Rush Enterprises Inc (RUSHB) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Rush Enterprises first quarter 2013 earnings results conference call. At this time all participants are in a listen-only mode. (Operator Instructions). As a reminder this conference is being recorded. I'll turn the call over to your host, chairman, Marvin Rush. Please go ahead.

Welcome to our first 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, Jay Haselwood, Vice President and Controller, and Eric Weaver, Senior Vice President, General Counsel, and Secretary. Now Steve Keller will say a few words regarding forward-looking statements.

Certain statements that we'll 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 in 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 ending December 31, 2012 and in our other filings with the Securities Exchange Commission.

Now let's give you an update on the first quarter.

We were pleased to announce that the company's growth revenues totaled $757 million in the first quarter of 2013. Net income for the quarter was $13.5 million, or $0.34 per diluted share. We ended the quarter in a strong financial position, including a cash balance of $205 million. Our parts, service, and body shop revenues reached a new quarterly record high, and they accounted for 64% of the company's total gross profits this quarter. This is a result of increased maintenance of aged vehicles, incremental revenue from our Ohio acquisitions and wide range of aftermarket solutions. Despite higher expenses related to taxes and employee benefits and the effects of the acquisition, and declines in the energy section, we still achieved 111.9% absorption rate during the first quarter.

Rush Class 8 new truck deliveries accounted for 5.4% of the total US Class 8 new truck sales, which is well below normal replacement levels of this quarter. As expected, our Class 8 truck deliveries also decreased due to declines in the energy sector. Our Class 4-7 deliveries increased by 26% over the first quarter of last year, and accounted for 5% of the US Class 4-7 market. This growth is a result of good performance by our medium-duty franchises across the country, including our Navistar Division. Our light duty and new truck sales increased compared to the first quarter of 2012.

Industry outlook. Industry experts forecast that Class 8 retail sales will be flat with 2012, or about 198,000 units. Class 4-7 retail sales are expected to increase about 11% to approximately 182,000 units. New truck quoting activity remains strong. We expect this will lead to increased retail sales later this year. We are encouraged by the successes that Navistar gained in implementing their strategy this quarter, and we believe we will have a positive impact on our Navistar Division truck sales going forward.

We believe our aftermarket parts and business will also continue to remain strong throughout 2013. We are very pleased with the financial performance this quarter and we're grateful to all of our employees for their contributions to the company's success.

Now we're prepared to answer any questions that you may have.

(Operator Instructions). Our first question comes from Tim Denoyer from Wolf Trehen. Your line is open.

Good morning, guys.

Good morning, Tim.

To start with just a couple of questions on the order environment, my favorite topic, is the increase in quoting activity over the past several months translating into orders as it has in the past? Or is it--is the weakness in the March/April truckload trends that we're seeing the new normal this year?

That's a good question, Tim. The last call was about ten weeks ago. I said as far as quoting activity was strong and up quite a bit, and to be honest with you, it's still the same. Is it muted somewhat in actual orders? I see things -- people tending to take long for make decisions, to your point. We don't see missing deals. There don't appear to be deals going away, but people put off decisions longer than they have in the past.

Let me give you one quick little anecdote I found out the other day. I was talk to the guys at AC. They go back to 2011. I said in the orders taken in 2011, for example, 15% of the orders taken say in any, 90-day time frame were not built in that quarter but were extended out. Currently with the orders taken in, most of them 35% to 40% are built in 90 days.

I think that shows some change in buying habits. Some customers, we all know, it hasn't been very hard to get trucks for the last few years, even ramped up at 198,000 units retailed last year. I think customers are not necessarily purchasing, looking out 12, 18, to 24 months out for their orders, but actually ordering for a more immediate type delivery, that's part of the negotiation process, I guess, from a customer's perspective.

Following up on that, and getting into a margin question, is the fact that truckers are just sitting back a little bit -- does that mean that the OEMs or your pricing per new trucks is being limited, I guess is how PACCAR said it yesterday? And can you talk about what drove the strength in the new truck margin in the quarter or the new and used truck section by subsegment?

I hate to break it by segment when it comes to margin, but obviously it was a mix issue. We had some nice mix, especially on the medium duty side. Our medium duty margins were as good as they've ever been. Our Class 8 margins were typical, actually matched last year's quarter Q1 of 2012. Class 8 were about the same.

So when you look at it, I expect our margins to maintain what they have historically, Tim. I don't look for a lot of change in our margin, to be honest with you, but it can fluctuate from quarter to quarter. You can have a 1% fluctuation, and that's basically driven by mix. But I really hate -- I really don't want to get into that on these kinds of calls. But it's a mix issue. I see no overall degradation or huge uptick in our margins, basically what we have historically averaged over the last couple of years.

And the truck pricing environment?

Pricing is in line where it has been. There has not been -- there has been a little bit of price increase from the OEMs but not a lot, again, market driven at the same time. But we expect to maintain our margins no matter the environment, no matter the cost push-throughs from the OEMS or the pushback from the customers themselves. We anticipate maintaining our margins with pricing.

It's a competitive environment. Nothing has changed. It's been competitive for a few years, and I don't see anything changing that. It's been so long since 2006 when it didn't seem so competitive, I can't remember that far, hardly.

Thanks very much. I'll get back in line.

Our next question comes from Neil Frohnapple from Northcoast Research. Your line is open.

Hey, guys, Congrats on another nice quarter.

Thanks, Neil.

Rusty, you mentioned quoting activity is strong. Just trying to get a sense of what your expectations are for Class 8 deliveries in the second quarter. You guys had a very strong Class 8 delivery last year second quarter and I wonder if you can help us frame it.

