Rush Enterprises Inc (RUSHB) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Rush Enterprises first-quarter 2014 earnings results 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, today's call is being recorded. I would now like to turn the conference over to your host for today, Mr. Rusty Rush, Chairman, CEO and President. Sir, you may begin.

Good morning and welcome to our first-quarter earnings release conference call. On the call with me today are Marty Naegelin, Executive Vice President; Steve Keller, Senior Vice President and Chief Financial Officer; Derrek Weaver, Senior Vice President, General Counsel and Secretary; and Jay Haselwood, Vice President and Controller. Now Steve will say a few words regarding forward-looking statements.

Certain statements we will make today are considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. As 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, 2013 and in our other filings with the Securities and Exchange Commission.

As you have read in the news release, our net income for the quarter was $12 million or $0.30 per share on gross revenues of $959 million. Starting with our focus on the aftermarket, our parts, service and body shop revenues reached a new quarterly record of $309 million despite harsh weather conditions and multiple shutdown days at key locations.

Our strong performance continues to be the result of steady demand for maintenance and repair of aged vehicles combined with our ability to offer a range of aftermarket solutions. We expect strong demand for Aftermarket Services to continue.

Moving on to truck sales, our Class 8 new truck deliveries accounted for 5.9% of the US Class 8 truck sales market, up 30% over the first quarter of 2013 and outpacing the industry, which increased 15% over the same time period.

We began to see retail sales improve in March across a wide range of segments and regions of the country. Rush Class 4-7 new truck deliveries accounted for 4.6% of the US market driven by sales activity in the medium duty fleet, utility, beverage and construction segments.

ACT Research forecasts US Class 8 retail sales to be 217,200 units or up 15.8% over 2013 and US Class 4-7 retail sales to be 193,500, up 8% from last year. Consistent with this forecast, our order intake and our backlog has increased as well. We expect this trend will continue as large on-highway and vocational fleets look to replace aged vehicles and add some capacity.

In the area of growth this quarter we completed our previously announced acquisition of Chicago International Trucks and Indy Truck Sales expanding our Rush Truck Centers network to an unrivaled 106 locations in 20 states. We continue to invest significantly in our existing dealerships with more than $60 million in new construction and expansion projects underway at our dealerships within both our Peterbilt and Navistar Divisions.

We also opened a new Rig Tough Used Truck sales location in Knoxville, Tennessee allowing us to expand use truck sales into markets where we currently do not operate.

With the significant growth in our network size over the past 13 months one of our priorities is now to integrate our culture, processes, business systems and performance metrics into our newly acquired operations and execute on these standards across the country. This will allow us to create a consistent and seamless network of Rush Truck Centers for customers anywhere they do business with us.

Finally, I would like to thank all of our employees for their efforts this quarter, especially given our rapid pace of growth and business system implementation. With that I will take your questions.

(Operator Instructions). John Barnes, RBC Capital Markets.

Could you talk a little bit on the absorption rate about where you were in terms of same stores and then what you were seeing in terms of the absorption rate on the recently acquired locations?

Sure, John. from a same-store basis the absorption rate was about 113.4%, okay. On the new stuff, I mean let's break it down by division, okay. The business models are slightly different in the Navistar Division and the Peterbilt side. And our Peterbilt stores currently are probably running about 12 points higher than the Navistar stores.

And probably the lower one of those and the ones maybe we acquired toward the middle, latter half last year. From my perspective the Chicago/Indy stores are running quite nice that we just acquired in January.

But some of the others probably needed a little bit longer time to implement our systems and the way we do business and all our aftermarket solutions whether it be mobile or on-site technicians, those types of things when we go out and get to know the customer base and integrate that philosophy and that way of doing business into those models.

So from my perspective it is a great opportunity. So you have got to look at it like that. And you have got to remember, as we said, those shut down days -- we were down five days in Atlanta. When you look at demand and margin that is done on all the stores in that area that is significant.

As I mentioned on the last call, people said -- I said service labor, you might sell some of the parts still, but it is very difficult to recover all that service labor because it is like an attorney, right, you are selling time, so (multiple speakers).

Sure, absolutely. On the absorption rate for the Navistar stores, is any of that being still plagued as a result of Navistar's warranty issues? Are you seeing any of that that may be having a negative impact on the absorption rate?

No, I don't think so. I think it is more just those stores have got to get integrated. Some of them -- nothing bad about any dealership, but every one of them is a different business. We do six acquisitions they all have their own nuances about them that are different.

So the integration of them can be a little different in different areas. Actually, even though the warranty side has come down, from my perspective that is a good thing. That allows us to get out and take care of customers because some of the backlogs on some of the warranty stuff was pretty strong and I felt we weren't doing as quite a good job as we should have done, especially because we've got so much facility work to do in some of those areas.

