Rush Enterprises Inc (RUSHB) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Rush Enterprises second-quarter 2014 earnings results conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to hand the conference over to Mr. Rusty Rush, Chairman, CEO, and President. Sir, you may begin.

Good morning and welcome to our second-quarter earnings release conference call.

On the call today are Marty Naegelin, Executive Vice President; Steve Keller, Senior Vice President and Chief Financial Officer; and Jay Haselwood, Vice President and Controller; and Derrek Weaver, Senior Vice President, General Counsel, and Secretary.

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 the 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 our other filings with the Securities and Exchange Commission.

As you have already read in our news release, net income was $19.8 million, or $0.49 per diluted share, on gross revenues of $1.2 billion. In the aftermarket, our parts, service, and body shop revenues reached $331 million, the result of ongoing demand for vehicle maintenance and repair, additional activity from increased new truck sales, and mobile service.

Our absorption rate reached 120% this quarter, a 9% improvement over last quarter. With the harsher weather conditions now behind us, we were able to see results from our efforts to integrate and execute in our Navistar division and implement continuous improvement across all our locations. We expect parts, service, and body shop revenues will remain strong through 2014.

Moving to truck sales, we began to see retail sales improve in March and that trend continued throughout the quarter for both our heavy- and medium-duty segments. Our Class 8 new truck deliveries significantly outpaced the market this quarter, with market share climbing to a record 6.5% of US Class 8 retail sales.

In particular, sales of Class 8 stock trucks increased primary to smaller vocational fleets and independent operators working in energy, construction, and refuse. Larger fleets continued to replace aging equipment, but are tempered by the driver shortage and higher cost of equipment.

Our Class 4-7 new truck deliveries also significantly outpaced the medium-duty market, accounting for a record 5.7% US market share. With improvements in housing and road construction, sales from our large inventory of ready-to-roll trucks increased as medium-duty vocational fleets needed fast delivery of vocational equipment. Medium sales this quarter were also driven by activity in the food and beverage and school bus segments.

ACT Research increased its 2014 forecast for the US Class 8 retail sales to reach 226,900 units, up 21% over 2013, and forecast US Class 4-7 retail sales to be 196,500, up 9% over last year.

We believe growth in the economy and improvements in freight movement will continue to have a positive impact on truck sales in the third quarter.

In the area of strategic growth, we completed an agreement with 3M in May to introduce a portfolio of compressed natural gas fuel systems for use in Class 6-8 vehicles. This agreement allows us to engineer, manufacture, install, distribute, and provide aftermarket support for these fuel systems using 3M's CNG tank technology.

An initial investment of $2 million was made this quarter, resulting in a $1.2 million reduction in net income, or $0.03 per diluted share. We will continue to incur expenses as we ramp up to introduce our new CNG fuel systems next spring.

We also acquired certain assets of Truck Parts Depot, which now operates as a parts and service location for our international division in Gainesville, Georgia, and we continue to expand our service network capabilities across the country, with more than $70 million in capital investments allocated to new construction, renovation, and building expansion.

Finally, and most importantly, I want to say thank you to all our employees for their ongoing contributions and congratulate them on helping the Company set new performance records this quarter. With that, I will take your questions.

(Operator Instructions). Brad Delco, Stephens.

Rusty, congrats. It was a good quarter. My first question --

I got 6,000 other people to thank. Go ahead, Brad.

The market-share number is really what stuck out, that combined with the margin performance on truck sales. Is there any way to parse out what percent of that market share came from some of these newer stores versus what you're seeing on a same-store sale basis in your existing markets?

Yes, let me pull that sheet here, Brad. I've got same-store (multiple speakers). You want Class 8 same-store? Let me pull that sheet. Class 8 same store, like quarter to quarter, it was about 1,000 units. It [came from up], basically. So basically, most of the growth in Class 8 came on a same-store basis.

Okay.

When I say (multiple speakers)

You picked up (multiple speakers)

(multiple speakers) year to year. I apologize. That's Q2 of last year, I believe, if I'm not mistaken.

Are you asking sequentially, Brad, or are you asking (multiple speakers)

Yes, year over year.

That's the year-over-year number, about 1,000 from same store and a little less than 500 for new stores.

Okay, got you. That's great color.

And then, Rusty, you have given some pretty good color on 3Q, but anything more specific in terms of what's in your backlog, what you expect Class 8 truck sales to do sequentially? The medium-duty numbers were really strong. What's some guideposts that you are expecting for 3Q?

I guess the best way to look at it is, I guess when you look at when the Q comes out, I think you'll see our backlog. Our backlog increased substantially from January -- excuse me, from December 31 to March 31 and it will be up slightly, probably 6%, 7%, from the end of Q1 to the end of Q2. So that ought to give you a little flavor.