Sure. I hate to say this, but as I mentioned earlier with people making more instantaneous order to delivery decisions than what they historically have a couple of years back, it makes it more difficult for me obviously to try to sit there and say this is what it's going to be each quarter. But if I am going to look at it, I'm going to tell you that I expect deliveries to probably be up 10% in Q2. I was hoping -- ten weeks ago, I would hope for a little bit more. But based on what I'm seeing and a little bit of hesitation in the actual ordering of trucks and people making final decisions, I think there may be more push to the back half of the year than what I would have anticipated ten weeks ago.

I'm not down on the whole year by any stretch. I'm still comfortable. I don't look for a big uptick over last year. I looked for a flat year, and I think many of the folks I've talked to in the industry still feel the same. Just a little more back half-loaded than what we may have anticipated ten weeks ago.

So activity remains strong. I was very proud of what we did, and still am, given the headwinds that we've had in the energy sector over all. But we're doing this without that, to some people's chagrin, probably. We're able to perform based upon how we go to market that we do hit those different vocations that we talked about. So we're getting some uptick in construction, which we are seeing in some medium-duty business, and concrete truck mixer business. A few things that we've been able to book that we haven't booked in the last couple of years.

Does that totally offset the downside that we've seen on the energy side? No. But I believe it puts us in pretty good position especially as I see those markets continuing to strengthen throughout the year. I've got to be honest with you, in the back quarter of the year I expect the energy sector to pick back up. It's nice to see natural gas prices rising again, getting to over $4, so we see some pretty good things out there for us. But as far as Q2, what your original question was, I'm really looking at probably about 10% or so would be my estimate right at this moment.

Just to clarify, Rusty, is that versus last year's second quarter or is that sequential --

No, no, no, no. That's sequential. It could be slightly better but it's not going to be -- I don't expect 25% over Q1. I do not see that right at this moment. It seems that people are taking long for make some of the decisions. I don't believe the deals are going away. I don't think people are saying I'm not going to purchase.

It's a little choppy out there, but that's what this whole thing has been like over the last couple of years. You get good reports a week or two here, then bad reports. Good reports for another month or another deal. And then the other thing we have got going for us also, that I look forward to in the back half of the year and probably in the fourth quarter is our Navistar side. I'm very excited with their implementation of the Cummins product, the ISX product, the 15-liter engine. They're out there producing those. And just a week and a half ago their 13-liter engine got EPA approved, which they have yet to build.

As that begins to take hold, you got to understand with all the acquisitions we've done, we've got about 25 Navistar stores now. They are now a whole lot larger piece of our business. With the headwinds that they've faced, which are obvious, I don't need to go over them over the last year or so, but it's been a very difficult environment.

But we're very comfortable long term with the acquisitions, don't get me wrong, that we have made. We're happy and excited about the implementation of their new engine strategy, the SCR engine strategy and how it's taking place. It's just that it takes a little time to do that. We are really are blowing competitors away, a big 2014 play in the organization as we go forward. That should help us towards the end of the year a lot more. As product gets out in the field and you build customers' confidence in the products as it makes a comeback from its lowest market share in years and years that they're experiencing right now, that starts building as this goes forward.

Great. And I guess, as a follow up to the Navistar discussion, I know you mentioned you delivered 121 Class 8 Navistars in the fourth quarter. Did you deliver more than that in the first quarter? I'm trying to get a sense of the opportunity in this division as we move through the year.

Sure, let me get a number for you here. Yes, there go. 150, but if you wanted the same store comp, 104 of those were in Ohio. So try 46. So if you see -- you can feel pretty good about the fact that we're in the trough, right? There is not much room. It's hard to purchase when you're falling out of bed, he's looking at me, as long as you're not on the top bunk. We look forward to having an opportunity, as I said, with the Navistar Division going forward.

And then just one real quick one, the energy sector is that still going strong from a parts and service perspective?

It's going. Is it as strong as it was last summer? No. But we're still active in it. It would be more towards normalized rates. I would say last summer was very excelling a little pretty overzealous rate, but right now it's active. I'm not going to sit and tell you that it's the best it's ever been, but it's sure not the worst it's ever been. I would call the normalized energy sector parts and services business going on right now.

Great, thanks so much, guys.

When I look at it yes, we did -- I'm sure I'll get a question, you could say your source was 112, but you got to understand that there is a percent of that that was muted off by acquisitions and then a couple of points that we were off before was probably a softness in the energy sector, plus expenses in Q1 are always the highest they are throughout the year.

Great. Thanks for the call, Rusty, appreciate it.

No worries.

Our next question comes from Brad Delco from Stephens. Your line is open.

Good morning, Rusty, good morning gentlemen.

Good morning.

Rusty, I wanted to focus on the industry Class 8, I guess expectations that are out there and it seems that you're subscribing to the 198. Industry sales were down 17% in the first quarter. What do you think the cadence is throughout the year in terms of how we get back to the is 198, given the soft start? And what gives you confidence? What are your customers saying and what pockets of strength are we seeing that makes you think we can make this up in the back half of the year?

No question, you look at the Q1, probably the worst quarter that we've had in seven, eight, I don't know, but I think it's been a couple of years roughly. 39,000. 39,000 US retail deliveries in Class 8 in Q1 was obviously our lowest for a while. So you say, "How do you build that back to 198?" So I guess you've got to look for these back loaded deals are always fun, right, because you're counting on the future.