We've got new facilities we've got going, already started and real estate bought and, like I say, in Columbus and in Cleveland and Cincinnati where we are well more than doubling the size of all of those dealerships. So I think those -- no, I don't see a negative impact really, it just maybe shifts your focus of business. But from an overall perspective I would rather have that the focus be that way than constantly working on campaigns.

All right, that makes sense. In terms of -- you kind of indicated or it looked like in looking through the numbers -- operating cost were up a little bit in the quarter. Now I recognize that you are getting through this operating system implementation and that kind of thing. When do you think those costs begin to ebb off a little bit just associated with ruling out the IT system, that type of (inaudible)?

Well, that runs through the first quarter of 2015. The majority of it will be placed into this year. As I mentioned before, it was going to be roughly around $0.10 over what we were running say last year hit over this year to accelerate that. So I could get it done before late 2016 because it is the right thing to do for the business to get all of these stores on the same systems.

And so we are very -- I mean that is the effect of that. And you have got to remember the first quarter also has higher comps -- sometimes higher comp costs and things like that involved in it because of options and things like that that are handed -- that employees get during that quarter.

So I -- but from a business system implementation that is going to carry on throughout the year. As I said, negative of $0.10 for the last year.

Okay, all right. And then lastly you had some nice commentary around the outlook on Class 8 trucks and that type of thing. Just kind of curious on some of your other end markets, maybe some commentary around municipal purchases, construction, oil and gas, that kind of thing. Could you just give us a little bit more color maybe around some of the end markets?

Yes, I could. Fleet business would probably be the strongest we have had here at Rush in quite a few years. That would be reflective of a couple things. Obviously the Navistar Division probably sells a little more -- maybe more on Highway business given their product mix than we do -- we do much more vocational on the Peterbilt side than we do on the Navistar side.

So we expect -- we expect -- so that will affect our volumes, I don't think there is any question that the Navistar Division will continue each quarter to deliver more units as we go forward and that will accelerate throughout the year coming off of lows of Q2 and Q3 of last year.

And obviously the added stores but even on a same-store perspective that should accelerate. Oh, I would tell you oil and gas is going to be better this year. Is it going to be like 2011 and 2012? No. But it will be better than 2013, probably some midpoint in between there I would guess, somewhere in the middle between those years. So that is a positive.

I look -- from a construction perspective it should continue to slightly accelerate, not at some huge rapid pace, but I know of transactions that we haven't booked yet that we are on right now and hopefully we'll be able to get some of those closed for the back half of this year.

That is some commentary on a few. You know, overall our Crane business is strong, I was just checking on that this morning. So I mean, you know, pretty solid all the way across the board. So we are pretty -- feel pretty good about it.

All right, thanks, Rusty, nice quarter. I appreciate your time.

Brad Delco, Stephens.

Rusty, I wanted to talk about parts and service. Clearly a lot better top-line growth there than we thought. But the margins ticked down a little bit to kind of -- I guess 35.7% was the number. Can you talk about what is driving that and does this change your view as to what we should expect from either a top-line growth perspective going forward and then the margins associated with that?

Well, I expect top-line growth to be better in the second quarter than Q1. The margins -- it is always a big key piece of it. The makeup of the business of the two divisions is different. They are a little bit different business models. And to that point, as I said earlier, our absorption rates were probably running about 12 points higher on the Peterbilt side right now than on the Navistar side, which, as I said, is a lot of great opportunity.

You tend to -- it seems like we sell more parts per dollar per service dollar on the Navistar side, which can drive the mix down a little bit, right. So if you are selling more parts obviously that is lower margin than the service business. So that has an effect on the blend of the two.

We look forward -- and I think a lot of that has to do we haven't had a chance in some of these -- all of these newly acquired 35 or 36 stores to integrate totally our mobile site. Remember we -- 20% of our technicians, or more than 20% on our Peterbilt side, don't work in our shops. So we continue to take that business acumen to -- and model across those stores we are very excited about that opportunity.

It is a little bit different, the business mix, and so, as I said I think on the last call, it may tick down our blended margin a little bit because you've got more parts for every service dollar and then also we don't have our systems integrated into it all yet and that is just going to be a continual, gradual process.

It is just blocking and tackling and going out there and getting in the marketplace, offering your unique solutions, and convincing customers and showing them how you can be a benefit to them from an up and running perspective, it is all about keeping somebody up and running at the end of the day.

And when people recognize that in the marketplace, because it is something new, maybe an approach, a bigger approach for the broader network than what they have seen before from the stores we acquired and what the competition has, we hope. Then we can show that value and continue and take [turn quest] accounts and do a decent job.

But we are -- to me it is all opportunity, okay, it is not that they are running -- these stores are still well over 100%. I think they are like a little under 104% for the quarter blended all the Navistar stuff. So that is just opportunity from my perspective.

