Rush Enterprises Inc (RUSHB) 2015 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Rush Enterprises Inc.'s fourth-quarter and year-end 2016 earnings results.

(Operator instructions)

As a reminder, this call is being recorded. I would now like to turn the call over to Rusty Rush, Chairman, CEO, and President. You may begin.

Good morning, everyone, and welcome to our fourth-quarter and year-end 2015 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 Derek 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, 2014 and our other filings with the Securities and Exchange Commission.

Thank you, Steve. As indicated in our press release we achieved revenues of $5 billion and net income of $66.1 million, or $1.61 per diluted share. For the fourth quarter, net income was $9.8 million, or $0.24 per diluted share, on gross revenues of $1.2 billion. As anticipated, declines in the energy sector did have a negative impact on our overall financial performance in 2015.

In the aftermarket, our parts, service, and body shop revenues were $1.4 billion, with an annual absorption rate of 115.6%. During the fourth quarter, our aftermarket service revenues was $331 million, on an absorption rate of 111.8%.

We began to see a significant negative impact of decreased energy sector activity to our parts and service revenues in October. This negative trend continued throughout the fourth quarter, as oil prices continued to fall, and demand for aftermarket services in these regions deteriorated. As a result, average aftermarket gross profit per day fell about 10% during the fourth quarter.

We expect decreased activity in the energy sector will continue to negatively impact parts and service revenues throughout 2016. To help offset this decline in business, we have implemented a broad and significant expense reduction plan across the company, and continue to aggressively pursue initiatives to help generate incremental aftermarket revenues.

When complete, we anticipate the expense reductions will help offset about half the decline in the aftermarket gross profits. We believe that the typical seasonal increase in freight activity and incremental business from aftermarket initiatives will help replace the remainder of our decrease in the aftermarket gross product.

Turning to truck sales, we sold 16,874 new Class 8 trucks in 2015, accounting for 6.7% of the total US Class 8 market. For most of the year, we were able to offset the significant decline in sales of energy-related Class 8 new trucks with incremental but lower margin truck sales to large over-the-road fleets. However, our Class 8 truck sales in the fourth quarter decreased about 28% compared to the fourth quarter of 2014.

In addition, used truck values decreased in the second half of 2015 due to a large supply of used truck inventory. As a result we incurred a significant write-down for our used inventory values in the fourth quarter. We ended the year with our lowest used truck inventory levels of the year, and we will continue to monitor used truck values, and manage our used truck inventory closely, in this very difficult used truck market.

For 2016, ACT Research forecast US Class 8 retail sales will be 222,000 units, down 12.2% compared to 2015. Even the increased capacity resulting from strong new truck sales market in 2015, decreasing freight trends, lower used truck values, and ongoing softness in the energy sector, we believe Class 8 truck sales could be significantly less than currently forecast by ACT research.

Our Class 4-7 [new] truck sales reached 11,241 units this year, up 13% over 2014, and outpaced the US medium duty market which increased by 8.3% during the same timeframe. Rush's Class 4-7 truck sales accounted for 5.2% of the total US market, as we continue to stock ready-to-roll work trucks across the country, allowing us to meet the needs of medium duty customers benefiting from a healthier economy.

Sales in the Class 4-7 new trucks through lease and rental food and beverage industries also contributed to our strong Class 4-7 new truck sales performance. ACT Research forecast US Class 4-7 retail sales to be a little over 218,000 units in 2016 but relatively flat compared to 2015. We believe our Class 4-7 new truck sales will remain stable throughout this year.

As in past years, we expect general and administrative expenses to be sequentially higher in the first quarter of 2016, due to employee benefits and payroll taxes.

In the area of growth, we continued to invest in our long term vision in 2015. We acquired dealerships in Illinois, Georgia, and Nevada, expanding our network footprint to 21 states. New facility construction, renovation, and expansion projects allowed us to increase service capacity in California, Ohio, Tennessee, and Texas.

We substantially completed the rollout of our RushCare Rapid Parts call centers, began production of our new Momentum Fuel Technologies compressed natural gas fuel system, and introduced a new telematics offering. We also implemented a new service management tool that will help provide real-time communication to customers with vehicles in our shops.

Finally, I would like to thank all of our employees for their efforts this year and continued dedication to help keep our customers satisfied and up and running. With that, I'll take your questions.

(Operator Instructions)

Jamie Cook of Credit Suisse.

Hi, good morning. I guess a couple questions, one on the write-down on the new and the used inventory. Can you talk about, was it broad-based, was it specific to one of the [OEs] and any color on sort of the model years, and do you think this is a Rush or geographic specific issue, or sort of broad-based throughout the US?

And then my second question relates to, you know, how we think about parts. I mean I know you said with some of the cost cutting initiatives you'll be able to offset, I think, half of the drop off from part [tail], so if you can give a little color on how you're thinking about parts, how you're thinking about absorption, as we think about 2016. Thanks.

Sure, Jamie. So about trucks first, when it comes to the write-down. It's broad-based, Jamie, it wasn't specific to one area or one individual brand or anything else. I'm not even going to go to specific year models per se. It's just a basic overall drop in the used truck market that began in the middle of the year.

And I think, I know when I was at [your] conference, I communicated that was going on to all investors or any folks I met. You can just see it across the board, the wholesale market is pretty dried up everywhere. The overseas market is dried up a lot.