But you got to have some confidence driven by what you see in the marketplace, and what we see is still very high quoting activity. We see housing picking up, we see customers -- I was on a customer tour and probably saw 70 customers three weeks ago. Most of them are very confident about their business and what was going on. And their cap budgets, they hadn't changed their cap budget, so what they had budgeted last year in the back half of the year when they set their budgets for 2013. Some of them may have been hesitant in pulling the trigger, just trying to get it. It's been one thing after another from a political perspective, whether it was the election, fiscal cliff, sequestration, all that good stuff. That sometimes makes people a little more hesitant.

I'm not blaming anything here. I'm just telling you why they may be hesitant and take a little bit more thought in their decision process as they make those capital decisions to spend. But in visiting with all those customers, that was really from one ocean to the other ocean across this country, I did not see anything that didn't make me feel that people were not going to -- it was business as usual. That we were back in some kind of thought process from folks. That's not what I heard from them. I heard that business is basically good.

As I look at delinquency, they're in good line. When I look at some of the portfolios, our portfolios and some of the finance companies that I talk to all the time, they appear in good stead. I see really nothing out there that tells me that this year is not going to come together. Of course, you're always a little uneasy when things are back-loaded, trust me, because you're counting on all those little anecdotes, and you see the orders are going to come.

I do believe housing is going to continue to pick up. I really do. I just think there are too many good things out there -- I think we're about to squeeze all the productivity that we can in some ways. We have certainly become very efficient with productivity squeezes whether it's packaging, whether it's how we do so many different things, we've squeezed and we've squeezed, I think productivity is going to start to decline a little bit, which will lead to higher freight volumes instead some of the freight volumes being muted by productivity.

I'm rambling on about the things that I see, Brad, that tell me the year is going to come together. I believe it will. I believe we'll have a good back half of the year. I was hoping the second quarter would pick up a little faster ten weeks ago than I see it. I expect that Q2 will be better than Q1, but it's not ramping as fast as what we saw. I believe when we get to the back half of the year I think it will be better -- I think it is going to meet flat with last year. But unlike last year, which was front half loaded and then trailed down, this will be back loaded.

In terms of the 70 customers, are these your large fleet customers, are these smaller fleet customers, are these more construction? What specifically in terms of --

Those were probably more middle players. Some of them were large. It was a pretty good cross section. Probably midsize to larger size. None of your big public truckload carriers there, but large private, okay, carriers. Also some folks that were not just haul for hire. I think it was a good cross section of customers, without me going into detail. It wasn't large public but a better cross section of customers, especially the markets that they managed about they managed, that they met with. There was some vocational business also. But it was just a good cross section of folks to talk to, to get a feel for what's going on out there.

I still feel confident in the year. I understand it's more difficult for folks when you're putting it in the back half of the year, but that's what we believe is going to happen. And for me, for Rush in particular, as I talked about the Navistar, that's a trough. We delivered 46 units off the stores I had in Ohio Class 8? Think about that, it can't get any worse than that. You got to believe there is some upside for us, right?

That makes sense. Rusty, I know you kind of mentioned on the margin there is always mix. But the one thing that stood out to us was your parts and service margins fell below that historical range of 38% to 40%, and I was wondering if there was any way to quantify, was that driven down by Ohio or is that function of maybe mix or less energy? What do you think is the driver there, and what is the expectation going forward?

Okay. There was some in Ohio. There was some in maybe some of my rigging which has a lot service business in it sometimes, okay, that was less, okay, which would be a mix issue. Oh, it was a myriad of things. I would hope that that margin -- plus, expense side was a little higher. Q1 historically is always our biggest expense quarter. We usually pick up sequentially, G&A goes up in Q1. It was a mix of those three things. I was a little disappointed in them because I was expecting to make some comeback in Q2.

I appreciate the time. I'll turn it back over to queue.

Thanks.

Our next question comes from Jamie Cook from Credit Suisse. Your line is open.

Good morning. I guess a couple of questions. First question is, Rusty, it sounds like the pricing environment is still challenging, and you expect it to sort of stay that way throughout 2013, no material change. But what do you think the risk is with Navistar back in the market that the pricing environment with another player in there just becomes a little more aggressive, and that puts some pressure on your margins?

I guess my second question is now that Navistar has approval on the 13, can you sort of talk about what you hear from customers in terms of interest level? I know there is a high level of interest on the 15. I'm just wondering what are you hearing on the 13, and what that means for you.

My last question is for Steve. Steve, how are you thinking when you think about capital allocations, how are you thinking about stock repurchase here versus the ability to do more acquisitions? And I have one more after that, but I'll let you answer that first.

You're full of good questions today, Jamie, as always. Pricing, as I said, it's going to continue. I don't see the Navistar getting back into the game more is going to affect pricing. I think they've been in it all along. They haven't shut down factories, okay. They've been selling EGR engines throughout this. I think I may take a different approach. I may say better now that they have SCR from a pricing pressure perspective because they didn't have pricing pressure with EGR engines even though they're 13 liter only. They've had the marketplace already over the last six to eight months just to keep their factories running. I may take different approach than that.

Okay.

It may be contrary to other folks but sometimes I'm that way.

As far as the desire for 13 liter product? It's a little early for me to say on that, Jamie. I have not been in touch with a lot of folks. It just got approved a week and a half ago. I know there will be demand for it. To what level do you see this huge ramp up in demand, I don't want to jump out and say we're hoping that there is a high demand for it, obviously, which I got to believe there will be, given the -- now they sold a lot of 13 liter engines since 2010, and they had no 15 liter product per se.

I got to believe the demand for the SCR 13 liter, once it gets out and starts proving itself. Remember, it has some hurdles to overcome, no question. You can't hide from the fact of the issues of the EGR 13. I'm not running from it, and the management team from Navistar isn't running from it either right now. But they are out to prove that the SCR solution on that 13 liter product will bring to the marketplace a very highly competitive, great fuel mileage, fluid economy type truck that will be accepted in the marketplace.