Got you. And then maybe this question is for Steve. Steven, forgive me, can you just remind me on the timing of when the most recent acquisitions closed? And I guess to the question from this point forward on the SG&A line should we expect sort of normal seasonal kind of trends on that expense line item or does that -- do we still have some costs that layer in that weren't fully reflected in the first quarter from the acquisitions?

From a sequential standpoint, we closed Chicago/Indy in the middle of January. So you will have a little bit more in Q2 than you did in Q1 sequentially for acquisitions. And then if you backtrack (technical difficulty) on a year-over-year basis, we closed -- I can walk through all of them, but when you do them year over year you are still going to have -- you are going to have some comp issues because we closed one in May, another in July, then October, November and January.

Yes, and I am focused more --.

Year-over-year it is going to be convoluted. But sequentially you just have this last -- this next quarter you will have a little bit more and then you will be caught up.

Got you. All right, guys, I'll leave it at that. Thanks so much for the time.

Jamie Cook, Credit Suisse.

Hey, guys, this is [Andrew Roscelli] on behalf of Jamie. Congrats on a good quarter.

Thank you.

So just back to the parts side. How much -- the strength of that being over $300 million this quarter, how much of that was acquisition versus (technical difficulty) the core Rush business? And then do you anticipate -- I know you had a little bit of commentary next quarter, but you anticipate that that is sustainable throughout the year?

Oh, yes. I don't think there is any question. I anticipate it better go up. From my perspective parts and service revenues should go up. We still have a long (technical difficulty) it should go up. We had 11 related issues. We had one acquisition that came in in the middle of January.

It is -- again to Steve's point a minute ago; it is going to be what do you define as the core stores. We had acquisitions in May, in July, in October and November and January. If I go back to -- it is hard to define exactly what those core stores from that perspective is, same-store growth in the first quarter was about 6%, which is probably understated due to the weather issues we have --.

And that is year over year, not sequentially.

Right. That is year over year so it was up 6%, same-store Parts and Services which actually I kind of like that number when I look at the multiple shutdown days and the amount of working days, etc., etc., there were some things running against that really, so that is pretty good.

So our goal would be to try to keep the same-store growth. And I can't get it exactly, it was somewhere in the 8% to 9% range I hope this year, maybe pushing 10%. Somewhere between 7% and 10%, it all depends on how it all falls out, somewhere in that range.

So on a same-store basis if we can get that done, obviously it will come with some added expense, but manage to keep a piece of that that will drive absorption up. That is what we look forward to doing. Again, I go to the point that there is a lot of upside in there in my mind over the next couple years to -- I want to get this thing -- if it is not 2015 but by 2016 I would like to see us have the ability to run 120% absorption in this Company.

I am not sitting here guaranteeing it, but I have a goal of trying to get it there. And I think given we have run 114%, 115%, 114% last year that is feasible with a lot larger base to do it with. So at the end of the day it means more absolute dollars, right. So that is how we are viewing it.

Okay, all right, that is helpful. And then just switching over to your Class 8 sales, they were double the industry and your market share is really strong in Q1. So how do we think about market share or your targets at least for this year given that --?

Sure, no worries. I mean you know me, I don't like to get into exacts on deliveries and there are so many things that affect timing and deliveries and trying to bunch them into quarters. We do so much (inaudible) with bodies and all these other things. So sometimes there can be hold ups.

But overall when you look at the year, as I said before prior to all of these acquisitions, I said 5%. Well, that is where we ended up last year on Class 8 and probably 4% on Class 4-7. As Navistar continues to regain footing and we continue to do a good job even hopefully a better job in our Peterbilt Division from the market share perspective going forward and Navistar regains position I expect -- I am looking to end up the year at 6% in Class 8, I hope to do that.

And I also know we'll get to 5%, but I think we really have a good shot at it in the high 4%'s or 5% in the Class 4-7 market. So extrapolate that out of ACT numbers and you can take it from there.

All right, that is great. Thanks, guys.

Bill Armstrong, CL King & Associates.

I think earlier in the call you mentioned that you expect Q2 Parts and Services growth to be greater than Q1. Were you referring to sequential growth or year-over-year growth?

Both I hope. Obviously I expect sequentially because we don't have any shut down days to deal with, the weather is good. That is the way it has been trending, same-store has trended -- yes, same-store now, same-store has trended up since 1 March and we are maintaining that in April as I look at it now. So from where we were in January and February. So obviously that would bode to over last year and sequentially both.

Okay. Medium duty trucks kind of sales flattening out a little bit. Can you maybe talk about what is going on in that market and what you see going ahead?

I don't expect that to continue. let's say it like that. I expect a better quarter in medium duty in Q2. Without getting specific numbers, as I mentioned, I think we were 4.4% -- 4.6% excuse me, 4.6%. My goal would be to be at 5%, okay. So that means I have some catching up to do for Q1, so let's -- and I'm looking at our projected deliveries that is my mind doable.

