Rush Enterprises Inc (RUSHB) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Rush Enterprises' second quarter 2012 earnings 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 be given at that time. (Operator Instructions.) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr. Marvin Rush, Chairman of the Board. Sir, you may begin.

Good morning. I'd like to welcome you to our second quarter earnings release conference call. On the call today are Rusty Rush, President and Chief Executive Officer; Marty Naegelin, Executive Vice President; Steve Keller, Senior Vice President and CFO; Derrek Weaver, Senior Vice President and General Counsel; and Jay Haselwood, Vice President and Controller.

Now Steve Keller would like to 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, 2011, and in our other filings with the Securities and Exchange Commission.

We'd like to update you on the second quarter results. We are pleased to announce that the Company's gross revenues totaled $836 million, a 26% increase from gross revenues in the second quarter of 2011. Net income for the quarter was $17 million, or $0.44 per diluted share. Aftermarket services accounted for 62% of the Company's total gross profits in the second quarter and reached a new record quarterly high of $208 million. This resulted in another record quarterly absorption rate of almost 118%.

Our aftermarket growth has been driven by our efforts to increase the range of service solutions we offer to meet our customers' needs. This has allowed us to strengthen our relationships with existing customers and to win new customers.

Rush Class 4 through 7 truck deliveries increased by 41% compared to the second quarter of 2011 and outpaced the US medium-duty truck market, which only increased 11%. Rush medium-duty truck sales accounted for a record 5% of the total Class 4 through 7 market in the second quarter. Our medium-duty sales growth this quarter is a result of increased new truck sales to medium-duty fleets across the country, along with the strong performance of our Ford franchises.

Class 8 new truck deliveries increased by 19% compared to the second quarter of 2011. This is a result of the continued activity in the energy section and replacement purchases from large fleets.

Let's talk about the industry outlook. We expect the US Class 8 retail sales will reach 180,000 to 185,000 units by year end.

Reduced truck order intake during the first half of the year, combined with economic and political uncertainty, could negatively impact truck sales by as much as 20% during the second quarter of this year. We believe order intake should increase by year end as these concerns subside. Industry analysts expect Class 4 through 7 retail sales will remain on pace to reach 160,000 units in 2012. Used truck sales and residual values are expected to remain steady.

Given our focus on aftermarket solutions, we expect parts, service, and body shop sales to remain strong.

I would like to congratulate all of our employees on their efforts in contributing to another quarter of record-setting performance. I'm proud of our organization, and I'm confident we have the strategies in place to deliver continued good financial results.

We are now prepared to answer any questions you may have.

Thank you. (Operator Instructions.) Peter Chang, Credit Suisse. Pardon me, your line is open. If you have your phone on mute, can you unmute your phone, please?

Neil Frohnapple, Northcoast.

Congrats on the good quarter, guys, and thanks for providing additional detail on the balance sheet and cash flow at the end of the earnings release. Does the commentary about back half Class 8 deliveries being down as much as 20% factor in order intake level in line with the 16,000 to 17,000 range we've seen in the last few months, or does the guidance imply another step-down in order intake over the next few months?

No, I would tell you that it would be in line with what we've seen over the last five months or so, which is, lately, the last couple of months, it's been around the 16,000 to 17,000 range. So I would anticipate if it's down, Neil, so it's down a couple of thousand units or something like that. But it's nothing, it's not going to drop to single digits or anything like that, if that's what you're implying. It's similar to where we've been in the last few months.

Okay. And can you comment about customers' plans for 2013? Are you quoting for 2013 a lot at this point, and are customers more optimistic for next year?

My personal opinion is yes, to answer your first question, yes, we are quoting. It has picked up over the last 30 days in certain market segments. We've started quoting deals, I would tell you, over the last 30 days for next year as people get their plans in place for next year. I am, especially given what we've seen in order intake over the last five months, where it's obviously coming in softer than any of us anticipated at the first of the year, so I feel very strong about 2013. I think we've just been affected, as I've said in the release, there's been a lot of uncertainties out there.

I don't think the fundamentals of our customer base spread across most market segments are bad. So I think people are just sitting on their hands, have been pretty much, waiting to see how -- a lot of it is political and what happens later this fall, and I would expect it to pick up quite nicely towards the back half of this year. So I'm really excited about '13. Like I said originally, we none of us expected these uncertainties, and Europe to be quite as rough as it is and present these, but the fundamental outlooks, most of the customer base, are solid, the people I've talked to. And I get around quite a bit.

And Rusty, do you anticipate parts and service revenue in the third quarter to be in line with the second quarter, or could we see another sequential uptick?

I'm going to tell you I'm going to look for it to be in line with the second quarter right now. It's hard for me to predict it going up from here. If you want to talk about year over year, yes, I can tell you it will be up year over year. If you're looking at it sequentially, probably more in line with the second quarter. I know so far through this month that we're trending just like we have in the months of May and June.

