Rush Enterprises Inc (RUSHB) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Rush Enterprises third-quarter 2014 earnings results conference call.

(Operator Instructions)

As a reminder today's conference 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, everyone, and welcome to our third-quarter earnings release conference call. On the call today are Marty Naegelin, Executive Vice President; Steve Keller, Senior Vice President and Chief Financial Officer; Jay Hazelwood, 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. Because these statements include risks and uncertainties our actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include but are not limited to those discussed in our annual report on Form 10-K for the year ended December 31, 2013, and in our other filings with the Securities and Exchange Commission.

As you have read in the news release, net income this quarter reached $23.5 million, or $0.57 per share on gross revenues of $1.240 billion. In the aftermarket our parts, service and body shop revenues reached $340 million, the result of continued demand for vehicle maintenance and repair, additional activity from increased new truck sales and service support in a broad range of market segments.

Our absorption rate reached a record 120.2% this quarter. We continue to integrate and executive in our Navistar division and implement continuous improvement across all our operations. We expert parts, service and body shop revenues will remain strong through the remainder of 2014 but continue to watch the price of oil and its impact on activity in the energy sector.

Moving to truck sales, the improvement trend that began last spring continued through the third quarter. Our Class 8 new truck deliveries significantly outpaced the market with marketshare climbing to 7.4% of US Class 8 retail sales.

Larger fleets continue to replace aging equipment to improve uptime and appeal to a wide range of drivers. Stock truck sales to small and midsize fleets operating in the vocational segment also continued to climb and we saw a significant increase in mixer order intake and deliveries.

Our Class 4 through 7 new truck deliveries accounted for the second largest sales volume in the Company's history. We continue to see strong sales from our large inventory of ready-to-roll trucks meeting the immediate needs of vocational operators.

ACT Research increased its 2014 forecasts of US Class 8 retail sales to 227,100 units, up 21% over 2013 and forecast US Class 4 through 7 retail sales to be 196,300 units, up 9.3% over last year. We expect demand for Class 8 trucks will remain strong as fleets continue to upgrade equipment but expansion will be moderated by the driver shortage.

We also expect Class 4 through 7 new truck sales to remain strong. We continue to make progress on our business system rollout, new facility construction and renovations and work to expand our solutions capabilities. Our new business now called Momentum Fuel Technologies, is on course to launch a natural gas fuel system featuring 3M tank technology next year.

Finally, I want to say thank you to all our employees and congratulate them on helping the Company achieve another record quarter. With that I will take your questions.

(Operator Instructions) Jamie Cook, Credit Suisse.

Good morning and congratulations on a great quarter. I guess first, Rusty, the strength on the truck side was pretty phenomenal and you guys mentioned in your press release you had some benefit from some large fleet. Do you think the use any pull forward there from Q4 or how do we think about the fourth quarter just given the fact that your third quarter was so strong?

My second question is on the parts and service business, which was obviously another phenomenal quarter. How do we think about same-store parts growth year-over-year because you gave us that number last quarter? And then just what do you think a longer-term sustainable growth rate is for that business just because it has been growing in the 20% to the 30% over the past couple of years? Thanks.

Let me start back at the front. From a delivery perspective I expect it to remain similar, in line with Q3 and Q4. I did not really see any pull forward.

Our backlog remains roughly the same, maybe up slightly, so I don't see anything that tells me that it is going to -- it will be similar. There's timing issues, obviously, but it will be very similar to that.

From a same-store basis around 9% is the growth rate on parts and service so far this year. We typically try to target -- obviously it depends on the year -- but we typically try to target between 7% and 10% from a same-store growth rate as we go into each and every year, just continuing to invest in facilities.

We've got a lot of facility expansion going on right now, which will increase -- probably in the next 12 months we will probably add 200 bays to existing facilities that we have already and continuing to push different services and things through there. Like I said we've got close to $100 million in facility expansion going on right now but we have always proven in the past that is typically how we get our growth.

It may affect absorption slightly down sometimes when you open a new facility when you are doubling and tripling the size but eventually it drives absolute dollars up as you grow into that facility. So we feel real good about where we are at from a parts and service perspective. If you look at the fourth quarter from a parts and service perspective, I don't expect gross profits to be quite as strong just simply because of all the holidays.