Okay. And can you talk a little bit about this Rig Tough Used Truck location?

It is a start of something as we continue to look for -- I have got a couple things on the drawing board, but that is one that I am ready to talk about. And I would hope to open up a couple more stores before the year is out, it is just preparing ourselves as the Navistar Division, Navistar particularly comes back.

They sell to a lot larger fleets typically, the more over the road business, not as much vocational, oil and gas mix and construction mix maybe and big stuff and construction Class 8 but I get on the other side of the house. So dispersal of that product in territories that I possibly don't have franchises, independent used truck operations will be something that we will continue to look at strongly going forward.

And would the customers be mostly independent owner operators or smaller fleets, how would that look?

Yes, a mix of that, a mix of that. Both -- you are right on with both of them.

Okay.

It is more sales it is not full line -- it is not $15 million dealerships I am building here and things like that, it is just more sales driven operations.

Got it. Okay, thanks very much.

You bet, it is just as important a product.

Art Hatfield, Raymond James.

Rusty, I didn't hear if you commented on what you think about your heavy-duty market share in Q1 and how that may translate going forward. 5.9% is a huge number for you guys and is that kind of what we should expect given the acquisitions you have made?

Yes, sir. In two words, yes, sir. I expect -- and now remember, let's don't look at it in quarter, let's look at it on the year, okay. I said 6%, I believe that we can attain 6% as Navistar gathers some -- a little bit -- we continue -- hey look, they are in better shape than they were nine months ago, six month ago, three months ago, it is a gradual work out of a very tough position in the marketplace.

But we are still very comfortable with our acquisitions. I sort of like the timing of them. So I think it is -- in my mind it is only got one direction to go, okay, and that is up. And so that should help feed along with our continued excellent performance -- you have got to understand, our Peterbilt market share, our territories is pretty strong.

But we don't run over the last three years we will average 17%, okay. So there may be a 16%, there could be an 18% but it will come out to about a 17% average over the last three or four years. And we do a pretty good job when you look at their national averages in the 13% to 14% range, just the last couple of years. So that is one third of that so you can take it from there.

I can and I will get to that here and a sec. I have got another question and then I want to kind of ask you about the whole picture because -- but let me ask and I know, Steve, you commented on G&A in the quarter. But if my calculation is correct I am getting G&A kind of around that $120 million level.

Is that the right number kind of working around that number going forward or is there something in there that kind of -- I hate to use the term one time, but is it acquisition related that as you kind of integrate these things or -- things that can be integrated that you can start to work that number back down?

You are close. It was a little north of that in Q1, the G&A piece. And we do have some seasonal one-time costs for acceleration of employee benefits and comp costs and payroll tax in Q1 that should settled down some and Q2. And you have got a little bit more from the Chicago/Indy acquisition.

But it should settle -- the G&A piece should settle in that spot for a while, right. It is going to significantly start coming down probably until Q2 of next year because we have such a heavy focus on the accelerated rollout of SAP. But for the year your run rate will be that with some seasonal adjustments depending on how business takes over for the second half of the year.

No, that is kind of what I thought and that is helpful for you to confirm that. Let me ask you the big question then Rusty. As I sit here and see what you did in Q1 and look at the market share and kind of look at --. Again, I think it was commented earlier, Parts and Service did a lot better than we expected, mix was the margins were a little bit lower but that is fine, the gross dollars were really growing nicely.

If I put all that together, what you did in the first quarter and take that, I come up with numbers significantly higher than my current $1.65 for this year. Now I know you don't want to give guidance, but kind of what am I missing as a headwind to think about my numbers for the rest of this year? Or should I let them run to higher levels based on kind of what we have seen in Q1 so far?

Now, Artie, how can I sit here and tell you where to put a number? You know I don't do that (multiple speakers). Let's look at it like this -- let's talk about it -- I'm going to talk about it like I usually do and a little rounder.

I have been specific with you to market share this morning. And I have been -- you have to extrapolate out of that. We do -- there is still some investment cost. There are some things and other stuff going on, not huge one-time things but we are going to continue to invest too, okay.

These stores I bought, I have got to make them look like Rush Truck Centers and there is a lot of money I've got invested to do all this. That doesn't mean that they are not doing well, some of them -- when I always say stores are accretive, that doesn't mean they are immediately accretive, some are, Chicago/Indy, some aren't. But they are accretive over a couple of years.

I like the way if there's anything we know how to do it's how to run a truck store. We may not know how to do much else but we do know how to run a truck store and a leasing division in this transportation industry we are in. But I hear you. I feel good, I am excited. Let me -- ahead of myself, but I am not giving you the answer you want so --.