All right, great. Thank you very much.

Brad Delco, Stephens.

Congrats on the quarter. The first question, Rusty, could you just talk a little bit -- it sounds like you're being a little bit more cautious on the truck side in the back half of the year, but yet again, you hit new records on the medium-duty truck side. What's different in those two markets? Or what's different in the customer bases that you think is driving that, and maybe just some color as to expectations in leasing and parts and service and how that's supposed to flow through in the second half as well?

Okay. Well, on the Class 8 side, a lot of those transactions are done, a lot of times, way ahead of time. They're ordered out for a year-long basis. They're not ordered, say, okay, we want a medium-duty size. It's more driven by the general economy. A lot of smaller buyers, okay? So that will be more quick. They'll decide in March they want a truck in July.

Whereas typically, the most of our large Class 8 customers will know by the first of the year what they want throughout the year. They might dampen and slow down some of the stuff in the back half of the year, and I will tell you, that's what we've seen. And then you haven't really had any other -- there have not been any big orders to speak of. Most people, the big fleets had already purchased, and you haven't had the follow-through on the medium-sized fleets that you would typically see during the middle part of the year.

As far as the medium-duty side, as I said, it's more tied to the general economy. There's some pickups in the construction areas going on that I think we're seeing affect some of the medium-duty purchases. And we feel good about medium-duty staying pretty constant for the rest of the year, to be honest with you. But Class 8 business, as we said, we expect it to trend down up to 20% in the back half of the year.

But we already know where we're headed, given the order intake that we've seen in the last five months. And again, remember, a lot of medium-duty is bought off the yard. More medium-duty is purchased off of our front lines that's already in stock than our Class 8 business.

Got you. And maybe where I was getting at with that, it seems like you guys have been more tempered in expectations on the energy side, but with medium-duty as strong as it was, it suggests to me that other markets are coming back stronger. And any anecdotes you can give to that, I think, would be helpful.

Well, the construction business -- I think we've all seen new home starts at a four-year high last month. So you can see that. We're seeing that across the medium-duty business more than we are the Class 8 business currently. And then look for, you know, there's other -- when that happens, and automotive remaining strong, but to be honest, I could give you the sectors. I mean refer to the energy sector, yes, the energy sector is going to tail off a little from a truck delivery perspective. The important part about the energy sector, remember, is it's still going strong from a parts and service business perspective. We're still very active out in the energy fields across this country from a parts and service support perspective. But as far as truck sales, that will tail off in the back half of the year.

But order intake says regardless of what sector, if you look at order intake the last five months, we're going to be down 15% to 20% in US retail deliveries. I think, if you look at PACCAR's announcement of a bottom end of 210,000 US and Canada, that implies about 180,000 US, and I think that's where my number is also, 180,000 to 185,000. So it's pretty much in line with where their number was.

Got you. And Steve, I wanted to give you a chance to address the additional details you're providing now in the press release. What's really driving that? What's the message? I guess my take is cash flow probably looks a lot better than what it looked like before, based on the way you're reporting. And if you calculate some returns on the capital you are employing, it looks like your returns are a lot better than maybe what it would suggest otherwise. So could you just expand a little bit as to the reasoning and what you think we should be taking out of the new information?

Yes, you're right on both of those issues, Brad. It became pretty apparent to us from speaking with guys like you and some of our investors that people didn't completely understand the numbers in our financial statements as we're required to report them under GAAP, specifically as it relates to the floor plan financing of our inventory and our lease and rental business. So we wanted to take the opportunity to try to walk them through it and show our capital structure in the same way that management views it.

And real simply, if you look at Bloomberg and FactSet and those agencies who report notes on us, they say we have $1 billion in debt. So as you can see through the net debt calculation, which feeds your ROIC calculations and your enterprise value calculation, our debt is significantly different than that when you understand the business.

Likewise, when it came to the income statement, we wanted to treat things fairly and make sure that if we're not going to include the debt in the capital structure for those items that we didn't add back to G&A and interest so that we're doing apples-to-apples return comparisons, and free cash flow is the same concept. So yes, we were trying to give you the tools to use to go in and do your return calculations in a more accurate fashion.

Got you. And then my only follow-up to that, on the leasing side, you guys report healthy gross profit margins there. Looking at those returns relative to the capital that you have or the debt you have on your balance sheet, are there any costs, overhead costs, on the leasing segment below the gross profit line? Or is essentially everything on the cost side baked into the cost of goods sold?

All the capital costs related to the debt are above the line. They're in cost of sales. Your interest and depreciation are in cost of sales, and some of your operating and running costs. You see on the lease and rental line item, we have a margin of, depending on the quarter, in the mid-teens, let's call it. There are some G&A costs below that, but that is a profitable business for us. And what's left, when you strip out our EBITDA calculation, is only that incremental cost of running the business that's left in those calculations and not the capital cost.