I think the important thing -- I guess I'm going to do as I usually do, ramble a little here. I think the important thing about the whole quarter when you look at it is it was broad based. I can look back on different years where we have had big, big energy years or big fleet years or things like that, but it was very broad based, which is nice to see from my perspective because we work very, very hard at making sure that we have a balanced approach to all market segments.

So, it is nothing I can say was great, but everything was good. Everything was decent and good, and when you add a bunch of decents and goods up, whether talking about oil and gas or construction or fleet or small fleets, owner-operator, refuse, there was just a lot of different markets that were good.

Now I do expect maybe some mix going forward. I don't look for margins to remain quite that high. Maybe it's a little more -- maybe a little better volume with some fleet and deliveries we will have throughout the rest of the year, but maybe tempered some on the other side of the equation.

But the good part is, who knows, all these other markets should continue, hopefully, to remain strong, too. We just had a real nice balanced quarter this last quarter.

Yes, you did. And then I will ask one more question and get back in queue. Steve, the SG&A line, clearly you guys are making a lot of investments. Seems like they are paying off. Any sort of guidepost you can give us for 3Q as to how we should expect that number to trend sequentially, maybe with some of the new items, too, related to the 3M investment?

The 3M is -- we are working on the business (multiple speakers) for that piece of it now. We spent $2 million in Q2 and we probably expect to spend another $5-ish million to $6-ish million between now and next spring. We don't know the exact flow of it. We have a lot of moving pieces right now from getting things ready to go.

But there is certainly going to be G&A continuing on that project. What you also have, and we've been talking about it for a year now (multiple speakers)

Since this call last year.

-- is we told you we are ramping up the SAP rollout, and that added some G&A for 2014. That is in full effect right now.

On September 1 is our first big drop where we accelerate the rollout to a lot of stores. So we have a lot of people on the road, training. We fully ramped up all the trainers and employees and backfilled personnel to address that.

So, you are going to continue to see G&A -- it's going to be -- it will be up in Q3 versus Q2, because of the rollout and because probably a little additional business as Q3 is usually a strong quarter in the back ends, but then you got commissions and things that go along with that. But I would expect it to be in the ballpark of Q2.

Got you. Guys, great color and great quarter. Thanks for giving me the time.

Yes, I think when Steve was talking about the rollout of SAP, I want to bring one thing to light. We have completed all the Peterbilt stores and we had our first Navistar implementation back in June, and with our accelerated rollout of all that, we hope to have it all completed by March.

But we have completed all the Peterbilts and working on Navistar, but this is going to come as -- we call it our big bang theory or whatever, between now and the end of next March, we're going to try to get it all rolled out.

John Barnes, RBC Capital Markets.

Rusty, you are being very humble about these results. These were great results. In terms of the outlook, as well, the absorption rate, you have provided targets on that in the past. The 120% in the quarter, can you just talk about -- based on that and the trends you are seeing, is that a new sustainable level? And especially given that -- I'm assuming you still have some new acquired stores that are not running at that rate level that you've still got an opportunity to improve, so what's your outlook, especially given how quickly you hit the 120%?

I am, hopefully, how should I say, reserved that we can maintain close to 120% the rest of this year. Obviously, Q1 is a difficult quarter, so we're not going there, but for the rest of this year, I would hope we can maintain within a couple points of that, if not maybe somewhere in that range.

You start nailing down percentage points, one by one it gets a little difficult, but it's an outstanding quarter, but I see nothing -- I see nothing so far in the month of July that says it's going to go the other direction. There will be a little bit more holidays that will be involved. There will be -- we will get into a few less working days in Q4 and things like that, but I hope we are able to maintain our ability to stay close to that number the rest of the year.

With the new stores, we are hoping to continue to get our processes, to your point a minute ago, and our way of doing business into them and raise their contribution even to help deal with minor headwinds that we have. But so far, there is nothing that I see that is going to impact that negatively down to 110% or something like that, somewhere close to that.

Okay, all right, very good. There was some commentary recently that Navistar has finally started shipping some medium-duty equipment with the SCR engine. Do you foresee that as being maybe another stairstep increase in medium-duty trucks sales, now that they're getting some of those engine issues resolved and especially on the medium-duty side?

Sure, I would hope so, so we can get back to more normalized historical market shares for them, because you look at where their depressed market share was last year. Again, that's some -- and I'm not sure about the exact timeline of total acceptance and getting to end markets, but obviously, they will have a positive impact.

And you look at -- when you look at the organization, I think I started the year by saying -- or the end of last year, I said there's a few things that we have on the horizon. If you can get some fleet purchases and you can bring back some small business and you can bring back oil and gas from nothing in 2013, just some -- nothing great, but just something. Then you get some construction going on, and we still have, in my mind, plenty of upside left in Navistar market share.