No, but -- well, you may be closer than you realize. But let me ask you this based on that comment that you just made. Steve and I just kind of talked about G&A and the selling side of that is what it is, right, based on the trucks you sell.

Right.

So the costs you are talking about and the investments that you are making in these facilities, where does that show up? Does that show up in G&A? So is that already accounted for or is that kind of buried -- buried is an unfair word -- but is that put in cost of goods sold or is that a D&A issue that we need to think about for modeling purposes?

It is more of a depreciation issue, obviously it's capitalized stuff. But understand you can see the cost (inaudible) your absorption number is going to give you a pretty good read on stores. Some of the investments from a corporate perspective, they may not be all in as I tie this network together.

Look, I have got to continue to do some things as I am rolling out -- as I have gone over the last year and added e-business people and recruiting people and all these types of things we need to do to support these stores, that has to happen.

But there is no huge headwind, if that is what you were asking in there. I see what you are talking about with the numbers. I feel good about the numbers, I just would like to watch it come to us, okay, Artie, I am not --.

Fair enough -- know that is fair, Rusty, and that is helpful. Let me ask you one question on that just kind of as I think about things going forward. As you kind of continue to grow your market share and I guess the assumption is there that a lot of that is going to be -- obviously you're doing good on the Peterbilt side, continue to do what you can there. But a lot of the growth is going to happen on -- or improvement in market share is going to come from the Navistar side --.

And a lot of big fleet stuff, too. You have got to remember --.

Yes, and does that mean that we should -- as that occurs that the cost or the net profit or gross margin on --?

Margin -- your margins --.

-- Should go down?

-- Yes. Your margins should come down as volumes go up because it is less small one, two type truck sales.

No, understood. Yes, you're still going to get good growth.

You get large fleets with obviously a lot less margin. But at the same time I am putting product on the street and hopefully I am picking up some service work and warranty work and everything else along with the sale of that truck.

You know the engine of the truck is the engine that drives the train. But, yes, you will see a little less margin I would think going forward as the volumes do grow because a lot of that is going to come from fleet business.

Let me ask you one last question and then I will let you go and I really appreciate you indulging me, Rusty. And this may be for Steve actually. This may be for Steve. But on the D&A line, given your guy's comments, the $8.8 million in Q1, should that grow going forward? And if so, I mean, would you feel comfortable kind of telling us where that number could be for the year?

It will grow some, not a ton yet. Part of this investment when we say it will grow on D&A line I think we said in our comments earlier we have $60 million worth of projects happening, right. Those layer in over time, probably not a lot of them will go into service by year end. But you do have some maintenance CapEx that is going to be added there specifically, lots of vehicles and mobile service vehicles.

So it might go up a couple hundred a quarter or something like that. But nothing appreciable until you start seeing those buildings get put into service and we will talk about those on a quarterly basis as we execute them.

And so that will be more of an issue for 2015 then?

Yes.

Okay, fair enough.

And remember, because you remember, when you are doubling the size of these places, and that is what our goal is so we can take care of customers better. And you may take originally a little bit of an absorption hit, but then you pick it back up and you pick up more revenue and more volume, you follow me, and it drives absolute dollars up. And so that is the thing we have done for years around here.

Perfect. No, that is very helpful, thanks for the time, guys.

You are more than welcome, Artie. Sorry I didn't answer your question.

No, you did. You don't realize it, but you did.

Brian Sponheimer, Gabelli & Company.

Can you talk about the pricing environment that you are seeing out there on the vocational side and the fleets particularly on the fleet side with what Navistar is up against with its own engines and putting the Cummins engine in?

Yes, well it is a difficult -- it is a very competitive pricing environment. You have seen the one particular OEM have big market share intake over the last four or five months, which has made it very competitive. And you are dealing with the tail of the EGR engines have left a bad taste in people's mouths, which doesn't help when it comes to driving current pricing.

So it is very, very competitive, Brian, without getting into too many specifics on the fleet business, it really, really is. But we are ready to be competitive and we are ready to compete and I think Navistar is to. And on the Peterbilt side, I think they are very ready to compete in that market. We are very focused on that side and doing more fleet business also.

We have got an extra -- we are focused on both sides. When you see that coming into play you have got to go after it and both divisions are going after that fleet business currently. So that is why I was mentioning earlier you could see some compression on margins from both sides of the house obviously because there's going to be less onsey twosey and more fleet business.

And we participated in that and this part of the cycle many -- numerous times throughout my long career. So that is what happens in this type of environment.

Yes, I guess along those lines, how confident are you going to a customer now, a potential fleet customer with the products that you can offer from Navistar versus what you had say six, 12 months ago?

Oh, a big difference, huge difference -- from where we were -- as I said earlier, from where we were 12 months, nine months. The acceptance has been great. I have no -- there hasn't been a problem with acceptance. It is the toughest motor in the [post star], right?