Got you. Okay, guys. Thanks for the time. I'll turn it over.

Hey, Brad, one quick comment. I want to make sure you're clear on what I see when I forecast that Class 8 sales. Now, when I say 20% off, we're only talking about the back half of this year. I think what the uncertainties we've seen and the softness in order intake only bodes even better for 2013. The average age of the fleet out there is still pushing all-time record highs. That hasn't changed, and it's reflected in our parts and service gross profit currently.

So you've got to understand, I'm still very bullish on 2013, if not more bullish than I was at the first of the year. You've got to remember, numbers have come down from the original forecast going into this year from 220,000-something units, I think, by ACT, down to they're -- I think they're a little high right now -- they're at about 204,000. But I believe for US retail sales are only going to be 180,000 to 185,000, given we've had so much softness in order intake for the last five months running. So don't take this as anything derogatory about the business.

As far as our business model, when you look at how we've shifted the earnings stream of this Company, we're a service company. And we sell trucks, but more than anything else, we've shifted to the most gross margin, and most of our gross profit comes from parts, service and body. And that will continue as we go forward, especially given the investments that we've had. From the truck sales perspective, I look for 2013 to be a much better year than 2012.

And that's good color, Rusty. So essentially, we're reading that as you're still thinking '13 from a delivery standpoint, and probably from an earnings standpoint, could be better or should be better than '12?

Oh, no question.

Okay. I appreciate that clarification. Thanks, Rusty.

Brian Sponheimer, Gabelli.

I want to spend some time talking about your brands. Obviously, the Peterbilt performance on an industry basis was excellent in the quarter, and I'm assuming that that's where most of your growth on the heavy-duty side came. With Navistar's new engine announcement, how do you foresee the next six to nine months working with them? I want to talk about your confidence in their ability to continue to deliver trucks to you. And do you foresee any sort of pre-buy of the old EGR engines going out, given the reduced cost?

Okay. The first comment was probably correct. The majority of our deliveries, yes, of course, were Peterbilt during this quarter. Navistar, obviously, has had some issues as they get their technology with the engine straight. But I am very comfortable and very confident in the future of their decisions. They obviously have made some changes over the last month in their direction, and I am very comfortable and confident -- I've been up there and visited with them -- that they will be able to meet the requirements of the EPA and be back and up and running in whatever amount of time it takes them to get the engine, the after-treatment in the engine put together. I know they're continuing to look at exactly how the -- you know, the timelines and put all this together. So I have no issues with that.

In the short term, can it be a little bit detrimental? Of course. But in the long term, I'm as confident as I've always been in the brand itself. As far as any type of pre-buy, that's to be foreseen. I think we're just getting into the middle of that right now, and we'll have to see how that plays out over the next 30 to 60 to 90 days as they transition over to their SCR or ICT Plus, which is SCR technology on their new engine. So there's a short-term issue, probably, with some market share stuff. But long term, I don't think there's any issue at all.

From a customer basis, are you getting any pushback or changeovers? Are you seeing any shifts to Peterbilt from International Truck?

No, I think it's way too easy there, way too early to say that. I think customers have been just looking to get a clear direction, as much as anything. A long-term Navistar customer, I'm confident, will remain a long-term Navistar customer. He has just been waiting to get clear direction on technology, and I think now that it's there, and as the timeline becomes clearer as we move forward, I have no doubt that their market share will return to where it historically has been over the last five to six, seven to eight years.

Look, the product, the truck itself, is a good truck. They're just working through the, obviously, the EPA and the engine issues. So as I've said originally, I'm very confident in the brand in the long term.

And they'll be delivering trucks over the next six months to you until they get this fixed?

Yes. I'm confident they'll work it out. That is between them and the EPA. They have assured me that they should be able to work that out. I am not privy to those discussions, but I am privy to the information that they have given me and said that they are working on that currently. And for the foreseeable future, they see that they're going to get that all worked out, especially as they transition over to the new technology, the new after-treatment.

I don't want to take up all the time, but just on the medium side, where are you seeing some of the air pockets right now? Construction's doing better, and energy's doing slightly worse. What are the other puts and takes in that market?

Well, we still had some good energy deliveries in the quarter. Don't get that wrong. In the second quarter. I see that yoke is going to be softer in the back half of the year. I think I've said that earlier in my last conference call, and I'll say that now. We are seeing pockets. We're seeing some nice developments, as we said, with our Ford franchises that we purchased in Texas, in Oklahoma, also in Florida, and California. I'll be honest with you. Actually, all the Ford that we purchased over the last year and a half or so. So we're comfortable with that.

