just been pure volume?

I mean, we hope to. We hope we are. At the same time those are hard to measure and they are going to be measured looking back historically not this quick.

The way they measure it, it will be measured -- I will know more about that next year when I get some other statistics from some folks that measure it. It's not like trucks. It's something that they measure on a longer look-back type perspective.

Okay. Then just finally could you give us your thoughts on the medium duty cycle looking the next few years out? I guess how long before a replacement cycle unfolds? What are some drivers?

And how much of a burden does repair expenses become? Because we are now like three or four years past the peak on that.

Well, I would tell you medium duty is going to lag Class 8 pickup. It typically does.

Simply, why? You asked about drivers. Small business. Small business is going to drive -- the general economy is going to drive medium duty more than the Class 8 business. Okay?

The Class 8 is going to be more industry-driven. Yes, driven by a general economy, but also tied to the influences of the past four years inside the industry more related to truck sales and things like that. Where the medium duty business is always going to be tied a little more to the general economy because it is tied more to small business, if that helps any.

Yes, it does. Thank you very much for your time and good luck next quarter.

Barry Haimes, Sage Asset Management.

Not to beat a dead horse on the customer hesitancy question, but I had one related question. That is, just in your conversation with customers, is the regulatory uncertainty having to do with the hours of service, CSA, etc., and possible driver shortages, is any of that do you think having an impact on the customer hesitancy? Or does that seem like it's not as much of an issue?

I don't know if that is the main driver behind holding Class 8 truck sales back. I would say no.

Could it have an effect? It's probably got a minimal effect.

To me the issues are, as I said, broader. No one wants to get caught up in some type of huge downturn again. I don't anticipate that.

Everyone is a little more conservative given the lessons of 2006 and 2007, when freight started down in '06 and everybody was growing fleet. So everybody is a little hesitant there.

But the overall thing is, as I said earlier, the replacement cycle pickup. Really those numbers that are out next year, in my mind the numbers that ACT has out there next year, they don't take into account any pickup in construction and housing and automotive getting back to a 14, 15 million SAAR number, things like that.

I think that's basically just replacement. That's why I am still extremely excited about '11, '12, and '13.

Timing wise, I've talked about some of these issues that I think may be holding it back a little bit right now and dampening it right now. But overall it's going to come. It's just a matter of timing.

I know that's what everybody gets paid to do, is pick out the right time, that inflection point of when it picks up. But we are all looking for that. But I am still very confident in the next three years as we look out.

Terrific, thanks so much. Appreciate it.

Bill Armstrong, C.L. King and Associates.

Good morning. Rusty, there's some concern that Navistar may lose market share with this, their new engine technology. Given your commitment to growing your Navistar business, what are your views on that?

If they do, it will just be temporary, a timing issue as much as anything. I don't look for them to lose market share. I am very comfortable with both of my major OEMs' platforms going forward and have no worries whatsoever investing behind that platform with them.

I think it's just a timing issue as much as anything from their perspective in getting the engines out and ramping up. So if it is -- if they do take a little marketshare hit temporarily, I would expect them to get it back in the future.

Okay. A couple of housekeeping questions. On used trucks, gross margins have been pretty strong the last couple of quarters. Do you have that number for the third quarter, what the used truck gross margin was?

Sure. Yes, it was 11.4%.

11.4%.

It was down -- which was down from the first and second quarters, okay? As I mentioned, it's going to start trailing because we sold out that inventory that we traded for at the last part of last year, in the fourth quarter of last year, and you start trading for stuff at more current market levels.

Right, and you said the average used price is $39,878?

No, it was $41,564.

Okay. Then just last question. Within the medium-duty truck sales, how many buses were there?

Let's see. There was 100 -- let me look my sheet here -- 114. So that was down. We were down, if you strip out the 73 that were sold in our new division -- which by the way also includes international buses, and I don't have the breakout of that 73 in the acquisition. But of the 73 that includes their medium duty and IC Buses. And the 114 sold in Rush Bus under Blue Bird brand. That would be under last year's number or under the second-quarter sequential number, I don't know, about 15% I think as far as delivery.

And that was reflective back into the -- as I said, the OEMs that we were a little late on getting inventories ramped up with, that didn't come to market with their product. We didn't start receiving until August.

Right. Okay, thanks.

Tom Albrecht, BB&T.

Congratulations on a great quarter. A lot of my questions have been answered, but I did want to ask, when you look at the increase in new and used truck sales on a revenue basis, you were up about 38% or so.