Now that timeline, I can't exactly tell you what the timeline is. As we continue to -- especially on the heavy side, continue to work with the overhang on the old EGR engines, but every day that goes by is a day in the right direction to getting their market share back where they historically belong, on both sides, on medium and 8.

So, talking about next year, you look at what everybody projects for housing starts. That should bode fairly well for the construction business for us on this side from the supply side. There is still some good stuff.

As I said earlier, things are decent. Things are good in a lot of varied markets, but nothing is super, super great, over-the-top historical highs for us, and so I like the quarter, okay?

Very good. And then the last thing, and I recognize, Steve, what you said about you are still working on the business plan with 3M, but just in general to start with, you have given us some idea on the cost and $5 million to $6 million of additional costs between now and next spring. But can you at least pinpoint when you think you will at least generate $1 of revenue from this? Is that a back-half 2015 type event or is it more like a 2016 event?

No, you answered your question. It is a back-half 2015.

Yes, we introduced late spring -- well, you know, that's going to get hard to really put any -- we will put some dollars in there, but nothing really consequential in Q2 next year if everything works on our timeline and that's what we anticipate. I see nothing so far.

We have been working very, very hard. We are paired up with their technology and we are assisting with Roush Engineering and ourselves and we just got the facility. We're working really right now in total design phase and we're about completed with that. And we are very, very excited about the project, I am telling you.

As I have told people before, we -- you have to remember. We were 15% of the natural gas engines sold in the United States in 2013. And given our play in that, it is -- I am not going to be on the bleeding edge. I will say that about a lot of things. We are going to be on that leading edge, and every store we build is natural gas retrofitted for it. I can't tell you how many separate buildings I've got going up or facilities. There must be 10 or 12 of them right now going on that we are fitting for them, in areas of need where we have helped put product.

We want to be there to service the customer. It is no different for me. We want to be able to service them like we service everybody else, but that's a -- for us, it depends on who you talk to where that market goes one day. I'm a believer that by 2017, 2018, it will be a 10% market-share play.

Okay. Just for clarification, so you are putting these at your existing locations, at your own standalone locations. Are you planning on selling those out into -- to third parties?

Of course. (multiple speakers). We will be -- we have an agreement that our systems will be for the US and North America, actually. So we have control of that agreement and look forward to bringing that to market in the back half of next year, but -- we will sell in the back half of next year, but you know the real play is into 2016, 2017, and 2018, and I am just very excited about it.

It is all about solutions, remember. If we can provide that market a total solution, not just a truck, not just this, not just service, but provide a fuel system, which is highly critical in that business, in that industry, it's -- I'm very excited about it for us going throughout the rest of this decade, I can tell you that.

Very good. Again, nice quarter. Thanks for your time, Russ.

Jamie Cook, Credit Suisse.

Congratulations. I guess just a couple of follow-up questions, Rusty. I guess the thing that struck me in the quarter, you talked about the absorption, but that the parts and aftermarket represented 62% of profits versus -- I don't know, 61.5%, whatever the number was, in particular, given the strength that you saw on the new truck sales side. So, can you talk about how we should think about that level going forward?

And then, I guess my second question is you talked about strength pretty broad based, whether it was oil and gas, construction, fleet, refuse, whatever. Can you rank order -- I know everything was good, but can you rank order which was the best versus which was (multiple speakers)

This may change quarter to quarter now.

That's fine.

I am going to take the small independent and it's not owner-operator so much, but the smaller underlying 10-, 15-, 20-truck person and call that -- and that's going to be just more general, okay? And then, I'm going to say oil and gas, maybe two; fleet, three. Refuse will be in there, excuse me. Those are all up there. Construction, I think most of it is still to come. But maybe in the backlog, okay?

Okay.

With more fleet in the backlog now. So those others maybe highlighted that small fleet guy, which may show up again, which might bode pretty good, may continue to show, right?

We are still seeing strength in quoting activity in that arena. But a lot of those deals are -- like all that medium-duty stuff I talked -- we have ready-to-roll equipment and things like that. If somebody needs five of these, we have got them. We have stuff all ready to go.

So, those sometimes are hard to forecast this far out as some of the larger orders are, right? And that was the strong strength in last quarter. So, I think the construction and fleet will be stronger in the back half. How's that?

Okay.

Even though they were decent, decent in the other, but it was pretty close, Jamie. It gets real hard for me to sit here because I don't have it broken down, I sold 512 of these and 496 of these, right here in front of me. They just all felt pretty good. It is sometimes hard to exact figure every market exactly.

And by the way, to your point on the 61.5%, 62%, if I was proud of anything, if that doesn't show the change in the organization -- go back to 2006, okay, when we sold big truck deliveries, go check the numbers out and see if it was anywhere close to that back then. It wasn't. That's the shift in the organization to a service organization from just a sales organization, that we service customers first, then we sell trucks to them, because that's what keeps them up and running in service after the fact.