We see our Isuzu business, our Hino business -- they're all doing better. That sector just seems to be holding steadier and doing better for us currently. And it is pretty broad-based. It's hard for me to define just one area; it's more broad-based across, really, across our whole network. It's not just one area. So it doesn't give you an exact answer, what you're looking for, but it's more of a broad --

Actually, it's just anecdotal. That's fine. Thank you so much. Very good quarter. Keep it up.

Robert Kosowsky, Sidoti.

I was just wondering if you can go into some of the differences in the gross margin on the new and used truck side between 1Q, when it was 7.5% and 2Q, when it was 6.6%? Just some swing factors you might have seen there.

Sure. Well, Class 8 sequentially, we were down from 7.4% to 6.7%. I get into, a lot of times it's mix. As far as me telling you exactly what it was, then whatever, a lot of times it can be mix, whether it was a little more fleet business in there versus a little more small ticket. Class 7 was down 5% to 4.2%.

I hate to say it's seasonal, but if you reflect back to last year, it was 6.7% in the second quarter also. So on Class 8, and medium was 4.3% in the second quarter. So maybe there's some seasonality to it that I don't see there. It's pretty flat year over year, just down sequentially slightly. So it would probably be mix and a little bit of seasonality.

And used, we always say used is between 8% and 10%. Used went from, it was down from 10% to 8.3%. But again, there's no real worry or concern on my part or anything I can attribute that to. Maybe a little different mix, I think. And I remember one day we wholesaled out a larger package this second quarter, which can affect your overall margins, because that's a mix of wholesale and retail inside that used number.

But both margins are definitely inside of our comfort zone. I don't want anybody to get concerned that that's any trend. As I said, reflect back to last year in the second quarter, pretty flat margins.

Okay. So there's normal volatility.

Normal volatility inside of it, correct.

Okay. Can you talk about just general credit conditions for some of the smaller fleets, or maybe the smaller fleets' owner-operators' willingness to take on buying the more expensive trucks? I think that's what we've heard as a partial explanation for the weak orders that we've seen.

Well, I would say that from a credit perspective, it's funny you asked. I was talking to somebody that runs one of our largest groups yesterday. There are becoming more and more players out there, and they actually told me that their small-ticket purchases approval rates were up. Now, this is short. This is just the month of July I'm talking about. I'm not into the second quarter here, that they had seen some slight uptick and that their approval rates were up. Now, we're talking about three weeks here, but there's more players in the market currently, more financial institutions, more banks that are out there looking for financing, ways to finance more product.

Obviously, if you look at some of the -- there wasn't much loan growth in a lot of the portfolios out there in these reporting periods I've seen for the second quarter. So trucks are always a good item because of the high ticket price that they carry with them and the short payback, typically, that's on them for financial institutions to get into. So there's no question we've seen more entres into it.

But I'm going to tell you this, but the credit, the underwriting standards are holding solid. We're not going back to the '05 and '06 underwriting standards, thank God. We're staying to what's right. But there are, people have cleaned up, I think, some of their credit since the downturn of four years ago or better, and you're seeing higher quality credits coming in.

And what happened was also is you had a lot of people hold their trucks longer. So what they are trading in, though it may be older, is paid for. So their pay record, with things they got paid out, and the trucks they are trading, they're all paid for, because they held the truck six years or seven years on the real small-ticket items.

Okay, that's helpful. Then just two other questions. What was the same-store sales in parts and service and the same-store sales absorption ratio?

Is this on the over the quarter, sequential, or year over year?

Year over year on the same-store sales for parts and service, and then just wondering what the same-store absorption ratio was.

Year over year -- what have we got, Steve?

13.5%.

Yes, it was 13.5% year-over-year same-store growth. And absorption was, same-store went from what, 116.6% from 111%.

116.6%?

That was year-to-date. I apologize. That was the year-to-date number I gave you.

116% for the quarterly absorption rate, same-store.

116% for the quarter?

Yes.

All right. Thank you very much, and good luck with the back half, guys.

Chaz Jones, Wunderlich.

It's Nick Bender on for Chaz this morning. Let me just follow up real quick on the medium-duty side. Obviously, a little bit lower ASPs there. Anything specific driving that? I know you mentioned the Ford business picking up. Anything specific there?

No, that's seems what our historical range is. When you look at our historical medium-duty, it typically runs, maybe a hair less. It typically runs 4.5% to 5%, our average sales price. I apologize. I was talking about margin. It would have to be a mix issue, without me going into it. It's probably a mix, it's probably less PACCAR product or Peterbilt product and a little more Isuzu, a little more Ford product in there. I don't have those exact numbers in front of me, but I'm sure that's what it was.

Got you. Fair enough. On the acquisition front, I know we talked to you last quarter along these lines, and you guys had obviously seen multiples coming up and getting a little too rich for your liking across geographies. Are those multiples starting to come in now, that we've seen net orders weaker for the past five months, or where do we stand there?