The way Christmas and New Year's fall this year on a Thursday, it makes for tough weeks. It's always better when they are tied right in with the weekend. We don't see anything that says there's any -- as I am sitting here over halfway through the month of October, I don't see anything that says we've got this big decline or anything coming.

It's just how the calendar lays out, right? So you've got vacation and things like that going on a lot around the holidays. But as far as the strength of it, it is still there, it is just sort of seasonal effect.

And I appreciate we are in the third quarter but just in terms of 2015, can you comment on how you are thinking about industry retail sales? Do you sort of agree with what ACT is putting out there and just sort of address sort of where you think we are in the cycle because next year will be six years.

Typically truck cycles last that long, or do you think we will extend beyond that? Thanks.

I like to think that maybe the historical truck cycle -- I'm going to take it from you start at your last piece, Jamie -- I may beg to differ a little bit on historical being the norm now. And I'm not trying to say that the world is changing right front of us but I don't expect this huge of peaks is what we have had in some of our past cycles.

I think ACT's 240 number is probably solid high side. I think in my mind I think we can run somewhere between 220 and 240 here in 2014, 2015 and 2016. And if it goes to 220, it doesn't have that huge effect on our Company.

The change in our organization I hope would be very easy to see for everyone over the last decade as we have driven ourselves to become much more of a service solutions provider. Obviously truck sales are important to us but not anywhere near what they were historically. You go back to peak or somewhere high side of a cycle like this, 10 years ago truck gross profits would have accounted for 40% -- I'm sorry, 60% -- of our gross profits or better.

Now parts and service to still count for 63% of our gross profits in Q3. And given the amount of deliveries and the truck gross profit that was created, that's just huge but that is the change in the organization.

I have talked about it for years and we continue to try to drive our -- we are a service solutions provider but we sell trucks too, obviously. But that's where the majority of our gross profits come from and that's where they're going to continue to come from as we work towards trying to answer customers' needs and provide solutions to differentiate ourselves from our competition.

But back to your trucks, I don't see any 250 or 260, 270 year. Because I look back at it and look at it sort of like this -- you go back to -- 1990 -- remember the peak of 2006, 2005 and 2006, and then we go through but you get to 2009 and 2010 and we were short 200,000 replacement units. Some of that was -- we have not made all that back up yet if you consider 200,000 an average year.

So I see there's still a little tail on it here out past 2015. I would like to see it just stay somewhere around where it's at right now and I would be comfortable with that.

I don't think we're going to have as huge of peaks. We don't have the emissions issues to deal with we had the last decade that drove a lot of that also. So those are just my opinions on it.

All right. Great execution, as usual. Thanks for the color.

Neil Frohnapple, Longbow Research.

Hi, guys. Congrats on a nice quarter. Rusty, on the Class 8 market share of 7.4% in the quarter, very impressive. I know you guys probably have a higher mix of vocational business than the rest of the industry, so just curious if strength in this market in particular allowed you to achieve this record level of share or anything else you can point to?

Well, I think from a vocational perspective it was pretty much in line with Q2. The increase in Class 8 deliveries was really fleet driven. We have vocational fleets but there's a lot of that small and medium business remain.

The small and midsize fleets as I note to you remained about the same, pretty strong. Those guys didn't replace -- the replacement on the small and midsize guy, they held onto that equipment after the recession a lot longer than some of the larger guys. And so we have seen that strength really throughout the year in all different market segments.

But the increase really in the deliveries was fleet driven and could be vocational fleet and over the road fleet THAT that's why there was margin deterioration in there also, so that's really what you saw in those deliveries. 7.4% that's a pretty good number and hopefully we will be able to maintain that as we go forward and we continue to be strong in our Peterbilt marketshare, in the areas we represent them we are extremely strong, outpacing their typical market share.

And as Navistar continues to gain ground and coming back from the past two years, we look for that to maintain hopefully -- as I have said I have told everybody 6%. So I was kind of proud of 7.4%. But I am not ready to tell you we can maintain a 7% going forward but I wouldn't rule it out.

All right, great. And then just it sounds like the launch of the new CNG fuel system is on track and I know you had the $2 million initial investment last quarter for the new fuel system in SG&A and maybe a question for Steve, but were there costs in the quarter again related to this?

Yes, really this quarter there's probably only a little over half a cent that was related to that. Now that is going to ramp up. So as you think about your models going forward that will ramp up probably more like the -- a couple pennies a quarter here until we get it out, I would guess, somewhere in that range.