Something about Navistar that people forget, customers want Navistar to survive. That's no disrespect to my other OEM that I represent that I'm very proud to represent in my Class 8 business. But customers want a fourth alternative. They do not want three alternatives out there as far as ownership groups. They don't want just a Daimler, a PACCAR, and a Volvo solution out there. They want the fourth alternatives, and I think customers will be open to Navistar coming back into the marketplace with a product that better represents and competes than what maybe they've had over the last year and a half or so and the headwinds they've had to battle and the engine issues they've had. Over all without honing in on the 13 liter, I don't believe there is going to be a desire to work with Navistar from a customer perspective.

And before you switch over to Steve, you said you expect the deliveries to be up 10% sequentially, I think is the number you gave out. It does not sound like the month of April, even though we have some time, but it doesn't sound like the month of April was at that level. Is there any way to quantify or give it a feel of how much of a catch-up we need over the next two months to make up for April, if my assumption is right, that April wasn't there.

Whoa, Jamie. Well, I guess if you're -- if you only did 39,000 units in the first three months.

What did you see in April? Or if you don't have those numbers -- if you don't have that number yet, that's fine.

We don't have the April -- remember, every good truck dealership they're going deliver the last week of the month as the salesman goes for the paycheck.

I assumed that April would be an easy comp, because last year that's when things fell apart.

I'm not looking at last year's April, Jamie. I'm looking at this year sequentially. I believe April will be a slight uptick over March in deliveries, but I don't know if it is enough to just start ramping that way. It's going to have to be, obviously, when you get in a hole this far in the quarter when you get to 198 it will be a back-halfy thing.

I talked to some folks yesterday. I did that press release and then I spent three and a half hours in Steve's office talking to many people around the country because I had to get a feel of what everybody else saw and thought, too. I was probably doing something like what you do for a living, your job, right, making a lot of phone calls, just getting, making sure that I wasn't off. You know, so I -- I hate to get into that one little -- that one-month, Jamie. That gets a little bit difficult for me there.

Cool, I appreciate it. And then Steve, what are your thoughts on where you're going to spend all of your money?

Always acquisition. Right? With $200 million plus on the balance sheet we have plenty of money to fund acquisitions, as you know. We have access on our floor plan line which is probably the biggest piece of the asset when we do these things. We continue to look at acquisitions. There are acquisitions out there to look at. We have nothing to announce now. As far as the stock repurchase that we announced at the end of Q4 goes, we completed all of our paperwork near the end of the third quarter and we thought we should release earnings before we actively purchase in the market. You should expect us to see us actively purchasing later this week or early next week. We're ready to go on that. Our plan for that would be to purchase within the 10b-18 rules and opportunistically look at blocks as they become available.

Okay, great. Thanks, guys, I appreciate the color.

Our next question comes from John Barnes from RBC Capital Markets. Your line is open.

Thank you, gentlemen. Rusty, in terms of coming to the end customer, we've heard a fair amount so far in this quarter about private fleet conversion. It seems that is ticking up again. Have you seen any of that impact in your customer base in terms of the carriers that aren't for hire?

What was that again, John? I was looking at these numbers. You want to know about private fleet?

Basically, have you seen private fleet conversion of fleets that you've sold to in the past that may be are doing equipment purchasing through another channel now? They've either gone to a -- they've outsourced it to somebody who has converted their fleet or have you seen any impact on your customer base from that standpoint?

I have not heard that once. We're in the middle of a bunch of conference calls with our stores this week and I have not heard that brought up. And I was with my top sales people the other day, spent a couple of hours, that point has not been brought up to me, so I would have to say no.

Very good. Secondly, on the used market, can you just talk a little bit about how the used market looks right now? Are you still having any issues on access to equipment, and what do you see from a pricing perspective on used equipment as the year progresses?

Well, pricing -- pricing went down a little bit in the back half of last year. Pricing has stabilized and rising. I don't see any issues with used pricing. I think used pricing will remain fairly strong. If you take a four yearly cycle, then we go back to 2009, right. In 2009, we sold 97,000 Class 8 just retail. In 2010 we sold 110,000. So if someone one kept it for four years, maybe people aren't on the three-year cycles any more. Most people are on four and five year cycles. And we're in the lowest sales in 40 years. I don't anticipate any issues as far as valuation goes.

As far as getting product, we still seem to be able to find decent ample supply of product. How we get product is two ways. We have to trade with customers and then we have buyers and we're always out there looking for opportunities where we can take advantage of someone who is trying to dispose of product, and we can buy it right. And then hopefully so make a pretty good margin. Other than the specific little market segment here and there, we don't have any issues right now with product. And we don't have any issues -- our margins were good last quarter, and we anticipate the margins to maintain where they were into their historical trends, which are usually 8% to 10%. I think we were about 10% last quarter, so it's really on the high end of what's normal for us.

Okay, and I know you mentioned absorption earlier. Obviously I think it's kind of humorous that we're complaining about a 111%, 112% absorption rate. But just out of curiosity, I recognize the acquisitions cost a point on the absorption rate. Is there anything structural with those acquired properties to prevent you from getting back there, or is it just time?

It's time and investment. Let me tell you something. I'm so excited by Ohio. Why? They need a lot of investment. I'm going to $30 million or $40 million in real estate and I'm excited about. I have got 17 extra acres in Cincinnati. I hope we break down and build a dealership three times the size here very soon. I just signed on LOI in purchasing new real estate in Columbus. This is all in three months, man. This doesn't mean that we're -- it's not add water and stir. You have plans, sites, permits and all that kind of stuff, and you got to build. We're looking inside of Cleveland to put a new facility there.