So when you look at used trucks, it's usually pretty easy to tell where they're going to go, right, a lot of times, because the supply side is limited. You know what supply in used is going to be. You just have to look back three, four, five years, and you understand where the supply is going to be, depending on what market that truck is used in, and what typically gets sold in that secondary market.

But it's broad-based across, and I'm going to tell you this, I wouldn't tell you that it's all over with either.

Okay.

As we go forward, I would expect there is going to be continued pressure on used trucks. That's not to say that something couldn't happen and demand would increase. But that's always, it's a balancing act, right, like anything in life; it's supply and demand.

We know the supply side is going to continue rising, but I don't feel that good about the demand side, to be honest with you, to help offset that supply that rises. So you know, it wouldn't surprise me to see another, you know, 5% hit or so. I don't think it's going to be some 15%, 20% total tank anymore, but I do believe that you're going to continue to see pressure on used truck valuations going forward. Which lends itself to my comments, one of the biggest things that lends itself to my comments that I'm a little more embarrassed, I'm sorry on the Class 8 market, right?

I mean you've been consistent saying that you think that the market will be worse than what some industry experts are forecasting. Is it down worse than -- you know I think at the conference, you were talking about maybe at least down to 15% to 20%. Like how are you thinking about things, just based on what you're seeing in the first two months of the year?

Based on what I'm seeing, look at January's order intake, right? I think it was only, strip out overseas and Mexico, and you only have 14,800 units in the US and Canada, Class 8 order. And when you compare it back to where we were last year, when we had, what, four months in a row running over 40,000 units or right at it? Obviously, that's going to have something to do with the backlog that's out there.

You know, when I was at your conference early December, I would've said if you could have given me, I'm going talk US retail, I think, at that time if you remember, ACT was about 248,000. Well, they're down to 222,000 now, headed in my direction, which I really would've preferred to be wrong, if you want to know the truth. But when I look at US retailers, Jamie, if you put a crooked number on the front, like a two, and add zeroes behind it, I might take that right now.

Wow, okay.

200,000 to 210,000 okay? I'm not buying -- I understand people believe that there's built -- which there are, there's more inventory out there, right? So there's folks that say, well you're going to sell 20,000 out of inventory, right? Maybe so, I guess we'll see. It's going to pick up the difference.

Now production's going to be worse, because you're going to eat into the inventory levels that are out there, right, some accelerated inventory levels across -- and I don't feel that we're in that bad a shape from an overall inventory. Of course again, like anything, your inventory, whether you're in good shape or bad shape, depends on what your stock truck sales are, right?

You've got that numerator, denominator, right? You've got inventory and then you've got sales, if sales slow down off the shelf, then obviously, you start looking worse, so you have to balance that act. But as I said from a US retail perspective, somewhere between, you know, in the 210,000 range, and I would take it for sure, maybe a little less right now. Just my feelings. It's just my feelings. And I think we'll just have to see how the year goes.

It's still -- and those used truck values are going to have, you know -- if you are trading a 2012 model last year, and you say you are getting whatever you're getting for it, just X number, they were getting 45 or 50 and you're getting $6,000 or $8,000 less. 12 months later for a 2013 model, it makes it harder to trade, right, because you got to meet that balance sheet. In other words, you've got on that sheet, right, you know, where you depreciate your product to.

So that's just going to be some of the headwinds that we faced, and there's still supply out there. I'm not trying -- it's like I'm saying doom and gloom or anything here, but it's going to be a lot tougher. Somebody wants to be an ostrich, they can be an ostrich, but I'm going to be a realist and I've always been a realist for 20 years.

Okay, and then sorry, Rusty, also just on the, sorry, the parts, you know what I mean, like how we're thinking about absorption.

I've got all the time the world to talk. You don't always show up and talk about good quarters, you show up every quarter, right? You know me. So I'm showing up every quarter, good or bad or indifferent, right?

The parts and service business, we saw in the fourth quarter, we did take some margin deterioration as you can see. It was mainly on, and you say parts, but I'm going to speak about it as parts and service because how I report it, right? Remember, because that how I report, parts and service, to you, right?

So the parts area took more, some margin pressure, more discounting, okay? I mean, you know when you get in these types of environments, your customers are going to place a little pressure onto you, right, for what business you did get, and that's just part of this environment.

Look, we did a -- let me step back a minute. I started last year, this phone call last year, 12 months ago today. And I said, you know, we're going to lose $0.50 basically, going into the year, off of $1.96 or something, that's how we're going to start the year. And I thought, you know, we're going to do the best with an oil and gas perspective, right? Well, we hung in there a lot better than I thought, from a parts and service perspective.

We lost all the truck sales, second through fourth quarter. I always said 1,800 units or so -- not just oil and gas, but the tentacles of it. But then, I'm going to get around to your parts and service here, we hung in on the parts and service side. But I want tell you, come October, we started feeling it, very -- because I think what you had was you had budgets that were put in place, that carried through part of all that year -- right as oil was tanking in third quarter of 2014, right? So those budgets were already in place, you had stuff -- projects that continued. Well obviously, those projects ran out, and everyone -- just read everybody's releases in that business, and then trickle-down effect of it. And we really started feeling it in October, and we felt it even again in December.