I expect that to ramp in the fourth quarter first and second for sure. Anywhere in the $0.02 to $0.03 effect on each quarter before we get to market later sometime later next year in the middle of the year.

Great. And then just a final one here. You mentioned opportunity for market share on the Navistar side. It is customer acceptance for their new 13-liter engine continuing to improve in the market, or any color you can provide their (multiple speakers) fuel economy-wise?

Well I think customer acceptance on both platforms. The Cummins Engine Platform and the 13 liter. Obviously the Cummins was an easier starting point, easier to sell coming out because it was a known quantity.

You had to gain back trust in the 13 liter with SCR and I think that is being done, probably not as rapidly as the Cummins expansion has with Navistar. But I think both are on track to continue to work towards gaining market share as we go forward.

The biggest issue continues to be the overhang of the EGR engines but we continue to work through that and they continue to work through that and we work with them continuing to work through that. But the good part is every day get a little bit further in the rearview mirror so we just keep working through it here over the next year or so.

Thanks for the color, guys. Appreciate it.

Art Hatfield, Raymond James.

Good morning, everybody. Rusty, actually just a couple of clarifications because most of my questions have been answered as of now. When you talk about Q4 truck sales being comparable to Q3, are you talking just Class 8 or are you talking about overall?

Overall. It depends -- a lot of medium-duty stuff you get some tax drive on the fourth quarter and I will have a better look at that here in the next 30 days or so, so overall yes we are fine there.

Maybe a little more pickup in medium but I have to see that. When people look at the medium-duty customer typically has a little more tax drive in the fourth quarter sometimes, so (multiple speakers)

Adding to that your comments about you are cognizant of lower oil prices and how that may affect purchases from the energy sector, is there a kind of WTI price that you get concerned about, or is it just kind of as it trends down people will back off there really isn't a number that you cross, say $75, where people really fall off a cliff?

Well I think if you got under that mark you are mentioning and you stayed there for a while, there might be some effect on it. And it's not just so much truck sales as we have a lot of parts and service driven (inaudible) too, so we continue to monitor it.

We don't see anything right now. There hasn't been anything currently and we are not hearing anything vibes or I'm not getting any signals that there's any overreaction with what is going on here recently. But obviously the reason I put it in there is obviously we watch it.

But the good thing is fortunately we have worked very hard the last 10 years as I think we have proved out in 2013 when it fell in the tank, the oil and gas business did, that we have grown to a lot of different market segments. And we work very hard and are very focused on all those other market segments too. So that yes you can take a little hit here and there from one of them but you don't get crushed unless they all go down.

Right.

I still feel pretty good. I see nothing right now from our customer base that says there's any pullback but we are going to continue to monitor it always. (multiple speakers)

No, that is helpful. And then finally just kind of I want to revisit your comments about parts and service gross profit in Q4.

I get the calendar effect but when I look at Q3 versus the first half of the year, that step up, was that just the culmination of a better market, you guys doing all the right things, some of these acquisitions kind of hitting their stride? Or was there something unique that kind of stood out that was unique to the Q3 that may not be going on on the go forward?

No, I don't see anything really that was unique to it. It was just a culmination, as you said, of a lot of those things.

I still think there's some runway left in some of the new stores. I still think we have run way in some of those, some of those integrations take a couple years to really get them into your flow and how you like to operate and get them into the -- going after the different market segments the way we do, etc., etc. So I think there is still runway in that piece.

There was nothing outstanding other than just continued execution by our folks. We have continuing investment in mobile trucks and mobile techs and going to customers.

I have always said that when we go to sell product I'm not going to ask you about the product, I'm going to go and ask what can I help you with. What is your biggest problem and how can I help you and that is how we go to market.

Okay, perfect. Well just a follow-up to that then, thinking about this and you may have never looked at it and there may actually be no pattern to this whatsoever.

But is there a pattern Q3 to Q4 that seasonal drop-off in the margin related to kind of the calendar that you have seen in the past? And if so can you quantify it, is it 30, 40 basis points, or is it something you just -- it is just not -- there's not enough normalcy to the change in the season because of the calendar that you can see a pattern there?

No, it is not margin. It just becomes amount of hours that you can -- a lot of times you can build. There's more vacation, there's the holidays and there's stuff and it's just that area. There's not going to be --

Is it better to think about Q4 then that it's a revenue issue but the margins could still be close to the level you saw in Q3 but because of limited work days it is more of a top-line issue that lowers that gross profit?