Well, that's a good question. I would tell you that they haven't risen any. But I don't think, there wasn't that many sellers out there. I would tell you that there might possibly be a little bit more activity right now than there has been. There's nothing to talk about or anything at this current time. But we are aggressively pursuing opportunities where they make sense for us, and that's really all I can tell you.

And I am not shying away from the Navistar business. So obviously, with PACCAR, we've reached a lot of our growth, pretty much reached our growth potential. So as we look forward from a medium-duty and also from a Navistar perspective, we're not shying away from any of that as the opportunities present themselves.

But multiples would have to be in line for us to consummate an acquisition. But I think those opportunities will be there.

Got you. All right, that's definitely helpful. With the CNG facilities before you got stalled in the additional 6.5 by year end, what are you seeing early returns there? I know it's early in that cycle, but what is feedback, then, on that front?

People are excited about it, but as far as getting monetary, real strong, hard, monetary concerns is my bottom line currently, no, that's not the case. We're doing work with it, but it's not that huge of an investment. In some areas it's larger than others. In some areas, I might spend $50,000, in some places I might spend $250,000, just depending on the facility and the makeup of the facility there.

But those are long-term capital investments, and they're made to support a growing market that we believe will, within five years, be probably anywhere from 10% to 15% of trucks that are being ordered. So we're getting out there. But in certain segments, a whole lot more than that, when you look over in the refuse sector or around some of the ports and things like that and some of the municipal business. I tell you what -- it may build steam faster than any of us ever thought it would, even the spike.

With the investments you're seeing from OEMs in engine technology, that's going to be one of the big things that drives that growth, is how much the investments in technology to get the level of the performance level of the engines up. And I'm pretty excited about what I've seen in the first half of this year from an investment perspective. So people ask me and I say, "Within five years, it will be 10% to 15% of order intake." Who knows? I would hope something could change that and make it 25%, would make me happy. But the business will take care of itself.

Sure. Sounds good. Thanks a lot, guys. Great quarter.

Peter Chang, Credit Suisse.

My apologies for -- I had a little hiccough earlier.

I thought you were a ghost there, Peter.

I'm making my appearance now, though. So the first question I had was your G&A, I know you came into the year sized for 215,000 retail sales outlook. Here we're coming down to 180,000 to 185,000 right now. At what point would you consider trying to take costs out of there? Are you still sized for that 215,000, if that's what we end up seeing in 2013?

Oh, Peter, I'm not going to -- we're going to manage our G&A to not just a short-term moment, but to a long-term cycle. I'm not going to get caught up in a little bit of (inaudible) months of order softness, because I still believe in the cycle. Are we going to make some tweaks? Of course we are. That's just natural, good business practice. But are we going to change our focus, our strategic plan on investments when it comes to training, when it comes to facilities, when it comes to anything else? No, we're not. I'm not going to get turned around worrying about making an extra penny or two by cutting back on investments that could make me an extra $0.25 to $0.50 down the road. It's not going to happen, because I still believe in the cycle at this point.

Got it. No, no, that's very helpful. And then on the -- you talked about some comeback in construction markets, and we've seen housing is a bright spot in a bleak --

Let's call it a little twinkle, how about that?

A little twinkle.

I think it's a light out there in the distance. It's a star, but at least I can see the star. The clouds have moved.

Right, exactly. But how big does that twinkle have to get before it starts really starting to impact the heavy-duty truck industry and orders, really?

Oh, gosh. It needs to be consistent, how about that? It needs to stay where it's at and continue to grow gradually, like it's been doing. So give it another six months or so. Give it into next year, where our customer base can be confident that it's going to remain a cycle and not a blip, that it's not just a moment, that it is a cycle, it is a housing cycle, not just a six-month look or a three-month look.

It's up to my customer base, not me. They have to be confident enough in the cycle that they will invest in product so that they can take advantage of it over a two-, three-, or four-year cycle, not a six-month window. So give it another six months of good reports, and I think by then you'll start seeing some real play.

Great. And my final question is just on inventory levels. They came in at the end of the quarter pretty high. At this point, now that we're through most of July, have those been right-sized, or can you give us a sense of where this is?

Inventories, since you've looked at it at the end of Q2, inventories are coming down. And, of course, that's a good and a bad thing. Because of our mix, we always have a lot of trucks in what we call IPD, in process of delivery. So there's a good and a bad to that. Our stock inventory, which you only see one number, our stock inventory is also coming down at the moment, which when we have, we keep that and manage the average month or how many months of inventory we keep on hand. That's going to be coming down.

Unfortunately, along in the second half of the year, as you know, given what order intake is, our trucks that are in process of delivery are going to come down, too. So inventory levels will be down at the end of this quarter. I don't think there's any question about that. But again, I expect by the end of the year, order intake to pick up -- well, I think you'll be surprised where you see things come the last couple of months and going into next year from an order perspective.