It was a very well accepted product throughout 2008, 2009 and 2010, very well -- had a big place in the marketplace. Low- to mid-20% market share, percentage of market share. So I don't think there is any problem with the product with that -- if you're asking specifically about Navistar I see no issues with (technical difficulty).

I guess staying there, as they transition on the medium duty side to SCR, is that an opportunity for you or do you think there are going to be more speed bumps with this transition for your medium share?

No, they continue to put more and more Cummins product in there, that is in opportunity on the truck sales side. As they gravitate to that direction I think it broadens -- obviously it broadens the range of solutions you have for a customer. So you have got to believe that that is a good thing and we see that in the marketplace.

We just have to keep going forward. There is no secret sauce to get through the EGR tail, you just have to keep -- it's blocking and tackling, you keep working it. We do see better acceptance with most all -- with all of the -- with most of the [flat haul] product, with the campaigns that have been done on the product that the product on the used and aftermarket -- that is what we are dealing with, the 2011, 2012's and 2013's in the aftermarket are being accepted better in the used marketplace.

It bottomed out, I want to tell you Q4 early Q1 and I think we are seeing a leveling off of valuations. And I look forward to those valuations going the other direction and making up some of that ground with the hit that the used product took (inaudible), and that is the key piece that we deal with. The product that is out there now, what they build is a good product. So it is just dealing with the residual effect of three years of EGR engines (inaudible).

Yes, I understand that. Last question and completely away from that. A source of frustration for you must be the spread between the A shares and the B shares. Any update on any plans maybe to convert some B to A or do anything just from a financial engineering side?

Brian, I really don't have any commentary on that right now. We continue our buyback program, buying back B's. But we will look at all our options as we go forward what we think is best for the organization as this year unfolds over this year, you can rest assured.

All right, terrific. Well, thank you very much, guys.

Joel Tiss, BMO Capital Markets.

Hey, guys, this is actually Richard Carlson in for Joel Tiss. No one has asked any dumb questions yet, so I thought I would throw a couple at you.

First off, just on the missed opportunities with the weather I was hoping you could maybe drill down a little bit as far as is that all parts and service related? And then actually did you see any benefits or are you maybe going to see some benefits from weather just from all these guys that never cranked a truck in 20 degree weather saying that it doesn't turn on quite as easy?

Yes, well, I guess maybe that could be part of what I think has picked -- started increasing in March. It is a good point, Richard. It didn't affect truck sales. That really had no effect on truck sales per se. If it did it was a positive and it forced people to maybe look at replacing older product, right.

Right.

But you know, that is hard to say, I think most of them were just doing it because that was part of the game. That was what they were, they were planning on doing it anyway. You pick up some of the parts sales it's just very difficult to get all that service back when you have only got so many hours in a day to operate.

And that could be part of the uptick, it is kind of hard for me to drill that deep in of why things improved in March over where they had been in January and February. It was a combination of being able to -- just more -- people work better when the weather is nicer. People can move trucks around faster. You're not on icy and snowy roads and you can get more production, people are more efficient.

I'm talking about technicians just in general; it is a lot easier to work when the weather is 60 degrees than when it is five or 10. I think that is one of the things I found by moving up in the Midwest, we didn't have that many cold weather storms. We were in Colorado, we've been in Utah, but most all of our people have historically been in the South.

So I have learned a little bit this year myself. So -- but there could be some residual pickup I guess out of that, it's hard for me to really tell. But it is nice to see the needle moving from a volume to a revenue perspective up in March and maintaining in April. Maintaining -- maybe not going up like it did but maintaining with slight up (technical difficulty).

Great, and you may have actually already answered this one before, but with the organic growth rates just from that Parts and Services business, if we kind of stripped out some of the acquisition stuff where would we have been?

Yes, and I did mention it, Richard, it was 6%. So when you take into account the effect of the days that we were down, it could have been maybe 8% or 9%, who knows -- or better. I didn't really extrapolate that number out.

But I feel good, as I mentioned earlier, that I would like to see, I will say somewhere between 7% and 10% same store growth this year in Parts and Services and I would like to see a 9% and 10%, but that will work itself out throughout the year, we will see how it all goes.

Got you. And just last one from us. The mobile business seems to be a pretty good opportunity. How big do you see that being? How does that work, is it about maybe three mobile per dealership or is that just kind of how the math currently works out?

So it is how the math currently works out where we've been around for a long time, or maybe the business models grow -- depending on the mix of business in certain locations can ride. So it is not driven by just everybody has three or everybody has four, it has a lot more to do with mix of business at the store.

But the great part is we are figuring out how to get markets where we haven't tapped into given the highways and congestion and people are understanding how we can keep them up and running better in other markets. It originally started as just an oil and gas thing for us but it has expanded immensely since then into other markets. And up to 280 head (technical difficulty) almost 300 mobile trucks and 125 techs outside of that.