And when I said we were off 8% to 10%, the majority of that came out of certain reigons. And that was a lot related -- there were certain reigons why, well 20% plus, okay? And that was really felt in the fourth quarter. It came on strong and faster than I anticipated. My fault, I guess.

And we're making, we're working around making those adjustments we started in the fourth quarter, but really got going here in the first, and we'll continue making them through the first quarter, and hope to have everything in place because, as you look forward, yes, we're making cuts.

I've been through this cycle --these kind of times before, so we're doing the right thing, you've just got to make sure you're do the right things. You don't just go out there with a sickle and cut the whole yard. You make sure you're cutting the right expenses and doing the right things, built around what you anticipate the environment to be as you go forward. So Jamie, I'm hoping as I said, we do $2 million gross profit a day in parts and service on a 14 day average. Well, I lost 10%.

Okay.

It's that simple. You can put it at 20 working days in a month, you can see, I'm trying to make some, I've been very open about it. I'm trying to make some very good expense cuts, I'm trying to get back $24 million to $30 million in G&A expense.

And I'm hoping that through some initiatives we've got and also we typically have, once the spring is sprung, should I say, you typically -- your business goes up, okay, once you get out of the winter. You always look forward, so look forward to November through February, right? I say that as jokingly of course.

But typically our business will pick up on the backend, and I'm hoping that, combined with some of that typical seasonality, combined with some initiatives, the initiatives probably a lot will take place in the second half, because we're really installing, working very, very hard in a couple of them. And I don't want to get into sort of the trade secrets, but things we're doing around the organization that we're still going to maintain focus on, but it's a broad view, and I know I'm probably rambling, talking a little more than you want. But I don't mind as I said telling everyone where we're at, understanding where the organization is, and where the organization's headed.

Okay, all right, thank you, that was very helpful.

Brad Delco of Stephens.

Morning, Rusty. Rusty, I think maybe going onto Jamie's question a bit more. So when you think about parts and service, in your comments about being able to offset, is it fair to -- do you think parts and service revenue could be down this year, and you can offset half of that? Or maybe more specifically is there a number that says, we're going to have $20 million of expense savings and these will start to flow through in the second quarter? Anything that sort of could be more specific?

I think that's what I just said anyway, Brad. As I said, I'm shooting for somewhere in the mid 20s, somewhere in that range, overall. When I say it's probably going to be 20 not 24, 25, it's not going to get started -- you know, there's things you have to do. It's broad. You go through every bit of the organization, organization's is a little larger than it was last time I went through this, really, even though you shouldn't manage like that all the time.

At the same time, it really should start to flow, that part should flow through mostly in Q2. Q1, as you know I've got a lot of comp cost and a lot of taxes and a lot of other things, you can always look back to Q1 historically, it's not just this year, so we get hit with a lot, it evens out for the rest of the year. But yes, we're doing, we're diligently working on that.

But at the same time, you're not always going to save your way to total greatness. You've got to make sure to make some of that revenue back. So we are focused on that side of it too, right? It's a double-edged sword.

But to answer your question, is parts and service going to be off from a top line perspective in 2016? I don't think there's any question. Okay? Now, can I offset that? Or some of it? I'm planning on it, okay? I mean if, as I said, if you're off $4, if I get, right now, if I get $2 of it back from the gross profit perspective, and $2 from the expense perspective, I at least try to balance that. Right? And that's how you have to approach this type of environment.

No, that makes sense. And then in terms of the value of inventory, just wanted to be clear that this was related to, was it both new and used, and nothing related to your leased portfolio?

No, this was just new and used inventories, nothing related, no, no. I'm very comfortable with our leased portfolio. For 20 years I've been public, speak to that. We've never, when it comes to our leased portfolio, there has never been a year that we had a loss [a gain] on sales. I may have broke even one year, but I've never had a year were I have lost a gain on sale. So we typically run our depreciation schedules very conservatively and all of that.

Yes, I knew your record on that. I just wanted to make sure that we didn't break that record.

No, no, no, nothing like that. The strictly inventories are mainly weighted towards the used [type]. Okay?

And then, Rusty, or maybe this question is more appropriate for Steve, you kind of have a countercyclical cash flow model. Obviously, when your inventory levels start falling, they're off a decent amount of cash, and your floor plan sort of comes down with it. When do you think we'll start to see that play out, if we are going to be in this prolonged, call it, weaker demand environment?

Brad, I'm not sure (multiple speakers) following, I mean, truck sales up and down, those are from an inventory stocking standpoint. That's a cash neutral equation, because before everything going up or going down, it's just the incremental gross profit that falls to the bottom line. So actually you're going to cash flow better if you sell more trucks.

I mean, I guess maybe, I was looking at it just from where your debt levels are. I know how you look at adjusted debt levels, but they were up relative to declining truck sales, and so I guess that may be a concern for some investors. So I guess, how should we think about your debt levels relative to your inventory levels, and when might we see both of those sort of go down in tandem?

Depending on what happens with the truck market, if it's off 20%, you will see our inventory levels adjust accordingly. But again, we floor close to 100% of our inventory balance, so that will go down.

There were some other debt items that happened in the quarter, we did finance some real estate. So maybe you're lumping that in. We finance some existing real estate, and we bought a property and financed it, so we added about $40 million towards the real estate debt in the quarter, and that might be what you're seeing in your numbers.

I think that's probably what threw me off, then. And then maybe just last, Steve, can you give us the gross margins by truck segment?