And nothing points to it more than that. I don't know what the number is. You tweaked me. I didn't want to look at 2006 and see, because I know our delivery numbers were very high. I remember a 3,000-something unit in Q4 of that year or better. So I'd really like to see that -- to see the percentage of mix, because I'm telling you it is going to be probably 50 or less. It was probably in the 40s, and so that just shows the shift in the organization, the stability, I think, of the long-term earnings stream of the Company.

Okay, and then I guess just a follow-up, just on the pricing front. I know it is always challenging, the OEs are taking production up, so you are balancing that between trying to increase price. But as we approach the back half of the year, do you see more of an appetite from customers to accept price increases or do you think still the market isn't strong enough, tight enough, that the pricing environment is still going to be somewhat challenging?

I expect it to remain somewhat challenging, maybe not as challenging as it was, I don't think so. But somewhat challenging, because -- you are very smart. Obviously, you know, there's production and there is that balance between ramping production and then filling those slots, and that's what shifts pricing, so -- with demand. You add all that together.

So, it remains somewhat challenging, Jamie. Maybe not as challenging, okay, as maybe it was a year ago, right? So there might be a little room for OEs, but I don't know how much. Customers are still -- backlogs are built out further. There is no question about that. Backlogs are further out, but those backlogs shrink when production ramps up.

So I think a lot will depend on if they do ramp production up more, and you probably know more about that than I do, so if they don't ramp production up, then I think that would bode that pricing could be a little -- they might get a little bit of price for it. But if they -- production goes up, then that will temper that a little bit.

Alrighty, thanks. I will get back in queue. Congrats.

Andrew Obin, Bank of America Merrill Lynch.

Great quarter. Congratulations. It seems like the team has done a lot of hard work to get here.

Just a question on parts and services, can you -- first question is, can you break out for us how much of the year-over-year growth was organic and how much has to do with the acquisitions that you have made?

And the second question, as I look at your gross margin, right, it seems that it is a step down versus historical and also versus where we were last year. And I understand that you are changing the business model, but the question I have for you, should we expect continuing evolution of the service business and does that mean that there is some trade-off between growth and margin, i.e., yes, you're getting better growth, but as you change the business model, gross margin is coming down a little bit? Thank you.

Sure, Andrew. Same-store growth in parts and service year-over-year quarter to quarter, Q2 to Q2, was 8.3%. Okay?

Okay. That was easy.

Now the margin question. Yes, you can possibly expect -- I think I talked about it last time -- slight margin deterioration.

A lot of it may have to do with mix and not just a parts and service mix. We are finding that maybe there is sometimes more part sales through the stores that we acquire. Maybe they don't have all the mobile trucks we have. Remember when you do mobile, it's more labor intensive than it is -- or they don't have as many outside technicians in both shops.

Remember, I got over 300 mobile trucks, mainly in the Peterbilt business, and 150 outside technicians and probably 100 of those are in the Peterbilt business. So, those tend to bring more service labor in than they do part sales, right? So you don't have those -- that inside the Navistar business.

And as we bring those in, the Navistar business tends to have more part sales than it does service business, it seems like, and which service has more margin than parts. So your mix changes.

I would expect that we will be able to maintain somewhere between, I think it was -- what was it, 35.9% this quarter, and we have told people 36%, but I could see it between 35% and -- at a high point of 37% if we ever get enough service business -- outside service business into the Navistar stores, but somewhere between that 35% and 37%.

I don't anticipate being able to get to 40%, but sometimes when you're going after -- you can't do -- it's a customer mix issue. Customers continue to consolidate and we continue -- we take care of all the small and everyone. But at the same time, we might have to discount more to go after some of these big guys to make sense out of some of these big fleets and that's what we are doing.

I've got some great stories from the last quarter, even with some large over-the-road fleets that I put technicians and shops, and am I discounting? You better believe I am. But you know what? It's still growth and that shows up in the absorption number at the end of the day. And that's the number I care about more than anything else. I'm not driven by margins. I use margins to help manage business, but I don't use them to run my business.

But do you think as you, quote, unquote, I guess, industrialize your parts and service business that the margins continue to drift into the low 30s or do you think 35 is where they could settle?

No, I think settled at 35, okay?

Thank you very much. Congratulations.

Bill Armstrong, CL King & Associates.

I also have a margin question. This one relates to the lease and rental. Historically, you have been in that 14%, 15% range, and you --last two quarters, 12%, 13%. What is driving that and what should we model out going forward?

As you know, we acquired a lot of new lease locations with these acquisitions last year, especially the one at the first of the year. And their margins were not up to our standards, let's say that.