Yes, sir. That's how I would phrase it. Yes.

Okay, perfect.

It's just typical of Q4. But don't look for any huge downturn here. I'm just saying --

No, I'm just trying to understand -- I think that comment on it's a working days issue more than a seasonality --

Even though you have -- really if you want to know the truth, you've got the same amount of working days this year and it's how the calendar fell. The problem is is you put in a Thursday Christmas. Well that just blows that week up.

No, I have seen it for years. Understood. So okay, that is helpful. (multiple speakers)

I love Christmas but I like Christmas on Friday through Monday from a business --

We like them on Wednesday because it blows up our whole week. Thanks for the time, Rusty.

Bill Armstrong, CL King & Associates.

Good morning, Rusty. Could you update us on what percentage of your revenues overall comes from energy markets now?

Boy, that's tough, Bill. And revenues are -- from a truck perspective that's a tough one. I don't have the systems that really tell me exactly what that is.

How about maybe from a unit sales perspective?

Gosh, I mean it's sometimes harder to always find the small guy and it's buying a few sand haul trucks, or some water trucks or things like that. Let's just from a truck sales perspective I'm going to say this year in that quarter no more than what, 12%, 15%, something like that from trucks. If you want to look back in Q3, between 10% and 15%. That would be tops is 15%, probably more like 10% I am going to guess.

Okay. And then for Steve, since no one has asked this one yet, wonder if you had the breakout of gross margin on the heavy-duty, medium-duty, light and used trucks.

Yes. Heavy was 6.9, medium 5.8, light 4.5, used 10.3.

Okay, great. Would you happen to have the same-store Class 8 unit sales for the quarter?

We've got it. Let's pull it here.

3,313.

Okay, that's still a very healthy increase then?

Correct.

Okay. All right, great. Thank you.

(Operator Instructions) Joel Tiss, BMO.

Hey guys, how is it going? Just two things. One, I didn't hear you guys talk about the pricing in the industry, what is going on with heavy-duty truck prices, are we seeing a little bit of increase, or not really everyone is still fighting it out for market share?

I've told a lot of people I keep getting asked that question. It's really no more than 1% or 2%, 1.5% and I don't look for that to change to be honest with you.

I don't see -- I think market share is still important with all the OEMs and I think -- I sure don't look for any 3% to 4% increase in truck prices next year. I'm going to tell you it's just going to be your typical 1%, 2%.

And then in between both of you guys can you talk a little bit about sort of the structural issues as you increase your capacity and the costs get behind you and maybe mix change is a little more toward OEM over the next two to three years? Can you sort of give us a little bit of a roadmap of what that means for earnings, or margins, or just trying to sort of summarize as we get through this kind of transition period.

Okay, let me see if I followed the question here.

You've got a lot going on, you are integrating all these Navistar dealerships and as you look out three years from now all of this work you are doing, what is it going to turn into?

You know I am not going to give you a number. It's going to turn in like it always does --

I know but just sort of like a little bit of a roadmap by the end of 2015 --

A roadmap I would hope to be able to continue to drive absorption up. As I always tell everybody the key metric -- we are going to get our share of market -- we are going to get our truck market share.

I am always confident in that of the truck market. I can't control always where that truck market is going to be. But I expect our share to continue to increase driven by Navistar eventually over the next two years getting back somewhere close to hopefully close to 20% market share.

Also gaining their medium-duty market share back that they've lost. Not just heavy but medium, from a truck sales perspective.

From a parts and service perspective I talked earlier about we continually try to drive between 7% to 9% of same-store growth. That doesn't mean it drives 7% to 9% of absorption because it takes some incremental cost to drive that. But I would like to think that over time we can continue to ramp absorption up, and it may not be evenly but over the next three years I would like to see three years from now that we are running 125% absorption.

If I am able to put it in those terms I would like to believe that we can do that in three years by continuing to provide more services and products and understanding needs of customers. Given predictive diagnostics that are coming on and our investments and all of that in telematics and predictive diagnostics we're investing a lot of money right now.

We are very focused on that. We are very focused on being transparent with our customers. I believe that with all of these investments those are the kinds -- those of the type of ratios I can give you that we continue to make this a larger service company.

In sales we are always going to execute in sales, I am very confident in that given our ability to service. Because the service drives the truck sales, not truck sales driving the service.