Yes. It was 6% on Class 8, 6.6 % medium duty, 6.1% light duty, 3.8% on used.

And that's where you took the hit on the write-off?

That's correct.

That is correct.

All right, guys, thank you so much for the time.

Neil Frohnapple of Longbow Research.

Hi, good morning, gentlemen. Just a quick follow up to Brad's question on the leasing business, and I know you talked on the profitability side. But would you expect leasing gross margins to pick up in Q1? And I guess just a quick follow up. This business delivered another strong quarter of revenue growth in Q4, so just curious on what your expectations are for sales within the leasing business, in light of the overall market weakness.

Right. Well, first off I expected our margins, as I said on the last call, to be up in Q4 and only about 11.5%. I wasn't real pleased with that. I do believe that we will get back to more historical margins, you know, probably in the 14, in the low teen range, right? That's what I was counting on for Q4 but we didn't quite get there, it's just taking a little longer.

But as I took a quick cursory glance at the January numbers, we are getting there, okay? So hopefully that's indicative of what we will see, okay, as we go forward. From an overall revenue growth, we're budgeted out at 8% in the leasing division next year, with back to more normalized margins.

So 2015 was not a good year for us in the leasing business, compared to some of our historical results. I expect 2016 to get back in line with more of our historical results in the leasing business. And be something to the good for us next year, okay?

Okay, that's great to hear. And then Rusty, what's your expectation for Class 8 truck sales in Q1? Really just trying to understand the outlook given some of the share shifts that can occur quarter to quarter.

Well, I haven't really looked at the, for Q1. Our anticipated is probably, you know, we're going to be a little softer than we were in Q4. Now, you know I'm going to say 10%, 15%, temper a bit, somewhere in that range from our deliveries.

I would expect, I'm not sure about the market though, I really haven't studied the market from the quarterly perspective. I would expect it to start slowing down. Whether it's -- you know it's going to -- I don't look for it to be a rising environment as we go through the year would be my comment, okay?

If we started one number, I don't expect that number to start bouncing upward as we go through the year, based upon what we've been seeing from an order intake perspective, and a cancellation rate perspective, and the only thing that I said some people, it'll be how much they [able to weigh] overall around the country in inventories, really.

Okay, that's helpful. And just one final one, on the medium duty market, I think you mentioned stable demand throughout the year, and component supplier yesterday was talking about maybe some excess medium duty inventory in the channel, not as high as the Class 8 side, but just any thoughts you can provide on that market in general? Do you anticipate maybe some modest growth?

We feel, as I've said, pretty flat to maybe slight growth, based upon where we're sitting right now, our backlog, and I don't feel bad about our inventory. So there could be some more broadly based, little more inventory in some areas, for maybe some particular brand, per se. I'm not going to say all brands. So I don't believe that to be the case right now, where we're sitting at, and I hope that holds true as we continue throughout the year.

But you know as I said, medium duty we feel good about, leasing we feel that we'll get back, that's a plus for us going in 2016. Medium duty at least flat, if not up a little bit, we'll see. It's still early in the year, it's just February. There's a lot can happen, it's an election year, so who knows.

So I would tell you, but you know, the medium duty business is always, I always tell folks, it's tied a little bit more to the general economy, right? You've got big leasing companies, and you've got the general economy, those are your two big drivers. And so medium duty doesn't accelerate as fast as Class 8 did early in the cycle. It always tends to run a little bit longer at the end. So I think that's really where we are at, and so we feel good about the medium duty business and the leasing business going into the year.

All right, thanks, that's very helpful, thanks for the time, Rusty.

Brian Sponheimer of Gabelli & Company.

Hi, good morning, guys. I guess from an opportunities perspective, what's your sense in the M&A market out there, Rusty, and the potential to continue to add to your footprint, given some concerns for broader weakness?

Well the M&A market, I haven't seen a lot, I haven't really seen it yet. But I would anticipate as we get further into the year that it will, there will be phone calls being made around. It always happens when you, when after you hit a peak and start going the other direction a little bit. I would anticipate -- I really the last quarter, to be honest with you, the last three months I've been focused on our sales as much as I have anything.

But, because it's what we've had to deal with here, but I would anticipate that there would be opportunities that would present themselves as we get further into the year. And we plan on being in position, both from an operational perspective, and from a balance sheet perspective, to take advantage of something if it makes sense for us as we get into the year.

All right, I appreciate that. And then just talk about customer assessments of what Navistar has rolling out now, given how big that is, how important that is in your own footprint.

Sure. The customer, the product is good, okay, there's nothing wrong with the product. It continues to be the same issue we've had -- you know you feel like you're beating a dead horse, right? It doesn't go away and that's the overhang of used trucks, right? Remember, we're only three years past the last, when they [started to] put Cummins into the product, right? Three years since they switch from just strictly a 13 liter platform with MaxxForce, to a Cummins engine, was three years ago past January, last month.

So typically, it's probably we've got another 12, 18 months of overhang on the used truck values, till they get down on the customer's balance sheets to where at least there's someone -- you can navigate them somewhat, because the total dollar on there is not so large and the gap between actuals, actual real value, and what it is on the balance sheet is there.

The products, though, no problem with the products. I think we saw their medium duty product, got them lined up and actually had some gain I think in share last year, slight gain, share, medium duty share last year, which was a positive which is a good thing, right, it's been hard to find that silver lining for a while.