So, this will be a continuing evolution as we roll those older units out; bring newer units in, hopefully; go after the customer bases we are looking for that we historically have had inside of our other lease business. So, Bill, over time those margins will come back. We are not going to manage to those margins, my friend, over time. So that went out -- unlike Andrew's question, I'm going to tell you it is going to go back up, okay?

Okay.

You inherit -- remember, you are inheriting a book of business, right?

Right.

You may not have -- you didn't book that business yourself, so you just have to work your way through it, and that's the answer, simply said. But they are good markets. We are happy to be there and look forward to doing well in them in the future.

Understood. And on the CNG fuel systems, so maybe you could describe for us laypeople how these systems are more attractive to fleet operators than existing systems? In other words, why are you putting -- you're backing this horse. What's the pitch for customers?

What's the pitch for customers? First off, if you understand that market, there is one group that is an 85% player in that market.

It is an emerging market. We have been very, very -- pretty heavily in it and have a lot of customer touch in many areas throughout our sales business, our lease business, and service business. We believe getting in at this level is the right thing to do.

Why does -- the biggest problem for people getting into the natural gas business historically over the last -- ramping it up faster has been twofold -- infrastructure, which I think is getting taken care of, gradually getting taken care of. I know it is. And cost, cap cost of the equipment.

And the fueling system, while there's a very large piece of that cost, and we viewed it as a market that we had dabbled in. We viewed it as a market that we felt we could bring some advantages to customers with technology, with lighter tanks, with more capacity, with 3M's designs and engineering, and with Roush's engineering, and with our network to service it that nobody can touch. And then its own standalone business to go with it, but leveraging off of our network that we thought we could bring to that market something that I think is going to be a growing market.

It's not going to replace diesel. I'm not telling you that. But what it is, there's going to be a growing, emerging market for certain market segments, for sure. I am not saying it's going to be for everybody, but the market segments that we believe it will grow into, we believe that between the three of us, especially between 3M and ourselves, that we're super excited. I don't think anybody's got what we have to offer.

I am telling you from an aftermarket support, nobody will touch us. And remember, it is about keeping product up and running, and I can tell you one of the issues with this stuff sometimes, it's keeping them up and running. And the other -- your competition does not have the service network. Doesn't come close. Plus I am going to broaden my service network with associate dealers and all kinds -- I've got all kinds of things going.

And I just think that we've been in the -- I don't know if you are familiar with our CVS operations. We have been upfitting trucks for oil and gas, for every construction bank, building things for a long time. People sometimes don't understand who we are. They look at us as we just sell a Class 8 truck.

And this just continues to allow us to push more products and services and keep a customer up and running better than anybody else, and that's our goal. Our 2020 vision, just total customer solution, and this just fits right into that market segment.

I know I went on probably longer than you wanted, but I hope you became as much of a -- a little -- I am only a layman, too. Remember that when it comes to this. So maybe you grew in your rank of laymanship.

So, this is more cost effective to the customer. Is that from the upfront cost or from (multiple speakers) up and running?

It's from a natural gas to diesel. I am not going to get into the cost of fueling systems here. I am not ready to get into all that.

But I can promise you total cost of ownership will be better from us. I think the range, I think -- there is a lot of technology that I am not going to get into on this call that we think will get into -- will provide the best fuel system out there in the marketplace to damn sure support it better than anybody else.

Okay, great. Thank you.

Neil Frohnapple, Longbow Research.

Congrats on a great quarter. Rusty, understanding that you guys are on the tail end of the chain from a new truck order -- from when a new truck order is placed to OEM production to delivery by you guys, did you benefit much in Q2 from the pickup in net orders the last six months or is the vast majority of those deliveries still yet to come for Rush? I know you mentioned backlogs were up 6% to 7%, but just trying to get a sense for Q2 was the peak this year (technical difficulty) standpoint?

I couldn't have that ramp-up if I didn't benefit from it, Neil. So, yes, I benefited from it.

Does it have a little -- I am not here to tell you because -- there was a nice mix in there this last quarter with the smaller stuff in there. But yes, our backlog, as you pointed out, as I pointed out earlier, up 6% to 7%, so we still have some legs in our backlog to continue where we are at.

But I am not sitting here -- I don't want to get into margins and things like that, because that may be peak, because of the small mix -- the small customer mix that was in there. There may be many large companies that I do business with that may be flowing into the future here. So there may be -- that's just the way it is in different market segments, but we had a lot of small stuff in the mix, but that was part of the ramp-up, okay? So, it's just different parts of the ramp-up.

But I can't sit here and rightfully tell you that it's going to fall down, because it shouldn't fall down in Q3.

Great, great. And then, it looks like you guys moved to a net cash position again in 2Q 2014, even after all the investments and acquisitions you guys have completed the last 18 months.