These areas are starving for investment. You know what investment leads to, it leads for business, and it leads to us taking care of customers and attracting more customers, taking care of existing customers and building a better, broader business and becoming a dominant player in the marketplaces that we represent. I'm excited, John, about a year or two from now, and the amount of revenue they'll be able to produce out of those stores. Remember, Navistar is still the number one rental store in the state of Ohio. That was one of the attractive things for me in this acquisition. So I didn't say anything about the good stuff they had for us. But it's not add water and stir, but when you do things like this consistently, which I like to believe we have, year after year, and you stick to your model, then I think the results are being disappointed in 112% absorption, how about that?

I hear you. I hear you. On the acquisition front, obviously you've laid out fairly aggressive on your targets on where you want to be with Navistar. The issues with the engine and just getting a new engine introduced a week or so ago, the investment you need to make and the properties you've acquired, are these all reasons maybe you're taking a hiatus from that acquisition, or opportunities, or you are just not running into properties that are as attractive now? How would you look at it?

Who said I was taking a hiatus?

You haven't bought anything in a little bit.

That was December 31, sunshine.

It's April 24. Come on, it's my birthday. At least buy something for my birthday.

John, if you don't know by now, you never know what I'm working on. Trust me, I am active. I am actively out there looking to continue to acquire, supported by the management team at Navistar as we will make the investments that they believe they need from a dealership perspective. No disrespect. They have great dealers, but they're looking for more consolidated consistent in geographic areas, solution with someone who will invest.

And we'll invest. We're excited about it. I feel good about the transformation with the Navistar team that they've got in place. They've had a lot of head winds to deal with but they're working their way through it. There is only one way to do that. That's brick by brick. This is what you have to do. They've had their issues, but I'm still very comfortable with their long-term. As I said, customers want a fourth alternative. They don't want to be tied to three -- there are more than three manufacturers, but three ownership groups out there in the Class 8 marketplace. So don't worry, I'm not on any hiatus of acquisitions.

Okay. Nice quarter guys. Thank you for your time.

Thank you, John.

Our next question comes from Andrew Obin from Bank of America Merrill Lynch. Your line is open.

Good afternoon, guy. Good morning, I guess.

Good morning.

I just have a question. Thinking about vocational market and medium truck market. In your estimates, how far off do you think we're off the peak given that resi construction is just start to go recover. What I'm trying to get at, are you seeing residential construction recovery impacting your business? And what I'm trying to get at, can you quantify the rush of Class 8 vocational coming back, and what does it mean if the medium truck market comes back, specifically the contractors?

I think we're seeing, Andrew, a little more uptick on the medium side currently than we are on the Class 8 side. I'm hitting this with a pretty broad brush up here, but I'm seeing a little bit more investment on the medium side from the smaller players. Maybe a little bit landscape work here, or a little bit more of the guys that are doing the smaller site stuff working around the residential areas, the smaller contractors, you subs, and stuff like that. I would like to think that the Class 8 piece while we're getting a spot here and a spot there, we really haven't seen that yet driven by construction. I know you're going to try to quantify this. All you guys try to do this, you do this all the time. It's difficult for me to quantify it other than to say that we're in the beginning stages. We're still in the first quarter, okay.

Well, back in 2006, and I know the company looked very different, what percentage of your business was vocational, and what is it now.

Vocational -- let's not just say vocational, let's say construction-related?

Yes.

2006, I sold about 11,866 if I remember right, Class 8 units. And I want to tell you that I know we sold 1400 mixer trucks so that year. Somewhere around that, 1300 or 1400 mixer trucks. Last year I didn't sell any. This year I'll probably sell 600, 700 maybe the way it's going right now. I'm just giving you little notes here. That's not going to give you everything but it will give you little points to grab hold of. I'm really in the medium business. We weren't as large. We hadn't bought as many. We weren't a Navistar player back -- we weren't even a Navistar player back in those days, so I can't really say given their huge presence in the medium-duty place marketplace.

It's hard for me to figure out the other Class 8 -- it's so varied. Some of those other small subcontractors are so much smaller I don't have a system to quantify what that means. But obviously from that perspective there is a lot of upside if we're in the early stages. If we get back to building 1.2 million, 1.3 million, 1.4 million houses, I'm sure you can expect to see those numbers on the Class 8 concrete side. And all the other subcontractors that go with it, both heavy and medium, accelerate rapidly above the current levels.

And just to follow up on the question the part margin, how much of it -- I know you are sort of pushing more field services as you deal with larger customers in the field, particularly in energy. How much of a drag do you have in the mix on field services permanently in the parts business going forward?

Andrew, I don't have an answer for you, but it's something that I'm looking at right now. My margin was softer in parts and service than what it has been historically has been. I think Brad brought it up earlier in the call.

But your business is different now.

My business is changing. As I look at this, and I watch it evolve, and as I see that it's some consistent thing, I'll let you know. I'm not going to hide anything from you as the business evolves. We're getting our arms around it ourselves. As we see it evolving, as we push more parts and services out, sometimes it brings a higher cost factor, you know what I'm saying, instead of letting it sit in your shop and let them come to you. That's one of the things that I will communicate with you that I'll try to communicate better as we go forward in the year.

But I really want to look at Q2, okay, not just look at Q1 and say okay, this is set in stone. This is the way it's going to be. Let me get a couple of quarters under my belt here as these things continue to change, especially as we don't have as much energy involved. We don't have as much up-bidding. I'm trying to get my arms around that right now. Andrew.

Thanks a lot.

You bet.

Our next question comes from Chaz Jones from Wunderlich. Your line is open.