Secondly, the Class 8 truck, they just announced last week, they just finally got back into the construction business, when I say that, the heavy duty construction, the mixer business, the dump truck business, that type of business, they didn't even have a product, right, that would fit into that marketplace, so that was the first new truck that they had put out in forever. I say that ever since all this, the engine debacle we've had to deal with.

So those are good points. But it's not an add water and stir business, right? It takes work and it takes time and it takes working through, more than anything the used truck overhang. As far as a product -- I got no -- there's really no issues with the product out there right now. It's just still the same thing we talked about forever and ever, over and over, it's the overhang.

And all I can tell you, I keep saying, hopefully every day it goes down $2 on somebody's balance sheet theoretically, and goes down $1 at street level. And you continue to close that gap from a valuation perspective to what it is on book. And then you've got to go win back the customers, right, because you've got to win back their confidence. And I know we're working at it very hard, and I know the OEM is also.

All right, thank you, guys.

Joel Tiss of Bank of Montreal.

Hi guys, how's it going? Is there any way to tell if you're losing market share in parts, or gaining market share?

Well, there is, on an overall basis, I mean I know where we were hit. Mine was pretty, real specific, in the fourth quarter. I can look at the regions, and most regions, and I look out West, I looked at the southeast, if I look to Florida, I looked at Georgia, I'm not losing share, I'm not losing share in Tennessee.

I mean when I say that, I mean I can look at my year-over-year from a seasonal perspective where I'm at, you know the parts business supposedly was about $26.5 billion last year. I know we're about 4% of it, okay?

But what happened is we lost a specific large amount in the energy sector, and Texas and Oklahoma and though somewheres of Colorado. So there's a way to see what you are putting your sales against the overall, what is your total parts business is. But ours was region specific where we took the hits, man.

By the way, those are annual reports. You don't get anything like on a monthly or a quarterly report to look at, to see how it trends, right? There's no, I don't know of any reports that give you that. There's no one that gets, that dives that deep, because that's something they have to, I don't think the tools are out there to get it on that type of basis, Joel, but you want to get an annual number, right?

Yes, probably be meaningless on a monthly or weekly basis anyway.

You're right about that I would agree with you wholeheartedly. But no, I mean, look, the effects of where we're at, I've got more stores in Texas than I do any place, and in Oklahoma. Because I told my folks, we do a great job and we're going to offset it, we're going to do some great -- we've got some great things going on for the future. It's just it seems like all the arrows came out of the quiver in Q4, to be honest with you, and were headed our way. And we're going to make the adjustments, we've been doing this for a long time, and we'll get better.

We had parts of the country that were up. And we still have parts of the country that were up. I can tell you -- you know January, from a parts and service perspective, started trending slightly up and I'm not ready to buy it yet, okay? I've got to see a little longer. I've got to see a couple, three months strung together here, from a trend perspective.

You have to make that adjustment inside your dealerships, you know, these customers all of a sudden go away totally, you have to make adjustments. That doesn't mean there's other not other business go out there and capture, because sometimes you're [at a] capacity issue too. So it's a refocusing, and it's going after maybe other types of business, and we've done it in the past, and we'll do it again.

And then with all your years of experience, all the cycles you've seen, is this sort of supply-demand imbalance likely to work itself out in 2016? Are we going to have kind of a hard adjustment but then we'd get back into balance, or you think it's going to bleed over into 2017?

First off, from an oil and gas perspective, I'm not going to say anything good about 2017 yet either. But when I look at the overall market, let's talk about that because that's where we're really focused right now, because oil and gas is where it's at. And I don't think anybody sees an end in sight, or going to call this is it right now, here's when it's going to pick back up. Overall I think that we're going to get to some, your first comment, we're going to get a little better balance this year.

And a lot's going to have to do with the economy, right? It's always the biggest driver. I think we had a lot of new truck sales the last couple of years, we, the fleet's about at it's lowest age in 10 years. So you know, I don't see a cliff, Joel, I still don't but I do see a more stable flat run rate of what truck sales will be, I really do, over the next couple of years.

To be honest, if it's 200,000 Class 8 US retail this year in 2016, remember that's the average, guys. So if it was that again in 2017, I'm not going to feel that terrible about it. I am going to feel bad if we don't figure out how to get our parts and service business back up by refocusing on some things we're going on, we will.

From a truck sales perspective, I don't look for any bounce back of 230,000 or 240,000 US retail in 2017. I don't see anything happining that tells me that. I would hope we can just where we end up 2016, if it's in the numbers I'm talking about, I hope we maintain it in 2017. That's what I think.

And then based on all the pieces you're giving us about saving costs and working on the mix and all that, you think you can stay close to flat in 2016 versus 2015 on EPS, or that's just going to be too much?

Joel, Joel, Joel, Joel, you know I never go there. I'll give you some, try to give some macros on it. But I'm not ready to go there right now. I'm ready to see this first quarter, as I think I told some folks when I saw them in December, that let me, give me through March, give me to March and let me see how things are trending. I've got 30 days or one month into this plus ten days in February already.

And I need to see certain parts of the country and how they're coming back. I'm not ready to call the year yet, to be honest with you. Because we're in a transition. I'm in that transitionary moment. It's hard to say exactly where everything lights, both from a revenue perspective and from an expense perspective. Just because you run through the place one time and you squeeze it down, doesn't mean you don't run back through it twice. So let me work the year, that's all I can ask.