And then, with the expectation of positive free cash flow and continuing to add to the net cash position, how should we think about your priorities for use of cash beyond the investments you are making on the CNG fuel systems and the expansion of your service network (multiple speakers)

Our cash flow, obviously, was very nice. When you consider some of the last quarter, when you consider some of the investments, not just 3M, some other things that we have done. We probably bought real estate, another $10 million of real estate we paid cash for. I can think of about $20 million out of the normal ordinary business that we spent cash on last quarter and we still pumped $34 million or so.

So, it was a nice quarter and I don't see that stopping. I will tell you this. You say, so what are we going to do with it? Obviously, we're going to continue to make investments. And nobody has even asked if there is any M&A right now, which is good, because there is really nothing on the horizon, but you never know.

But we have got a lot of construction going on. And historically, if you look at the organization, we used to finance all our real estate, but over the last four years, we have been paying cash for the majority of our real estate. And we will continue as we build new locations -- you realize we have got -- we are putting in -- I think what you -- one of the things I don't think anybody understands, the investments we are fixing to make, we're fixing to double, 2-1/2 times the size of Denver, Colorado. We're more than doubling Columbus, Cincinnati, Cleveland. By the way, I think you are from Cleveland, right, Neil?

I drove past you guys' dealerships this morning, actually.

The old one or the new one?

Yes, it's the new one going up right next to the old one.

There is a new one going up. Yes, you're correct. That one is going to -- that will be first of all those.

We have got a new one going up in San Antonio, Denver, Columbus, Cincinnati. I've got construction going around the Chicago area. I've got construction going in many areas right now. We got a new building going up in Dallas.

What you got to think about, think of all the extra bays. I am not building office space. Yes, I am putting office space in it, but I'm building extra bays and the potential from a parts and service perspective in the future.

Now when these places open, remember when we do these kind of things, absorption may drop, but we will bring it back up and the revenue and the profit dollars will grow with that. Again, that's where you use percentages to help you manage, but not run your business. So when we do these kind of things -- but long term, those -- I don't even know -- I was thinking of -- actually, I was laying in bed last night and I thought, you know, when I talk tomorrow, I need to find out how many extra bays we've got -- we're adding right now. That's a good question. How many extra -- in existing territories, which is not like going out and doing M&A, but in a roundabout way, you are adding lots of opportunity, you follow me?

Right.

To work on more trucks and do more things. So, that's an interesting thought. So, I am not sure -- it would be up to close -- I think it's well over 200 more bays being added. So that's like doing an acquisition over the next 12 to 14 months, by the end of next year, let's say, because you never know with construction.

Got you. Well, thanks so much for the color, Rusty. Appreciate it.

You bet. One other thing, Neil, we are continuing to repurchase shares.

Got you, okay.

We're repurchasing, as you know, on a daily basis back on B shares.

Great, thank you.

Art Hatfield, Raymond James.

Actually, Rusty, I got on 15 minutes late, so I'm probably going to end up asking you some stuff you guys may have covered in your comments, but a couple things. The Class 8 retail sales in the quarter, market share very, very strong, did you comment on where you think that could or should be going forward?

I have always said 6%, I thought, and better, as Navistar's market share comes back. And I am not going to change from that. I don't know that I can maintain 6.5%. I would hope I maintain 6%, but I could. We'll see as the quarter unfolds. The back half of the year, let's just not talk about (multiple speakers) quarters.

So I would expect -- but when the year is out, we should be over 6%. I don't see any reason we're not going to be 6% of the market -- over 6% of the market share.

For the full year.

I'm not saying 7% yet. I say 7% in the future if we get Navistar's market share back to where it belongs.

Understood, but where were you at -- I can't remember where you were at in Q1.

I think it was (multiple speakers) 6 -- it was 5.7%. So, we were a little bit high (multiple speakers)

So your comment about being above 6% is for the full year?

Right, I would say we would manage over 6%. I'm not going to say 6.5% for the full year, because that means I'm going to have to pull some 6.8%s and 6.9%s to do that.

Understood. I am with you. I guess same question for medium-duty sales, as well. You seem to be a little bit above where you have been historically there, as well.

We were obviously 5.7% in the quarter. I'm looking for 5%, okay?

Okay.

I am looking for 5% and 4.27%. And again, that has -- you go back to -- Navistar gets back to historical margins here as, again, which they were huge in, and especially in the 6-7 business historically, and we would look for that to continue to drive up.

All our medium-duty franchises have been doing well. We have had -- as I mentioned, I made comments on all the manufacturers we represent. I guess -- I don't know if you got on late, Art. Everything was pretty broad based. That's all I can tell you, across the board.

Any thoughts -- what number are you using right now for -- I can't remember what ACT's most recent number is (multiple speakers)

I think it was in my release there, 226,000.