So I don't know if that helps any. But that's the track record we have been on excluding 2009 recession that we've been on I continue from a core expertise in this organization. That is not going to change, it is only going to get stronger.

So it sounds like I shouldn't really be focused on the costs as like a transitional high level of investment. Because if you want to continue to drive growth you are probably going to need to continue to reinvest like the world is going to change over the next five years?

I've got new stores going into existing markets. Let's talk about it.

We're going to open up a new store in Cleveland that's probably going to triple the size, 2.5 times the size of their ability and that is going to open in the first quarter. I've got a store going up in Cincinnati and I'm going to continue to use the old store to move my leasing company in and a separate medium thing and it's a little store now, I'm tripling the size of it. It is going on right now.

Denver is going to triple the size of it. San Antonio's building -- I just saw it the other day -- is over 50% complete to more than double the size of its capacity.

So these are going to be continuing investments. We have always done that. When you reach a certain threshold of absorption it is time to reinvest and build so those costs are going to continue to be part of it because that is taking care of the market.

As you have put more products into there and you bring more services you've got to make sure you've got the facilities whether they are the fixed facilities, whether it's the mobile stuff, everything else there. And on top of that remember, I didn't say I was done doing acquisitions.

I took a little breath this year so we could integrate and execute. So you can rest assured I think we historically show -- don't think that we don't have some thoughts about some other areas of growth in this country we are in. So I'll just leave it at that.

All right, thank you very much. That's great.

Jeff Monat, Seven Locks.

Hey, guys. Congrats on a nice quarter.

Wanted to understand a little bit more about potential capital returns to shareholders, buybacks, the different share class issues that have existed in the past. Can you just discuss that a little bit more?

Well, we are still currently under a $40 million repurchase that we are in the process of. That's really where we have decided to focus that and also focus our cash on more acquisitions and growth opportunities as I have talked about and reinvesting in these facilities.

Right now that has been the focus. Obviously other things that you touched on are always under consideration and thoughts. But I don't really want to get into where we are at in our thought process on those right now going forward but they are obviously on our radar.

But from a repurchase and a continued investing in acquisitions, that's really where our focus is going forward. We may not have done many acquisitions the first part of this year but that was because we did a lot of them last year.

But we truly will be looking to continue to fill out our map. That map is the key thing that we have. Those stores and I need -- there's still some room for improvement on that map.

So we can continue to touch a consolidating customer base in a way that differentiates ourselves from everyone else, but those will be the two big issues. But the other two issues you touched on, don't worry, they are constantly under revision, or review.

But you do think there is a way to kind of improve either the liquidity or the valuation of the differences between the shares?

Yes, I think there is. I think there is.

We will continue to monitor that and look at that. We have, as you may know, we have some covenants and some things in our franchise agreements and that's why it is there to begin with.

That's what we have two classes of stock to begin with, there are some covenants inside of some of our franchise agreements. So as we continue to work with those and monitor that we will also make sure to keep all of that in mind.

Thank you.

Barry Haimes, Sage Asset Management.

Thanks very much. Great quarter, guys. Rusty, had a follow-up.

You commented before that some of the small midsize companies in effect held onto their equipment longer and that they are kind of more back in the market this year. I wonder if you could give us a feel for what inning are they in in their fleet replacement?

Are they really just starting and you have another couple, three years for those guys to re-fleet, or is it a little further along than that? Just any color you can give us would be great. Thank you.

Sure. From my perspective we are probably in the top of the -- bottom of the third, top of the fourth. We haven't pitched five innings yet, so we can't get a W, so I'm going to tell you somewhere in there, probably bottom of the third, top of the fourth if you want me to look at it like that.

Because there is still more of that to come. Once you add more capital liquidity in the credit markets -- not that the underwriting has gotten bad -- gone deep -- but at least there was more money out there and access to capital appeared over the last 12 months.

That coupled with confidence and new technologies that have been out now for three to four years that they can see the people that have invested are getting better fuel mileage, etc., and then obviously the maintenance cost of the products that they had. So those, all of those have culminated to this point but we are probably three innings through it, or something like that. This is swag on my part.

No, I appreciate that color. Thanks so much.

Thank you. And I am showing no further questions in queue. I would like to turn the conference back over to management for any closing remarks.

No closing remarks here, just we appreciate your time this morning and look forward to talking to you with Q4 results probably in February. Thank you very much.

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.