All right, well thanks very much for being so generous with your time.

Bill Armstrong of CL King & Associates.

Good morning, gentlemen. With inventory write-down I know most of it was used but you had some new there. Could you just talk about that? Was that maybe some order cancellations, or what was going on there with the new truck write-downs?

No, just as we came into a new year, a new year model, we reviewed our stock inventory and made a few adjustments. Okay? It was just normal. Most of the abnormal was more used right now, okay? We started the new year model. Remember the truck business, when you start January 1st of 2016, you're starting to build 2017 models. I would say one year, maybe we just skip a year so we can get back to normal -- for the year it is, right? But, no, Bill, that's nothing really out of norm there. It's really the used, where they're focused are, on the used. And hopefully we caught it all.

We did take our inventory levels down in used, I was happy about that. But because you have to be able, I have to be able to continue to trade for trucks, and just keep a very, very close eye on valuation. Sometimes in the truck business what people don't understand about used inventory is the fact that when used inventory drop valuations, you've already got them on the ground, and you may already be doing a deal with the customer to where you've got a six-month run of trucks coming in trade, that you've already committed to a price.

So sometimes you're doing deals you know that really aren't good. Right? But you made that commitment out there, and given the size of this industry, and how it's a small industry, you start backing up on your commitments, and you're not long for the world. And that's something I've never really -- I want to be long for the world and not short for the world, so when it comes to a business perspective and your credibility -- so you've made those commitments, and you have to stick with them, because what will happen is used truck values just dropped, right? And you've got commitments out there, and then you've also got inventory, and so you have to make adjustments on your inventory, and then suck it up on your commitments.

Fortunately I don't feel bad about any long, big commitments that we have out there right now, that are [out around] going forward, so hopefully we're able to manage our inventory to where the market is at the time as we go forward. Look, we were very blessed as an industry for the last three years from used truck. I had the best used truck margins I've ever had in the last three years and this is just the other side of that coin.

Got it. And then just back to SG&A, there weren't any non-recurring or unusual items in the fourth quarter, were there?

No, not outside of write-down and that was obviously, that wasn't SG&A. [No, actually] so G&A you can start to see some -- [I'll]split it -- there is S and there's G&A. When you look at G&A it wasn't terrible in the quarter, you can start to see some, a slight decrease in it but not to where it needed to be to catch up. It wasn't 10 points, which is where my parts and service business went, okay?

So we're going to work harder on G&A, and we're going to work harder on the revenue piece, and shifting our focus and raising our revenue and gross profit parts and service and other areas, okay? And that's what we're going as I've stated three or four times here on the call. That's the focus, but no, to answer your question, no, there was none, no, not a re-occurring thing.

(Inaudible) And I wasn't quite clear earlier, I know you got a seasonal increase in G&A in the first quarter, correct? And you're still working on reductions. What sort of run rate should we be looking at, you know, after all the dust settles, as we move forward through the year?

Oh boy, Steve, you want to -- I know where I want to be, I'm still working through it here in Q1. That said, I don't just take a sickle and walk through the yard. I've got to cut were cuts need to be made, and we've been spending countless hours across this company making those adjustments, and are still making those adjustments; so they should fully be in effect by Q2. You'll see them start taking effect in Q1. Steve, I mean, from a run rate, I mean, as I said I look at it like I was trying to take -- from an annualized -- if I had them all done where I hope everything could be by the end of Q1, it would be an annualized G&A. Remember, you got to strip S out, that's hard for you guys to do; but strip S. I'm looking for G&A to go out about $24 million on an annualized run rate. That's truly what I've told my organization I want done. So that's a couple million dollars a month out of G&A, right, on annualized run rate. So, that's the focus of the company. Actually I've got it a little higher for them, hoping to [lie] in that number so but that's not hard to manage.

So you mean an annualized reduction of $24 million?

Yes, an annualized -- from the G&A, okay? S is going to go with truck sales. I'm not going to, that's going to be a variable cost, it's going to be a percentage of truck gross profit, so that's always going to move with the truck sales market.

But on an annualized run rate of about around $24 million annualized run rate's what our goal is, inside the company, because right now if you look at where I was at when I talk about parts and service gross profit, you know -- it's off 8% to 10% which is 48 some-odd million. And I'm going to give some it that back, because I'm planning on that coming back.

The fourth quarter was just a very, it was a transitionary quarter. I mean you know these stores, and all of a sudden that business dropped on them like overnight, they can't go replace it now. I trust in the competitiveness, in the quality of people I have in the organization. We'll get some of it back somewhere, trust me, okay? But you can't do it overnight.

And it has be then to replace it you have to combine expense cutting with refocusing in maybe some other areas. The truck business is not just the oil and gas business, it's just not the construction business, it's just not the refuse business, it's all the above. The over road business. So sometimes maybe you've got to refocus your efforts, but you don't do that over a cup of coffee one morning. You do that with a focused purpose about what you're going after what you're doing and you're just going to have to trust that we've done this a few times.

That makes sense, thanks very much for that color.

Art Hatfield of Raymond James.

Hi, morning, everyone. When we look at fourth quarter market share numbers, is that kind of the right number to think about for a run rate for 2016, or do we see (multiple speakers) deterioration?