Right, that's for this year, but have they said what 2015 is yet?

What are they saying? Let me see what they are saying next year. They are saying 235,000, I think.

Okay. (multiple speakers). So you -- hopefully, you will see your market share grow next year, if and when Navistar comes back a little bit?

No, they are coming back. Let's don't say if and when. I am not going to use that terminology.

Okay, well --

(laughter). We're going to differ on that one. We don't have 50-something stores for if and when.

I understand that, but I was just saying that to be conservative in my thought process.

You should be. I am conservative, but we went out and did all that last year before the uptick, which I think is going to bode well -- bode nicely for us, by the way, with all the -- with 35 stores and six acquisitions and 12-1/2 months before we got into the uptick this year, right? It should work out well for us.

Yes, but as their market share continues to climb, which I am not looking at it on a monthly basis. I am going to look at it -- take six months. I'm not going to do that. I'm not going to run my business that way.

But as it continues to climb, which I have confidence it will, in all sectors, there will be bobbles along the way on a monthly basis. Some people get all caught up in months and quarters and things like that. I'm a little longer-term view. I take a little longer-term view than others. As it continues to climb, then your answer is yes. You are correct.

So, last question for you guys. Calculating -- in your SG&A line, looking at G&A, backing out the 3M stuff, it looks like total G&A was about $130 million. That's, I think, the highest level you have had and a little bit of a step up from where you were.

That's correct.

How can we -- is that the right number going forward? How should we think about G&A moving forward?

Right, remember, we're in full run on that SAP stuff right now. We have hired all those people.

When I said -- remember last year, I said I'm going to spend an extra $0.10. Well, I didn't exactly put it quarter by quarter, but we're full blow. Maybe in Q1 it wasn't full, but now it is full on because we just started bringing Navistar stores on in Q2 and we're ramped up with people.

So that's -- maybe when I say $0.10, maybe it was $0.015 and it is $0.035 and -- it's probably even closer to $0.12. When I said it was going to cost $0.10 more, it may end up being $0.12, but we're going to get the system out and we're going to get it right. I'm not really caring what. That is a big contributor to it.

But also, we are continuing to make investments in a lot of different ways. Let me talk about this customer solution -- touch, customer service, call centers, telematics, all these things, we are spending some money on it. But I'm not -- I think the results for the quarter speak for themselves, but those results that we have now speak for the investments we made in the past and we're not going to stop making investments.

You got to trust that we're making the right investments to bring the right returns long term for our shareholders and understanding what customers' needs are. So there are a lot of things we are doing maybe behind the scenes that are -- that we don't talk about.

I did mention our national phone call center for the whole country, a big rollout of that and accelerating it is supposed to take longer. So, there are things that we are doing, but yes, they cost a little money, but we have done that all along.

That's fine. I am just trying to get an understanding how I should think about it going forward. So, that being said (multiple speakers)

The rest of this year, call it Q2.

That's fine and that's fair. As we move forward, though, like into next year and beyond, as SAP goes away --

Like I say, the second quarter next year, SAP tails off, yes.

Does that mean that we see a drop-off in G&A or will you continue to step up investments in other areas so that G&A will just stay at that level?

Maybe not a drop-off, but a flattening, how's that?

That's fair. That's (multiple speakers)

Because I want to continue -- we have got other stuff on the drawing board right now that we are working on, outside of systems, and other kinds of systems that I touched on just a second ago that I really don't want to get too deep into right now since everybody can listen.

But we're making good investments to continue to leverage off this network, and we're actually -- I really want to build the network out a little bit more as we get into the next six months to 12 months. But we will just see where it goes.

Okay, that's helpful. That's all I got today. Thanks.

Kristine Kubacki, Avondale Partners.

You talked a little bit about market share for next year, and I'm just trying to get my arms around it, just a little hypothesize here. In terms of looking at the big fleets and even the smaller fleets, we have seen, obviously, with good tonnage and good freight rates, we're seeing a lot of people jump in and finally replace. And I guess as we think about 2015, though, the fleets are still really constrained by the driver situation and not adding capacity there.

Do we have enough replacement needs, I guess, for the industry still going forward, in your view, to get an up year next year, specifically talking about Class 8?

Let me back up and say I was probably off this time. I was saying usually I like to think I am right on my numbers. Let's talk about 2014.

2014 obviously has accelerated stronger than I anticipated, when you look at order intake and expect a May or a June like that. It was up over expectations.

And to your point on driver shortage, no question. That's the biggest thing -- that's the big driver of big fleets that we have out there right now. It's the biggest issue they face.

Can we continue it? I think we can continue at a similar pace, maybe not as a total year, maybe not as just a back half of the year. Because the back half of the year is going to show, if ACT is right, over 126,000, 127,000 units. I don't know that you can add that together for the first half of next year and the second half of next year and call it 250,000.