Right.

On a unit basis, those three were up about 18%. Does that reflect more of a mix issue? Or does it reflect the cumulative impact of more the expensive trucks as a bigger factor over these last several years?

A lot -- let's think about it like this, Tom. The average sale price was up dramatically also. Class 8 average sales price last year in the third quarter was $112,792.

This year, the average sales price was $127,641 as I look at it. So it was dramatically up.

Plus it is a mix issue, too. How many went into different vocations can have a great reflection.

If I remember correctly in the third quarter last year, we were heavily weighted towards over the road. And I would tell you this year we were more heavily weighted towards vocation.

I was in the middle of delivering a couple large fleets last year in the third quarter, over the road fleets. This year was much more vocationally driven, okay? I don't have those numbers in front of me, but I know the major customers that were taking trucks in both quarters.

So that had a lot to do with the price being driven up as far as the average cost price. So if that answers it, it's really as much as anything a mix issue.

You can look at even medium-duty truck sales. The average cost last year was $58,220. This year it was $69,193.

So again, that's new technology plus a mix especially on the heavy-duty side as to where they were going. That was all not just new technology on the heavy side; a lot of that was a mix into what sectors they were sold into.

Okay, that's helpful to hear. Then I understand your hesitancy to proclaim that this is it, the beginning of the new cycle, and also in response to [Art's] question on where the absorption ratio might go this next cycle.

I guess piggybacking on that though, there's already some estimates that seem to reflect a near-peak operating environment over the next four or five quarters. It doesn't seem like that's quite the way we ought to be thinking about the world. Do you have any comments on that?

No, I'm trying to get the flavor of your question again, Tom. I'm sorry.

Well, some of the estimates maybe already reflect like this is -- the environment has already started for peak. And given that you are signaling, yes, it's better, there may be still more fits and starts, just wondering how you think about some of the estimates that are out there at this time.

Well, I am not -- you know, when I say that, Tom, it's just that I don't have -- I can't see that far out. I feel that it's right there. I just -- it's I have confidence in the industry and where we are at, where it's at.

It's the overall general economy that holds me back as to saying it is starting right here, and saying okay, this is the start date. I know it's there, and I know that every day that goes by we get closer to reaching that inflection point.

I'm just not quite sure, confident enough to say, okay, this is it. It's solid. It's not pulling back. There won't be this one-quarter blip where it pulls back where everybody gets a little scared out there.

Gosh, I just don't see -- I know one thing. When we do start selling trucks, we are very poised. I think the model -- you've been around long enough, Tom. You've seen us long enough that (multiple speakers) the model is as solid as it has ever been or better than it's ever been.

And we will be very poised to do as I've said before in the peak markets of '99, '98, '99, '04, '05, '06,. So I think we executed and I think we handled the downturn better than we ever have, especially given the severity of it. And I think the organization is poised to take advantage of it.

Can I tell you exactly when it's going to start? No. But, hey, if it starts a little later, I think my -- to make you feel a little better I would tell you that the incline just gets steeper and the rise. Okay?

I think they all run to the front of the bus at the same time. Okay? The longer out it goes, everybody tries to get to the door at the same time is I guess the best way for me to explain it to you.

I'm totally in agreement with you. A different question, given the increase over the years in the cost of new equipment, particularly Class 8 equipment, and the fact that a typical buyer may have let their fleet get five or six years old instead of the three and a half, four. How much of a hindrance from a financing perspective is the idea that they may have to finance $90,000 or more versus $50,000, $60,000 just a few years ago? How much of a hindrance is that so far or likely to be into the next few years?

I don't think that's going to be the -- Tom, as I'm thinking about your question here, I hadn't thought about the question before. I don't see -- my thoughts are -- they are just -- I think that's going to be just the way it is because of the cost of price of trucks.

As you look out, I think the residual values will continue to rise given there is not going to be any supply for who knows how long of used trucks. And given that new truck pricing is not coming back, okay? I mean we can look at the OEM levels for the last year and a half; they don't have margin inside of what they're doing. So it's not going to come back.

But trucks? Trucks will be replaced, and balance sheets will -- should be able to support them, support the credit that will be needed.

My biggest concern, is there going to be enough credit out there as some friends of ours in Washington continue to borrow more of it and take it out of the private sector where it belongs. That is a bigger concern to me than that question.