Okay, great. Thanks, Rusty. Appreciate the time.

Bill Armstrong, CL King and Associates.

Most of mine have been answered, but just a couple of others. Parts and service margin down a little bit in the quarter. Was there maybe a mix shift between the parts and the service components, or was there something else going on?

No, I think it was just a little bit more mix. As I've mentioned before, sometimes our growth is outside of our shops. The growth in some of our mobile stuff may be a little less margin because it takes a little more, if you follow me, to up-rig a truck and send people out and keep them on the road, et cetera, et cetera. So that might have a little effect. You've got to remember, that's incremental. That's what's driving growth, so don't let that bother you too much.

I think it's more of a mix thing than anything else. We're still very comfortable and confident. As we've always said, I think for the quarter, it was 38.7%. Yes, it was down a point. But that's more of a mix than anything else. And it was down sequentially a point. I think if you go back there, you get the quarter over quarter, it was down 0.5 from last year -- I'm sorry, year over year, it was down 0.5 point. So I don't think it's alarming to me.

No, I wasn't alarmed. Just picking at things, I guess.

When you don't have things to talk about, you've got to pick at things, right?

Right. I do have one other question, though, and that is when you're talking to your customers and they're anxious about what's going to happen over the next six months, what do you think is the most important issue in their minds? Is it the election? Is it the fiscal cliff? The cliff is going to be in January; the election's in November. Or I guess one feeds on the other. What do you think the biggest concern is?

Marty says yes and yes. How's that?

You know, when you just take the test and you've got A, B, C, and D, and E, you circle all of the above? Well, all of the above.

Okay. That was always just one of my favorite answers. Circle E, all of the above. It's that I think people want to see -- you know, they want to see both answers. They want to get some certainty.

I'm telling you the fundamentals, yes, okay, GDP's not going to be what we wanted this last quarter, right? But it was 1.9, it's 1.3 now or whatever they're saying it's going to be. It wouldn't surprise me to see it bounce back in the first half of next year to 2.8 or something like that. I honestly believe that's going to happen, but that's just Rusty, and I'm not the economist around here. I'm just in touch with a lot of folks that are doing real business in a real world. So that's all I can tell you.

But I think people are just a little nervous, but the fundamentals of their business are not that bad. They're just not. Are they blowing the top of the roof off? No, but they're okay. It's okay. I mean, look at the earnings reports. Most of them are not bad. Most people's earnings reports are pretty good. It's just everybody's searching for something that's not there and there's some uncertainty, and I think some businesses are maybe taking a little slowdown here just to wait and see what happens. Okay, that's all. On an investment perspective. When it comes to some investment perspectives, because people have learned, this country has learned in the last three or four years how to operate lean when it needs to. And when there's uncertainty there, let's just run it lean for six months, and that's really what I think you see a lot of the stuff that's going on out there.

And it sounds like, then, you're thinking that this weakness in the second half could actually create some pent-up demand in 2013 and create an even stronger 2013? Is that fair?

You've got it. Yes, of course it is. This hasn't changed the average age of the fleet business. It's only going to go up in the back half of the year as deliveries slow down. So that's not going to -- so all that does is bode well for 2013. And we keep rocking along. I'm not one that believes we're in any kind of recession or anything like that. I don't believe that, I don't talk to anybody, many people, that believe that, that run real businesses out there. They're just concerned and want to see how things play out over the next few months. And I've said it over and over, I wouldn't be surprised just to see some nice, nice orders, information, a lot of good stuff, a lot of good economic stuff start up at year end this year and then run through the first half of next year. I really wouldn't.

Okay, got it. Thanks for that color.

Tim Denoyer, Wolfe Trahan.

A quick question on the seasonality on parts and service as we look at the second half of this year. If I look at every one of your 16 years of public filings, it looks like third quarter parts and service has risen on average about 5% from second quarter, and then in the fourth quarter, it falls about 3%. You said basically steady for the second half. You expect a normal seasonal pattern, and should we make some adjustments and just be a little cautious, just given the benefits you had last year in terms of the energy sector and up-fits for truck sales that were going into parts and service?

You're asking me to look for the 5% growth and sit here and give you that from second to third sequentially. I don't know if I really want to give that to you right at this moment. I don't put it out of the range. I said I believe it would be flat. We might have our work for a normal customer base is strong. We might have a little shortfall in parts and service internal work.