Yes, hey, good morning guy.

Hi, Chaz, how are you this morning?

Just fine. Rusty, on the lease and rental growth, it seems to accelerate the last several quarters, is that being driven by anything specific, or is it broad-based?.

It's sort of broad-based. We're growing internally, no question about that. Are you talking about market sector we go into?

Exactly.

We keep pretty good tabs where we're at. I don't want to be tied to one market segment. We did a spread sheet not long ago, and I'm not going to run through it all, but it's like petrol and oil is about 20%, wholesale retail, 14%, food products 10%, manufacturing 10%, environmental waste, 7%, other, 12%. I could go on and on as to the industries that we're going into. When I see that broad based penetration into all those different markets I feel pretty good about it, and so should you guys because that shows that we're hitting on all the markets that we should hit on and we're not tied to one.

As far as our overall lease and rental sales going up, we purchased the Idealease group up in Ohio in Q1. That was a fairly large group of 400 power units or so. 600 power units, I apologize, that had an impact, obviously on our overall revenue. And our margins were higher than what we had been running in that quarter. There were a couple of reasons for that. Some of them may have been sustainable, some not. We're just getting our arms around that also. We had a nice quarter in lease and rental, and we're still very excited about where we are in lease and rental, and we look forward to continuing to grow that piece of our business as we go forward. Because I think it's being demanded by customers. And that's one thing I've always told you. One thing we do on any side of the business, any business we're in, we're in customer service, and we listen to the customers.

The 600 trucks that you were talking about, was that included in the preliminary guidance in lease and rentals around $125 million for the year.

Yes.

Okay. And then one follow-up question, just on the medium-duty side, the market share was well above what your guidance typically has been, and that kind of 4.1% to 4.6% range. You expect the market share to fall back or do you expect your guidance to come up?

We always said around 4%. I'm going to say that I believe it will be around 4.5% on average. I think we were at 5%, which was an all-time high for us. We had a couple of nice deals that came through, but I actually would like to think when we get into 2014 that we could be in that 5% play because as Navistar comes back with their product, not just their Class 8 engine but gets their medium engine platform straight, I would like to think that they would be working towards regaining their share as being the number one provider in the medium-duty marketplace, which they are not. We would look forward to them regaining that spot as we go forward which would only bode well for us, given our investment in Navistar.

But we're also -- our stores have done a great job with our Hino and Isuzu franchises. We're well over 25% over Hino sales, 18% of Isuzu. I don't want to get into all that. We have one of the largest Isuzu. We look forward to being the largest Peterbilt, the largest International medium-duty player, we look to capitalize in representing all the lines that we represent in being in first place as far as representing them and markets penetration and also total sales.

One quick follow up just on the acquisition conversation earlier in the conference call. Clearly there is a lot of appetite to grow the Navistar network, and I'm sure there are going to be other one-off medium-duty franchise acquisition over time, what does that mean for longer term? There's been conversation about perhaps getting back into the construction equipment market.

Well, we've had conversations about that this last quarter. Is there anything imminent or anything that I can sit here and tell that I know we're going to consummate any deal? No. But it's still out there. Obviously our first line of growth right now is continuing to work with Navistar, to support them in their efforts, to help them get back to their rightful place in the marketplace, and acquisitions to their side.

But for no reason think that we've turned a cold shoulder to the construction equipment business. It just -- right now the Navistar piece is really right at the front of what we're trying to get done. But that doesn't mean that we're not always out and talking and looking on the CE side either.

We're trying -- the growth, on the truck side for us, the truck business is still the core expertise of this organization. Business aligns nicely with it as far as business model. A little different but the business model is similar. We enjoy our time in the CE business in the Gulf Coast of Texas. We just couldn't get any growth out of it, so we exited that piece three and a half years, three years ago. So we'll continue to look and get back in there where it makes sense when the synergies are right aligning with our truck organization, but at the same time we still want to fill out our map our truck vocation.

It's about service. It's about customer service -- whether I represent Peterbilt or Navistar or all of the other medium-duty franchise that I represent. It's about points on a map. It's about tying all those together and making the customer become a Rush customer, not necessarily a Peterbilt or Navistar, but tying them to do business with Rush because we can keep their truck up and running, and understand what it takes to take care of a commercial user, a commercial business to keep their product up and running better than anyone else can from a dealership perspective across this country.

Great. Thanks for your time. Nice quarter.

Our next question comes from Brian Sponheimer from Gabelli and Company. Your line is open.

Hey, Rusty, hey Steve, how are you.

Good Brian, good to hear from you.

Most of my questions have been answered. I wonder any benefit you saw from the field campaigns Navistar has been conducting for trucks that are already in the field and what your customers have been saying about the instruct once they do get fixed.

Well right now, I'm getting good reports back. Obviously that has had some effect on the Navistar business. Obviously they have been doing a lot of work, going to customers, customers coming to us. Whatever it took to take care of the customer. We've been very -- we've been very flexible, very fluid to try to go out and talk to customers and what can we do best to get that product fixed. It's important to get it fixed, get it up and running right, and not having downtime. For any customer with a product, downtime is not a good thing.

But actually, all the reports of what we have, what we've done, I'm looking at Rich Ryan now in the building with me shaking his head yes, so far everything has been received, and product is out there and performing as it should be, with the product that we have fixed.

I don't know where we're at exactly. I know they're hoping to get this all completed by summertime. I know they were a third of the way through it. They felt three weeks ago, 30%-35% through all of the product, I'm not sure where they're at as of today but we're doing our part going above and beyond the call of the help where needed.

Do we benefit in some revenue respect? Yes. But is it also a hindrance from another perspective? Yes. It's a catch-22 there, right?