No. Look, I would hope that it's going to be, I don't see any further, no. [6,1] for Class 8, we better not get lower than that, okay? I would look at that as a bottom, you know, somewhere between there and 7.

Okay.

Look, last year in Q4 I think I hit 8, I said guys, that's not real, okay?

No, understandable.

But you know, given, because remember, I'm still dealing with the headwinds of Navistar. One day I'm going to get that bump, I know it. And I just haven't gotten it yet, right? So as we keep working over those used truck hangovers. But you know, I would say that should be a trough number for fourth quarter. If not, I'm looking across the table right now at the guy who runs all the heavy duty truck sales, I'll be after him.

Okay, well if you do, could you videotape that for us, we would appreciate that.

You got it, Artie.

Okay. Hey, and I probably calculated this wrong, because I'm not able to strip out parts inventory, but just on the back of the envelope I'm calculating about 120 days worth of truck inventory on the lot. Is that, tell me that, that number is wrong?

Well what you've got, Artie, remember, in inventory you've got a blend of stuff that's already getting ready for delivery, and stuff that's in inventory. So when I tell you 120 days, if that's everything that's on there, that's probably, I don't have that number front of me right now, I'll be honest. I mean, I would be remiss, even. If I don't know, I'm going to tell you right off the top of my head, I don't have that number (inaudible) before I got on here.

Well let me ask you this. Not knowing that number and whether or not that number is right, can you tell me, do you manage to a certain range of days that you want in inventory, or is that not the right way to think about it

There's no question, Artie. 120 from a soft perspective is not bad.

Okay.

I sometimes run anywhere between three and six months, or four and six months. That's the true stock. Okay? That's true stock. And then you've got to look at new and used and you've got to split that apart too, still.

Okay.

And a lot of it also has to do depending on -- there are not long lead times right now, but a lot has to do with lead times, right? So when you get lead times out there, which I'm trying to stock a little more inventory.

Got it.

The easiest way for me to tell you is I don't feel bad about our new truck inventory right now. As I said, our used truck inventory is down probably 400 or 500 units from where we started Q4. Now I think looking forward, we will probably have to go up 200 to 300, but as long as I can keep somewhere between 2,000 as long as the sales levels are there, right? January was -- I'll be honest, was not a good used truck sales overall absolute number. But we're seeing the first ten days of February is picking up some. So, but that's ten days. It's hard for me to trend everything off of 30, 40 days. And I'll promise you something that I might say: okay back ends are up a little bit right? So back end has picked up maybe they picked up two or three points from where they were running in December and January on a per day, but I'm not ready to call that a total trend yet. I'm hoping. I'm hoping that people are working like I talk about and brag on them and we're getting that done. But I don't feel bad about my truck inventories right now, I'll be honest with you. So hopefully we'll be able to manage that through the year.

That commentary is very helpful. I just want to clarify something too, just to make sure I understood you right. When you're talking about the kind of mid-20s roughly G&A savings, that is something you're working on now and you'll hit that run rate at a later point. You don't expect to see that fully in the first quarter?

No, sir. I do not expect to see that in the first quarter. The first quarter's always difficult to expense, you can go back late history, it always is for us. Given what we get expensed out and everything just from a seasonal perspective.

But at the same rate, I can tell you we're gaining on that expense cutting number as we speak and will continue to gain on it and it better all be in place by the end of March; and I would hope that we will see the effects of it, the full effects of it, some time in the second quarter. Some time in the second quarter. If not, I'm not doing my job, okay?

Fair enough, I appreciate that, I just wanted to make sure I understood right and I think I did. Last two quick questions. Rusty, you've been through so many of these cycles and one of the things I want to get your thoughts on is on the energy side. Clearly in the past, there has been consolidation in that market as the cycle is troughed out and we may see that going forward, whether it's through bankruptcy/liquidations or acquisitions.

How do you manage your customer base in that environment if you've got a customer that's in trouble and goes away? Have you been able to pick up business from the acquiror in the past? I'd just like to get your thoughts on how you've dealt with the energy industry consolidation through cycles.

There's always a lot more losers than there are winners. Okay? Is not an equal one-for-one ratio in this field. Because the winners will be the big ones, right? There will be three or four losers and you get one winner out of the deal because he had the staying power, the balance sheet, and the wherewithal to do it because the other ones were riding on the rim.

They were leveraged up too much or whatever. That is going on as we speak. You will have opportunities, sometimes where people will defleet. We saw it a couple of times late in the year, during the middle, third and fourth quarter last year, where we went and helped out and helped the customer defleet. The problem is they had to be able to take that hit, right?

I'm not going to take them out and take losses on it. We will help. The best thing you can do is be a good partner to those that are going to survive, so that when it does come back, they will remember you. And we've always done a pretty good job of that and that's why we're pretty decent at it when it comes to -- when the oil business is going, but as I said, we always do a really nice job of it when it's going good. And we have to be there to support our customers that are going to survive in the downturn and we will.

I don't see any, because of all my receivables, I don't carry this and that and the other, I don't have any balance sheet risk. I'm not financing trucks, I'm not the one carrying. There's no balance sheet risk to us in this. The most important thing we can do is be there for those that survive and try to help the ones maybe that, if they need to defleet, bumps some cash if they can and not break their covenants and go broke. We will be there for them. We're just a phone call away, and that goes for any customer in any industry we're in.