You know when I say that, and that's work on trucks that we are delivering. So if deliveries come down some, we won't have as much maybe up-fitting work on some of those units as we would have had if we had 2,800 in this quarter and we've got 2,100, 2,300, whatever the number is, 2,200. If it was 1,500 to 2,300, whatever that number ends up being, we're being 20% down in deliveries of Class 8 in the third quarter, we might lose some up-fitting work on that. At the same time, the age of the fleet, say, is old, too, so there's an offset there. So that's a tough call, Tim. But I do not look for anything to go down currently, and that's as of today, July 26, and I'm almost one-third through the quarter. So from that perspective.

Let me ask the question this way. Roughly what percentage of the parts and service business is the internal up-fitting kind of business?

Tim, that can be anywhere from 10% to 15%.

Okay.

And some of that's hard to gauge, because some of it's direct billed to customer, some of it's billed to trucks and put on and then sold in the truck itself. So that can sometimes be a little bit hard to gauge, but somewhere in that range.

Okay. And then just longer term, what are the physical limits around the absorption rate growth? And can you talk about the capacity you're putting in place, and there's a lot of good detail in the press release on where you're expanding service capacity? Can you talk about, put it in the context of how that's growing?

I would have told you, if you had asked me this question three or four years ago, I might have given you a top on absorption. But you know what? Our business is run driven by customer demands. And every day that I go to work, I see more and more demands from customers for higher service, more service, outside of what I saw as a box three years ago. So I'm not ready to put a top on that.

And that takes us outside of our physical location, as I tried to touch on in the release. The demands become more and more, and with that, it provides me an opportunity to drive cost savings to our customer base, efficiencies to our customer, yet, hopefully, margin to us at the same time, because that's what we do and that's what we're experts at. So I'm not going to top; I'm not going to give you a top.

If I said okay, it tops out at 120 or 125, I don't know. That's a moving target, and fortunately for us as an organization, we've worked long and hard, for especially the last 10 years, to build an organization that's focused on this, especially going into the next customer solutions and customer needs. And the more it's service-driven, the more it allows us to differentiate, given the base of our geographic network, which is by far larger than any of our competition's. It allows us to, as companies continue to consolidate and get larger, their demands become more and more, and we're more than welcome and happy to please them with providing the solution to their needs.

So you're not going to get a top on the number, but I'm going to tell you, as I talk about it a lot, the dealer 2020, I think we are primed and geared to fulfill the needs of what our customer base is asking for, given our size, and especially our focus on the customer.

Yes. In terms of the mobile service units, you said 185 in the press release. Maybe to ask about it differently, how do you see that growing over time?

Just like it has been, continuing to grow. Offsite technicians, mobile trucks, the whole works, especially -- I don't want to get too detailed. I can't give all my trade secrets away, man. You know, especially as we get into other industries, that originally started based off of one industry, but we're taking it even deeper and further, and I'm not going to give any more information other than that, and a lot of different industries that we're seeing that need, as we get out there and offer that type of solution, to --

Maybe natural gas?

Different market segments. What's that, Tim? Let me finish, but different market segments than we have in the past.

Might natural gas be one of those market segments?

You never know. It's a little early, again, on that side.

In terms of engine? Yes.

You're talking about oil and gas?

Not really. The engines. Yes.

You mean working on natural gas engines?

Right.

Well, you've got to be set up to do that. I've set up four shops there. You have to be very careful, because there are -- it has to be more regulated than working on a diesel engine. Doing that offsite, I'm not sure where that all is right now. I'm just trying to get set up in my shops to handle that right now.

But I'm talking about going out to a customer, taking care of it at jobsites, at facilities, at terminals, where they don't have to worry about figuring out how to get their truck delivered from Point A to Point B, then get it back from Point B to Point A, or having staffing technicians, doing whatever they need, wherever they need it, is what we're focused on. Natural gas will be something that we'll play into as we go. Trust me, we'll do our best to stay on the leading edge. I don't want to be on the bleeding edge, but I don't mind being on the leading edge. We're on top of it.

Got it. And then one final last one -- sorry, I jumped on a little bit late -- but could you talk about the leasing and rental revenue? It just seems lagging a little bit, and the margins are under a little bit of pressure. Can you talk about what's going on there?

I don't know that ours are. We continue to grow our fleet, year after year, and our margins are actually solid. What were they, 16.5% for the quarter, Steve? We had 16.5% margins. I think it was up 0.5% or so. Is that right?

Revenue's up 14%.

Our revenue's up 14%, so no, we're still seeing pretty strong lease and rental. And remember, ours is lease-focused. I'm not really in the rent to rent business. I like the lease business. It's much more stable, much more solid, much more creditworthy customer base, at least the way we handle it. And so we're fine with the growth inside of our lease fleet.

Okay, thanks very much.

Thank you. Art Hatfield, Raymond James.

Hey, Rusty, I wanted to follow up on the service commentary. You see a lot of opportunity out there. What is driving that? And, as you're successful, are you displacing customers' internal operations, or are you taking market share from other companies that they may have outsourced their service capabilities to?