Exactly. Right. Near-term benefits but potential longer-term headwinds. Let's talk about what happens once those trucks are fixed, once the fleet owner wants to bring it back. The residual valley of value of that truck, how damaged is that? And what does it do for affordability for fleets, or your largest customers anyway, on the Navistar side going forward?

Well, the thing about it, once you fixed it -- excuse me -- once you fixed the product, the important part is that the product has to prove itself out. That's why it's so important, as we've had discussions with our management team, we've got to get this product fixed because there is no question the residual value, the Navistar product has been beat down pretty hard. Okay? That's because the performance of the engine has not been there.

But what we're seeing is that the engine is performing, and then it has to prove itself out in the field, which we believe will lead to the residual values raising them back to where it should be, and then it has to be supported both by the dealer and by the OEM to help people trade out of these products. I think they have campaigns and thought processes -- I know we are working diligently with Navistar and their management team as we get these products fixed, in the field, proving itself, and then going back to the customers and help trade these folks out of these products. Because then the residual values of the products will come up once they prove themselves on the field.

You have to get the ball rolling. I think we're in the middle of all that, Brian. Okay? I know what needs to be done and I think they understand what needs to be done to get through this tough time. We're in the middle of doing that, but it's not one of those add water and stir-type processes. You fix the product, you get it out performing, then you go in, you work and trade for the product. Value should be coming up. You put the product in the secondary market It proves itself in the secondary market. Values continue to rise and it eventually fixes itself downstream. But we're in the middle of getting through that first part of the equation.

I hear you. Thanks for the color. Keep up the good work guys.

Thank you, I appreciate it. Tell Mario hello.

Our next question comes from Joel Tiss from BMO Capital Markets. Your line is open.

Hi guys, how is it going?

Hey, Joel.

If these have all been asked already, then just tell me. You had a jump in the SG&A in the first quarter, I'm sure from the acquisitions. Is that -- is there a chance to normalize that in the second quarter or is that more, going to take a little more time?

Well, two things. First off -- Q1 is always our largest quarter. You can typically sequentially go back historically and Q1 will jump six or eight points from Q4. It's extra comp costs, it's extra taxes, I could go on and on about the list of things of everything else that happens in Q1. It's no different than historical. A lot of it, you're right, was due to the Ohio acquisition. The normal jump we got in expenses was in line with historicals when you strip out acquisitions, if that's the answer you are looking for.

Then we look for things that act a lot like they do historical. But always bearing in mind one thing, Joel -- I want to make sure that everybody understands. I am making a lot of investment. Probably more investment I have ever made from a corporate perspective inside systems, inside people, inside training, inside a lot of different things in this organization. We basically doubled the size of this organization in the last three years, okay? And with that you know, you put strain on a lot of different things. So you have to make sure that your systems, and your infrastructure, your corporate support are proper enough so that you're managing everything properly.

When you do this, you also put yourself in a position to create an organization that you can continue to leverage off of, take it up another 50% or 75% in the coming years as you make sure that you're supporting it proper. So we're going to have a little more G&A costs. I have mentioned that both the last couple of calls, due to some systems and some things that I'm doing here at corporate. I'm doing that because we've doubled the size of the organization, and I plan on continue to go grow the organization throughout this decade as we look towards 2020 and what we think we should be as an organization.

So yes to your question. It's going to subside some, but also understand that I am going to continue to invest a lot this year and into the early part of 2014 to make sure, because we have doubled the size of this organization. And to make sure that we can properly support it and then get that leverage ability going forward over the next two to three years as we continue to grow the company. I hope that's plenty of color there.

Yes, yes, and then just this question some parts of it, I guess, have sort of been asked. The customer acceptance of the Navistar 13 liter, you guys know the historical lags and all that. Is that a 2013 event or is that probably more 2014.

You're probably more 2014. I said early it would be the last quarter of this year. Third quarter. They're supposed to start pushing them out in May. You got it get it out of there. After the problems we've been through, you got to build confidence in people. People have to get confidence. Go out and you seed the market. You are seeing the engines out there under the company's fleets. They're not charging for them. You're letting them build confidence in the fuel economy, them build confidence in the reliability of the product. You have to build that back.

But I'm telling you. I feel very confident. I've spent a lot of time with the management team over the last few months. January, February, March, April, I have spent a lot of time with those folks. I think they're on the right track. I don't think, I know they're on the right track to get this thing turned around. Everybody on the street wants to add water and stir. This is not an add water and stir business when you have dug a hole that deep. This is a prove-it business. This is a consistent customer you've got to prove it to if you've made a mistake. We're in the middle of doing all that, but to your question, again, for us it's got to bode nice in 2014 if they're right, and I am very confident that they're right with their solutions. They have just got to continue to work their way through it. Thank you.

Thank you very much. I appreciate your time.

You bet. Thanks Joel.

Our next question comes from Martin Falk from MD Falk and company.

Good morning.

Well, good morning.

This is my first experience with your company, and everything sounds very interesting.

I've never heard your name before.

I have a question, though. In The New York Times this past week they ran an article, "Fueling up for the long haul -- the trucking industry is set to expand the use of natural gas." Can you comment on this and your outlook for this type of fuel?

You better believe I'll comment on it. Considering that I spoke last Wednesday at a meeting here locally about natural gas with a couple of hundred folks. I would tell you natural gas, if you want to know from my perspective, is one of the more exciting things that we have in this country, to make sure that we take advantage to something that we didn't even know we had available to us eight years ago.