So you say financing $90,000; historically I think that has always been -- I don't see that as an issue, Tom. I really don't. I think it will be the way it is.

You know, if lives are going to be extended out and usable lives are going to be extended out because technology has made the equipment that much better, then financial institutions should support the underlying value of the product to those levels.

That makes sense, I guess. I'm shooting from the hip here. I hadn't really thought about the question.

But in my mind I don't see it as that big of an issue. The biggest issue to me is -- will there be enough credit out there for anyone in any business right now?

Will the credit and the financial institutions and the banks be well enough? And will there be enough available credit, not that the government is not borrowing too much, out there for everyone? That is of more concern to me from a personal perspective.

Okay, thanks for the commentary. Keep up the good work.

Chase Becker, Credit Suisse.

Just had a quick question and a clarification. I think, Rusty, you said in the fourth quarter you expected -- was it total truck units delivered to be relatively comparable? Or were you talking specifically Class 8?

Well, I was talking I'd say total, too. I'll say that about either one.

Again, timing can be an issue. But I would tell you in total, roughly, I'm thinking about the same. Hopefully I won't get caught in something that timing changes one of them.

But I'd look for -- medium could be slightly up, but not -- I don't want to get into -- medium could be up. Maybe used off a little bit, driven by supply being shorter. Okay?

So hopefully they would offset each other. And as you look at it in whole, hopefully comparable quarters.

Okay, so just to be clear, if ACT is assuming that the fourth quarter is up sequentially then maybe it's some timing. There's nothing going on in terms of market share that's materially different?

No, no, no. From my perspective, we were running in the low 3s from an overall market the first half of the year; and from a same-store we jumped to 4.1. But as I mentioned earlier, there was maybe some timing involved in that and some stuff that didn't get delivered in June that spread out into the -- because it was vocationally driven when it was ordered and had to have bodies put on and dribbled into the third quarter.

But I believe the third and the fourth will be similar. Okay?

Okay. Then just a quick comment on what your latest thinking is on acquisitions in terms of potential size of deals that you're looking at out there.

Oh, don't get me in that. I don't like to talk. You know I'm working real -- I'm working extremely hard at it right now.

We are pleased with the acquisitions that we have done, and we would expect to be looking to increase our geographic footprint. You remember, one of the key factors in our growth it looks going forward with international and with Navistar, as I have said all along, the growth will be in areas that we're not with Peterbilt. As we continue to increase our customer breadth, our customer touch, and I also want to do a standup job for the OEM that I represent from a Class 8 perspective in those marketplaces.

So we will be looking to increase our geographic footprint as we go forward, not in the territories that we are already in. So but acquisitions, you bet, we will be looking.

It's something I don't step out and talk about right now. It's nothing I can talk about, but obviously we are active on the front of looking right now.

Okay, great. Thanks, Rusty.

Jack Waldo, Stephens Inc.

Rusty, this is Brad Delco in for Jack. A lot of the questions again have been answered, but I did want to touch on two things.

First, I think I've heard previously you comment on maybe the portion of the parts and service revenue that have been driven by new truck sales. Did you see a pretty big uptick in that this quarter? Or how does that compare to the second quarter?

No, I think most of ours was -- I don't have that breakout right in front of me. But internal was up obviously because deliveries were up. Our internal -- when I say internal, that is driven -- internal parts and service sales are driven typically by truck sales, okay?

But I would tell you the biggest driver overall this year has been customer pay. Driven by the excess capacity that we've dealt with over the last year and a half being put back into operation.

So our warranty sales have been down this year dramatically. But that's because there haven't been that many trucks sold and all the new trucks that were so old, the few trucks that were sold the last few years obviously less than prior; so you have less out there to perform warranty on.

Most of the year has been driven by customer pay. Internal I am sure picked up in the quarter, but I've not seen it. It just would have because of the amount of deliveries.

But the majority of the uptick has come through customer pay tickets. And that is taking the excess capacity and putting it back into service.

Got you. Then how much was from the acquisition?

On a parts and service perspective, let me grab that sheet here. I am not going to get into exact dollars.

Overall as I mentioned before, the absorption level there was less than our overall absorption. I think the acquisition ran around 98% absorption where it historically had run the low 90% range, okay? Last year around 90%.

So from an absorption perspective, you can see that. But if you look at it, as we have said before, they were basically around 10% of our revenues and I would look at that as an across-the-board view.