Do I think you can do 225,000 again? Yes. They are saying 235,000. I think it's sustainable at a total-year look, given I think there is going to be other markets that come into play to help. And I do know that there are fleets that still have to replace. There's a lot of guys still want to get -- I have talked to two recently that still want to bring their average age down between now and the end of next year, especially that they have been able to get a little rate for a change and it looks like that's sustainable, then I would look for them to go ahead and replace.

And I'm not sure about growth, again, given the driver shortage, but what that does allow is, with rate increases, it allows other people to get into the business because they can make sense out of it profitably, if that makes any sense. Mine would say a year similar to this, not at the rate of the second half, at a 250,000-plus rate US retail.

That's extremely helpful. I appreciate that color.

I was just wondering a little bit more on the oil and gas side. I know you talked about it. Can you compare the interest or activity there from first quarter, and then through the quarter, has activity ramped? With activity -- it's been a lull; I just want to see what are folks saying going forward? Are we seeing a replacement bump there as well and then expect it to tail back off, or are we seeing new activity in that end market?

Looking at it quarter to quarter is tough for me. I think it has been about the same.

You got remember in some of the stuff when we got orders for it was early in the year and maybe it went in -- some of it went in the second quarter and some of the orders we got in the second quarter will go into the third quarter, that we will get in deliveries, because there is a lot of rigging that goes on with those trucks to get them ready, a lot of times.

If you compare it year to year, obviously, it's nothing like 2011 or 2012 or 2013. 2011 and 2012 were huge years; 2013 was a zero year, almost, and this year is in the middle, which, as I said, is about a lot of our markets.

So, I don't see it falling off. I don't know that it is going to ramp -- I don't think we're going to see a 2012 again, right now. But I do believe that it is -- I think it is sustainable, but I have been a little bit -- I was born and raised in Houston, Texas. I have been in the oil business a long time, so just when I think everything is right, it changes. But given the dynamics in the world and everything else that are going on right now, I find it hard to believe that we're going to stop seeing activity in the oil and gas fields.

Okay, very good. Thank you very much. I appreciate the time.

Rhem Wood, BB&T Capital Markets.

I think most of my questions have been answered, just a couple of numbers. Could you give me the gross margin by vehicle class -- Class 8, medium-duty, light, and used?

Steve has got it here.

Class 8, 7.6; medium-duty, 5.6; light duty, 5.5; used, 10.7.

Okay, thanks. And then, Rusty, just one more question on the -- if you go back to the absorption ratio, I understand the puts and takes, but you just did 9 points of improvement sequentially. It seems like that there is a lot of work left to do with these Navistar stores. Why couldn't that average 130% by year-end? I know you talked about keeping it flat, but it just seems like there's a lot of low-hanging fruit left there. Could you talk a little bit about that?

There is potential there. But you got remember, all our other markets are extremely strong right now, too. Can they remain as strong over three-year period? No, but I think the good part is even if they back off a little, they are still with 112% or 115%. I am talking about our traditional markets.

So the good part is there is room in certain territories of our Navistar business for improvement.

I can make one color comment, and that's the fact that our Chicago Indy acquisition at the first of the year has performed outstanding when it comes to absorption, better than anyone we have ever taken on on that side of the house. So we are very pleased with that and we think there's room for growth in some of the areas -- the other areas that we've taken on throughout last year.

I don't want to pinpoint, because these people are working extremely hard and already making progress, and that's the important part is if you are making progress, then you have got -- you're going to keep trending in the right direction, then you will get to the Company totals eventually.

So, is there upside? If we are on a nice three-year strong economy, you get strong GDP in 2015. Everybody is thinking 2014, obviously, we're going to finish strong, and then 2015 stays there, outside of any outside political things that happen.

Yes, there is upside in probably over half the Navistar stores, in my mind, for sure. And I think there's upside in certain areas of the country, too. Obviously, we have -- Texas has been strong for a while. And I don't see that changing, the whole Texas, Oklahoma area, but Florida -- geographically -- I talked about balanced earlier. Geographically, you want to talk about absorption? California stores, Arizona stores. I can go across the board.

They have -- their performance has risen, Florida, everywhere. The performance is coming up. I think it is as much about all our processes and the way we go to market, and that's what we're driving the whole traditional organization.

But back to the other deal, yes, there is still room for improvement as we bring processes and improvements to bring mobile stuff and things like that to these new acquisitions.

Okay, thanks. Good color. Keep up the good work.

At this time, I am showing no further questions. I would like to hand the conference back over to management for closing remarks.

Okay, I appreciate talking to everyone this morning and look forward to talking to you in October with the Q3 results. Thank you.

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