That's easily said, right? But now it takes, there is a lot of work involved. We have sold more natural gas trucks than anybody in the industry. In the last five quarters -- in fact, last quarter, first quarters in those numbers you saw, we sold 280 natural gas trucks, guys. That's out of the norm for a normal dealer. We're heavily involved with it on the refuse side, in the ports, in some of the municipal businesses and municipalities that we deal with, with many of those types and in the oil and gas fields themselves.

So I would tell you that while it's exciting, there are still things to come. It first takes product. We're still having to get the breadth of product out there. It's a CNG/LNG question. CNG should be able to take hold faster. We are still waiting for, Cummins is coming out with their new 12 liter product, which -- Cummins is coming out with the 12-liter product. It's not out yet, it's a little delayed but it's coming out this summer. It may be coming out now with 350-horsepower, they've got the 400-horsepower.

That's really -- that's a key moment, because we really just started getting investment with product over the last couple of years. We had the Westport with Cummins, and that was in the 15 liter ISX, and then you had the 9 liter, but you didn't have the breadth needed to cover the different markets it needed to go into to give you the right torque, and all the stuff that you need.

So continued investment and getting product out there, it works in driving down the cap cost some. LNG 15 liter product, because of the fueling systems, the tanks and everything else, not just the engine, you're talking about $140,000 on some of that stuff, which became a little cost prohibitive. I look forward with continuing investment to those being driven down. CNG, I think for sure will come a little quicker.

Now to the infrastructure piece, I'm probably not telling you anything you don't know, but the infrastructure piece has to continue to be built out. As you know, there have been folks that have been building out the infrastructure, starting on it for the last year and a half, really. But it continues to need to be built out more. I know we have seen groups come to us just in the last 45 days that I talked to over a year ago that I said, "you know, let's talk about, I want to, I thought about putting some fueling stations inside," because we have a lot of real estate in the country in some of our places. Oh, yeah, we'll do it and you can pay us for it. Now people are coming to me and saying, "You know what, if you give us an acre of ground, we might do it for free. Not might, we will do it for free. If we can sign up some of these guys to buy natural gas we'll work with you to subsidize some of that cost of selling product." Because they're out there selling natural gas.

We're in the middle of this evolution. You say, where does that go? And how does the trend line work? One thing we know about the trend line, it goes one direction, that is up. Now, at what rate it rises? And you have a wide array of estimates. Rusty is going to tell you that probably by 2016, 2017, it might be 10% of the marketplace. Some people tell you it will only be 5%. Some people say it will be 50%. I don't buy that. I think that's a little bit too much. That's just a little -- we're not far enough long. It's 2013, and we are just not far enough along to get to that point.

But I do know one thing, it's coming. How fast it comes might defend on if there is more government subsidies. That has something to do with it. A lot of these acquisitions, a lot of the purchases done from subsidized by the government. But really and truly the most important thing is to get that cap cost driven down, some of those fueling systems, there are not many competitors in those marketplaces that build it so the costs are extremely high. We have got to get the cap costs down, infrastructure up, and it only makes sense. It only makes sense for us to do that. We have 100 year supply under this earth of natural gas that we know of, and probably a whole a lot more than that if technology continues to allow reserves that we didn't even know existed.

I know it's a long winded answer to your question, I hope that gives you some color.

Thanks very much.

You're welcome.

Our final question in queue comes from Art Hatfield with Raymond James. Your line is open.

My decision is do I only ask one or ten questions.

Art, Art, it's not even your -- it was John's birthday, okay, but it's not your -- by the way, happy birthday, John. It's not your birthday, Art, but I'll let you ask as many as you like.

I'm pretty good. But just to follow up on the natural gas question, with the Cummins engine coming this summer at some point, and there are bills in Congress, as you said, and some of them include tax credit for purchase of natural gas vehicles, are you hearing from your customers at all that any of that stuff is maybe impeding near-term demand, and they're waiting to see how some of this stuff plays out?

I really haven't heard that, but John I need to hire you. Good point -- Art. Excuse me, Artie. I didn't mean to call you John. I was thinking about it being John's birthday.

You'll have to pay me extra for calling me John, then.

I promise you a big bonus next March.

No, anyway, you know, that's a good point, Art. The fact that that probably does, which I know if I was a customer, I would waiting too and see what the feds were going to give me. So point taken. It only makes sense, so, yes, I would have to agree with you as I sit here and think it out.

It's hard to gauge to what level. And just one other quick question, and then I'm good. You mentioned your energy customers earlier -- what is the tipping point on natural gas prices where you see a big demand coming in from those energy customers? It is it 450, 500, 550?

The old rule of thumb back in the day was 500. I'm being told, though, that if we can get sustainability in the mid-400s, I'm not going to peg an exact number, and it stays that way for a while, then we'll see it start seeing it ratcheting back up.

I was looking at rate counts, John, Art. I looked at a lot of things. Any time your year is back loaded, you're always looking at a lot of things to make sure you're right? I'm still making you John again, I know, I feel terrible. Art. I guess we will sing Happy Birthday to Barnes. I know, Art, I'm sorry.

I was looking at some stuff, and you know, to the point is it 450? Somebody told me it was 430. I asked a few folks. I know rig count, I know we're down about 10% year over year from where we were a year ago, that's all gas-driven. (inaudible) price is pretty small still. You know I'm going to tell you it's mid-400s. I don't think it's 500 anymore. It's less than that. It's mid-400s.

Very helpful. That's all I got. Thank you.

You're welcome, Art.

Thanks, Rusty.

See you.

There are no further questions at this time. I will now turn the call back over to management for closing remarks.

Nothing here. We look toward to talking to everybody in July. If you have any questions feel free to call Steve or myself after today. Thank you very much.

Thank you, ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.