Probably displacing more than -- probably a little of both, but more displacing than the other, simply because equipment is becoming more and more sophisticated. It requires a lot more training, a lot higher investment in diagnostics and et cetera. And if I can do it at a reasonable rate and with some consistency, where they don't have to take the risk out of it, it takes the risk for them out of it and makes the liability mine, not theirs, and do it where it makes sense and saves them money but makes sense for me at the same, because that's my expertise; that's my business. That's where we're seeing the most growth.

And it's keeping trucks and keeping everything up, it's being on time and not having -- it's taking care of all of these things. It's keeping trucks up and running, as we would say -- at jobsites, at terminals, wherever, whatever. To me, our approach to the market is typically, as our customer, tell me what you need and we'll figure out how to get it done for you. It's not about the truck costs this.

No, it's about, look, the truck cost one price going in, and you depreciate it over a certain amount of time. You spend more money keeping that truck up and running and focused on producing revenue than you do purchasing the truck, and that's where the key piece is. If I can keep a man's equipment, if he's running, you know, he has some downtime and he's averaging 23 days a month. If I can get that to 25 days a month he's up and running, I'm worth a lot of money to him.

And then taking the burden of keeping up with technology and keeping up with all the labor requirements and keeping up with all this other stuff and training and all the costs that go into it that nobody sees, that he truly sees, and we take that on because that's our expertise, and do it for him at a cost that saves him money, then it only makes sense for him to listen.

That's very helpful, but thinking about that, given your comments that you look at the opportunities on a customer-by-customer basis, does that make it difficult for us, or maybe for you, to identify what the size of the target market could be for you with this opportunity?

Yes, that's probably a good comment. It is difficult, Art. I have been, as I said to you -- you've heard me talk long enough -- if you'd have told me we'd be running 117-plus absorption right now and you told me that three years ago, I'd have said you were probably crazy.

Yes, I know. That's fair.

So what I'm telling you, it's more upside than it is anything else. I wouldn't have believed it then. I'd have said, "Oh, man, I hope I'm at 110% or 112%." But guess what? We're at 117%, and we just see more and more opportunities unfolding in front of us now.

That's helpful. Just one last question on this and I'll let you go. When you think about the opportunity going forward, how much capital do you deploy every year to maintain your existing service network? What kind of growth count do you think is a percentage of that total capital you commit every year should be related to grow?

Maybe its CapEx runs around $10 million to $15 million. I would say $12 million a year. Investment in facilities and all depends, and growth, depends on where we're at at the time. It's like I said in the deal, we'll be breaking ground on a new store in Corpus, we've already broken ground on it, and we already have a facility in Corpus. We've already broken ground in Ardmore, quadrupling the size of it. That's sometimes a difficult question. But I can tell you, we have been spending the last 18 months.

You know, when we went through the downturn, we cut our maintenance CapEx back to a little over $5 million one year from $10 million or $12 million. So we've been catching up with some of that, refurbing some of our places here, getting them up to speed where they should be normally, because in 2008 and '09 and '10, we cut back some of that from a maintenance CapEx perspective. But we're just about done with it. We're probably six to eight months away from finishing doing a cleanup of all our stores around the country, so we feel good about that.

But as far as the growth stuff, it's hard to say, because that changes because we're constantly looking at growing all the time. And obviously, we're in a pretty good cash position, and when it comes to facilities and building them, you've got to remember -- we finance all our facilities, so the outlay of cash is not that much.

Are you there, Art? Oh, I guess his tin can went out on him. Okay.

Thank you. Robert Kosowsky, Sidoti.

Yes, just one follow-up question. It might be a long shot. We talked about the good stuff you're doing on the parts and service side, but on the truck sales side from a market share standpoint, where do you think you might be able to be in five or ten years as you think about some of the opportunities that are out there?

Oh, boy. You guys, you guys. Well, how many acquisitions am I going to do between now and then, okay?

Just five to ten years.

I can't speak to my own personal real big goal, because that might make some people mad. But everybody sitting around here knows what it is. That has a lot to do with acquisitions. As customers continue to consolidate, if I didn't grow, if I didn't buy anything, let's take it at that level. Let's say I did not do any acquisitions. Given the way I see the customer base changing between now and 2020, if we're running 5, low 5's now, I would imagine we could probably be 6.5% to 7%, with the base I've got currently. So slap some acquisitions on there, maybe get 8% or 9%, I don't know. You're asking -- that's a tough one, Robert, because I don't have a crystal ball here. I just am always out, we're always out looking, we're always aggressive, and we're always looking for opportunities that make sense in this industry.

Cool. That's very helpful. Thank you very much.

Thank you. I'm showing no further questions at this time, sir.

All right, very good. Well, we appreciate it. Thank you all very much. We look forward to talking to you at the end of the third quarter. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.