And I would tell you on those 280 trucks there is more than 280 technicians, because sometimes we will work one truck with two or three depending on if it is jobsite driven or just depending on the market where we are at. So you can't always just say there is a mobile truck, there is a mobile tech, there may be 280 trucks, there might be 330 mechanics -- 350, I am not sure of that number. But I know there is somewhere around that number tied to those trucks.

So we get in -- just getting in there, figuring out your market, understanding those segments and maybe a segment that store is not selling. So you find the opportunity to do it. So you get in there and you provide your solutions. Remember we are about solutions.

At the end of the day, if we can keep a customer up and running on a national perspective, especially if it is a (inaudible) typically on a large consolidated customer up and -- more than our competition, that gives us an advantage.

I mean, the knowledge that these organizations have is a lot different than it was 20 years ago. I mean they can tell if the trucks they bought from us, if I can keep them up and running say 28.7 days a month and the competition is 27.9, you know that 8/10 of a day over whether it is a 60-month lifecycle or whatever, makes a huge difference. It means a whole lot more than a couple hundred dollars on cap costs, I can promise you that.

But you have to be competitive in all ways. It is more about providing a service that keeps the customer up and running whether he is drilling oil well, whether he is pouring concrete, whether he is picking up garbage, whether he is hauling dry freight, refrigerated freight, just -- that is what we are after.

And that is what we are trying -- in my mind, I am trying to bring to the fleet side of the business because that has been very difficult to do over the past. But am excited about the opportunities possibly provided by this harsh winter we had to do some different things -- just really, really excited about that. Had some discussions with some fleets and really excited -- no guarantees, but really excited about the opportunities to show how to bring value add.

Great. Hey, I appreciate it. Thank you for the time.

Andrew Obin, Bank of America-Merrill Lynch.

I have a question (inaudible) in answer to a previous question you sort of highlighted parts and service growth ex-weather in high-single-digit. And it seems to be higher than what you have been indicating last quarter. I was just wondering what you are seeing structurally that drives this high rate of growth?

Well, Andrew, it just seems like -- it is just so broad, it seems to be fairly broad. Obviously oil and gas is still very strong. We are working a lot of mobile technicians on that side across the Eagle Ford shale here in South Texas and also across North Texas. We are seeing -- I actually had a couple of fleets that I am moving some mobile stuff too.

We are seeing our shops seem to be -- people are -- utilization on the truck on the over the road side you have got pretty tight capacity. So that drives people to keeping their -- wanting to keep their product -- they don't have extra trucks, there is tight capacity so you have got to get them fixed fast. So I see that.

I see the medium duty business, things like most folks seem to be doing pretty good at right now. It just seems to be picking up. I mean I am not -- there is not one particular thing which is pleasing to me. It's very pleasing to me that it seems to be pretty broad. And then the opportunities that I feel we have on the Navistar side are great as we continue to bring our solutions and our investments and things like that to that over the next couple years.

So it is really not exactly one thing, but I do know that we expect absorption levels -- I expect absorption to be better than it was this quarter, I can tell you that, going forward, okay. That was as low a quarter as we have had in a while. And I've got loftier goals. Now, we just got to continue to integrate. I have got some stores that ran 70% absorption, okay.

So is it fair to assume that the baseline on parts and service growth will be maintained driven by oil and gas, but you should sort of also get a step up as your Navi dealers get better?

Right. And I wouldn't say driven by oil and gas, I said it was across a broader (multiple speakers) oil and gas.

Right.

I don't want to get tied to that. Oil and gas is good, but even when oil and gas wasn't good we still made a pretty good absorption level last year where our service business was still strong, our service business is probably stronger in that area now than it was last year. But it is maintained and maintained last year, we still ran good absorption.

But yet as the Navistar dealer, as we transition, as we continue to make investments, and I realize some people (inaudible) where you transition off all that warranty and campaign work. March was the lowest percentage of warranty business we've had. But that allows us to transition and really take our customer solutions out there because we are not just repairing trucks with warranty and campaign issues.

Now we can get into the marketplace and now we can attack the customer base with a different solution the way we have always gone to market or have learned to go to market across our more mature stores. For me that is exciting, there is no negative involved, that is all positive.

Thanks for taking my call, thanks.

Neil Frohnapple, Longbow Research.

Hey, guys, congrats on a nice quarter.

Thank you, Neil.

Rusty, I wanted to go back to the commentary on the energy segment strength you experienced last month, which I believe was an important positive change for this market given what occurred in 2013. So just to clarify, was that related to the distribution of new trucks? And if so, do you think the worst is behind from here?