Got it. Basically what I'm trying to get at is it seems like you hit a new base in terms of expectations on that revenue line item. I'm just trying to get a sense for what opportunities ahead, including the revival in new truck sales and how that would drive maybe more to that revenue line.

Well, obviously truck sales are going to drive the revenue line. They're the big, big driver because they are the high-revenue piece. So parts and service have a much less effect on revenue but a much heavier effect on profits.

So I look for it to continue. As I said earlier, sequentially the fourth quarter will probably on a per-day perspective it will be off probably overall, parts and service sales, fourth from third. But when you look at it, we've got four less working days because of holidays. So that is the issue.

And we are -- I would tell you it's not growing sequentially like it did first to second, second to third from a parts and service perspective. It grew so rapidly that it is leveling off.

Now, it's not coming backwards. But it's just not going to continue that same rate of growth into the fourth quarter. Just especially because seasonally trucks as you get close to Christmas, shut down, don't run as many miles. It's just -- there's some seasonal issues in there, too.

So what we would do would be look forward to maintaining our per-day average and then ramping up when we gets towards March, April, May of next year. As we get out into the second and third quarter we would be looking for our revenue lines to continue to grow even stronger from a parts and services perspective.

Got you, the last question. I know we touched on SG&A and cost, but -- and you guys did get a little good leverage there with the improvement in revenues. But anything, any cost controls that were put into place during the downturn that may be coming back in terms of benefits? Or anything like that, that we need to be expecting or make sure we're looking at correctly?

Well, I don't think there's much as far as benefits. But you've got to remember, even in our parts and service business there are variable comp plans. So as gross profit from parts, service, and body increases we have a large outside sales force that people don't even realize from the parts and service perspective.

We will -- so that's what I talked about earlier, about that 60-40 split. As I try to simplify it, you know me, I'm going to talk pretty straight and pretty simple.

It's not like loaning money. Someone has got to turn that wrench. Somebody has got to carry that part. Somebody has got to deliver it. Especially when you are running at such strained levels as we were the last couple years.

We took a 25% -- over two years we took a 25% gross profit in parts and service and even a big -- a huge revenue hit at the same time. Not quite that, but 22% revenue hit.

So that was very difficult. We were running extremely lean.

Achieving 96% absorption doesn't sound real good last year, but I'm going to tell you that was difficult.

No question.

So because of the hit we took on the profit side, we had to take out -- we took out -- 15% of it we picked up from an expense cut perspective. So we can't handle these amount of volumes, parts and service, without some incremental cost increase. That's just the way it is. It's the way this business works.

But it's up to us as managers, which I have all the confidence in the world in my organization and the people out there, to handle it and management within side the clearly defined goals of what we expect and the parameters of the way it should be done that we lay out as an organization. These guys have always shown in the past that, my people, they know how to do it and I have all the confidence in the world that they will continue to meet the goals that I set out there for them.

But I am not foolish enough to expect them to keep 90% of every incremental gross profit dollar in parts and service. It just doesn't work that way.

Got you. Thanks, guys, and congrats again on a great quarter.

Tim Denoyer.

Just one more little detail. I wanted to ask about the tax rate coming down to about 35% in the quarter. Is it -- does it normally stay up around 40%?

Steve will take it (multiple speakers).

Historically -- throw last year out because it was such a crazy year in terms of even levels of profitability and alternative fuel tax credit. Historically we have run roughly 38%. Some years a little better, but ballpark of that.

Now that we are back at the profitability levels that we are at, we should be back 38%, 39% for this year blended when the year ends. The other thing that affects that this quarter, there are some alternative fuel tax credits that come right off the bottom line.

But from an operational basis when you model, use about 38%, 39%, and then we will just keep you apprised if there's any material effects from alternative fuel tax credits.

Okay, great. And then just one more little detail. A couple weeks ago the bonus depreciation was extended by the government. Have we seen any of that in customer conversations, in terms of people trying to get anything in before year-end?

No, no. I can't tell you I've seen anything here just in the last couple weeks to do with that. Could -- should something might show up here real quick given that there are -- there's still time? We hope so, okay?

I would tell you that we would love to see it, but we have not seen that. It hasn't been reflected in any conversations that I have had.

All right, thanks very much.

(Operator Instructions) Sir, I'm showing no further questions in the queue.

Okay. Well, we appreciate your participation in the call. Look forward to talking to you soon. I guess it's probably be February when we get year-end release before we talk to you again.

So thank you very much for participating and we will see later. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.