Yes, I think it is across the board. I think we are seeing just as strong -- slightly stronger Parts and Services business. When I was looking at the technician counts, I couldn't tell what was out in the oilfield, it seems to be stronger than it was in Q4 and strong as it has been even [traveling] over Q3 last year.

On the sales side I think most of that referred to was really more order intake. I don't know that we have seen the delivery of much of it yet. But it has been -- so that bodes well for the next two quarters, or the next three quarters. It is more the order intake side. While very competitive it is a good market for us and it is one we provide a great solution for.

So I think that has been more on the intake side. So it is not going to be to 2011 and 2012 levels, but it shouldn't be 2013 levels and should fall somewhere at the midpoint, I am hoping. It is not all booked, it is not all there but we continue to see some activity.

There was an overbuy, it was overbought in 2012. That is just the way it went. But we obviously expected most of the deliveries to occur in the last half of the year and continue to expect to see nice trends, not straight -- climbing straight walls up, but nice continued improving trends.

Great, that is helpful color. And, Rusty, with regard to the lease and rental business, was there anything one time that impacted the gross margin in the first quarter? And do you expect this to bounce back to more normal levels in Q2? And did weather impact it maybe in the first quarter a little?

The first point, you are right on with the weather. Obviously I'm almost a truck line then, right? I am not on the dealership side. We all know how the transports were hammered by weather. So we -- that affected us. We also -- which also affected some of our costs, our keeping our product up and running, our own product. We were hit with that.

We were also hit with obviously just like the transports were. And then there is also some integration. Some of these ideal lease locations, as we get them in they are running at maybe some lower margins than we typically have run. But there is lots of opportunity there.

So while they are not returning as I would like, we plan on getting them there over time. It provides opportunity, I mean, to be a leasing dealer in Chicago and in Indianapolis. Those are great markets. And I am not -- I think our organization will probably bring a little better focus to leasing in those markets because we segregate it out and we run it with a dedicated crew with dedicated experienced leasing people. And we run it separately from our truck division.

So I think there is some upside in that. Because those are rate truck stores run very nicely. But I think we have got some upside in the leasing in those markets that may be more than we have had in some of them we have had because they were such great truck stores.

Great, sounds good. And then the last one for me, Rusty. You discussed continuing to expand service bay capacity for dedicated natural gas service bays. And can you just update us with where you are in the build out process for this? And if you are able to quantify how many natural gas service bays you have?

Well, I have looked -- I have got like -- let's say I have probably got about eight I think that they are all done, I've got four under construction right now and I have got site plans done on 40 something. You know, I could do it faster, but I need to make sure the population is there to support it, right.

I have always told you guys, we will be -- and you can put this down -- we will be the leaders in natural gas and the truck market. 15% of my Peterbilt truck sales last year were natural gas by that one. And we are very excited about where we see that market going and we will continue to be on the leading, not the bleeding edge.

And we will make -- I mentioned in the thing I have got $500,000 fueling -- fuel station I put in up in -- for CNG up in Denton in our CVS facility. Where investments are necessary we will make them ahead of anybody else, you can rest assured.

And I look forward to that market being strong for us and continuing to get stronger. And we will continue to do everything we can from an (inaudible) business and services and mounting stuff and doing things around that market to support it. So we feel good about it over the next -- real good about where that market is headed over the next five years or so.

Great, that is helpful. And if I could just sneak one more in, I apologize, Rusty. Since the Peterbilt new business system investment is done in May does G&A get a little bit of relief in the back half, understanding you still need to roll it out to the Navistar dealerships but will that be a modest tailwind in the back half of the year?

Hey, it doesn't cost any -- it's not any cheaper to roll it out to Navistar dealers -- the same price to roll it out to International stores as Peterbilt stores. Actually that is why we accelerated it. You are going to see more stores come on in a faster rate of pace.

Look, I am going to put 50 stores on in nine months. I didn't put 50 stores -- it took me four years to put 50 stores on before. So that is why it is not going down in the back half. We have had to hire an additional like 30-some-odd people from a training and in this perspective -- it is more personal driven than anything else the costs are related to.

Because historically we had to have people come in and train and we didn't have a big base. And then what happens is you hurt the stores that say we are at because they are short of people and to do it at this accelerated pace I've had to hire more trainers. And it -- and not take them from my other stores, have them come in and teach and all these types of things.

Without getting into all the detail, no, it is not going to go -- it's not going to -- until we get through Q1 of next year and get it totally rolled out, that is -- when we get into Q2 of next year then we can start talking about that. Okay?

Got it. Well, as always, Rusty, thanks for the time, I appreciate it.

Always, Neil.

Thank you. And we have no additional questions in queue. I would like to turn the conference back over for any closing remarks.

Well, we appreciate everybody's participation this morning and we look forward to speaking to everyone. I guess it will be July next time we talk. So until then I hope safe travels and everybody be safe. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.