Okay and I didn't imply that you had balance sheet risk, I was more thinking about thoughts about maintaining market share, or even maybe opportunities to grow market share.

The problem is they're not purchasing. When there is no CapEx budget, there is no CapEx budget. You can help them on the downside of it if they're having to defleet, if they're having issues here, or if they're needing. And sometimes I think that, it's hard to see, when someone does have to have huge layoffs that we can help with mobile service and things like that where it's variable cost to them or just where they need it and those types of things. So we're out there for that. Where someone has to take his employee count, headcount down, just because he can't afford it, but he does need some services, so we've already seen some of that where we're helping out. The problem is it doesn't offset the downturn of the other departments. But you're there to help out from all those perspectives.

I get that. I guess I'm really poking at then is have you seen in the past in the downturn where you have been helping people, or in essence, ended up created opportunities for customer acquisition when things have turned around in past cycles?

I will let the performance of our organization during the up cycles speak for itself.

Fair enough.

I challenge anyone, we do a heck of a job, excuse me, when it's going right. We just have to manage this side of it and I think I've been through it numerous times on these calls, you watch, we'll refocus on some other things. It's not going to totally replace it, but we're going to replace it with other revenues and other areas and that's a good thing about the truck business, it's just not one segment of the market, you can focus on it and do it. It's a transitionary thing, we've done it before and we will balance that with expense cuts and hopefully we will perform as we go forward.

Thanks. Last question and then I will pass it on, and this is a huge, what if question, and I kind of hate to ask it but--

No you don't. You don't hate to ask it, I can tell by you already asking. Go ahead.

Well, no, it is a what if question and I'm just curious, what if Navistar doesn't make it? Have you done any contingency planning on that? Theoretically, how would that affect the business or what would you have to do if they don't survive?

I don't think you're just going to shut down and go away. If that happened, I guess you tell me a good contingency plan for it.

You'd have to hire me for that.

Give me a good plan. Look, if you got to the worst of the worst and I'm not going to start spelling out the B word or anything else, but if that happened, it's not going to just shut down. You know, I think we still all know that they're going to be around. I still believe, remember the reason is because why, one of the greatest barrier to entry in this country is what? It's distribution.

It's the billions of dollars of private investment to create these business distribution service networks and that's why you don't see people coming from both sides of the ocean, either side of the ocean and just showing up who build trucks all over the world, just showing up and selling their trucks here. They can't service it. It's not like buying and selling cars. This is a commercial product that makes a living for someone and puts food on the table for their family and if you can't support it, people don't buy trucks to look pretty and run around town in. It's that simple.

So the most valuable piece they have is, the most valuable thing that goes with that organization is their distribution network. Pure and simple. So that distribution network will not disappear I don't believe, because there are other people that would like to be in this country. If something ever happened and I don't expect anything to happen.

I am confident that they will maintain, I'm confident with where they're at from a debt perspective long-term. That they will continue to maintain. I don't believe that's going to happen, I believe they will continue to maintain where they're at now and I believe once we get through this overhang of used trucks that they will get back into their rightful spot.

Just a quick question on that, given where the share price is, maybe something has happened privately we haven't heard, but why do you think nobody's made a public run at this thing? Given what --

Now you're asking me to get deep into my regular things I know and where I'm at and I'm not going there, Artie. Okay? Do not discount the viability of the Navistar brand going forward. I realize what it looks like to someone on the outside, but that distribution network, that brand is going to make it long-term and I believe that.

I agree with you. I just kind of wanted your thoughts.

No conjecture on my part, though.

Thank you.

Our next question comes from Tim Robinson of Susquehanna, your line is open.

Hi guys, good morning. I was wondering if you could talk about how new truck pricing performed in the quarter and maybe give us the expectations for 2016?

Sure. I think we were down about $4,000 year over year, were we not, Steve? Let me get the sheet here. I think we were down, but a lot of it had to do with mix. I was still selling a lot of oilfield business with bodies and we were rigging stuff up, and doing all kinds of work. Are you talking about pricing from OEM? I thought you were talking about pricing where we were, our sales.

Yes, for you, trying to think about how apples to apples pricing performed.

I know we were down. I'm trying to look up the number here for you. I just knew it was down. That was a mix issue, it was more over the road freight business, fleet trucks, and less specialty trucks. It always comes to be in a mix. What have we got Steve? I was right, $4,000. I thought I remembered reading that. There's a lot of numbers I read through before these. It's $4,000, I looked it up, and we were down year-over-year $4,000 in the quarter. I thought that's what I remembered and we were. But that was strictly a mix issue. I'm not going to say it's a pricing or anything to do with OEMs or anything like that, it's only a mix issue.

Okay and then as we go into 2016, presumably energy?

Probably in line with where I was in the Q4 for the fourth quarter. I would imagine folks will do like they typically do and try to get a little increase at the first of the year, but I imagine the market will dictate whether it holds or not and I would expect it to be similar to what Q4 was.

Okay. And then when you said that you hope to manage new truck inventories in the year, I guess are you meaning that absolute inventory levels are going to come down with lower sales or do you think that inventory days are probably at the high end of your range and that maybe those will come down too?

When I look strictly at my stock inventory, I have what we call in process and deliveries trucks, which are a lot of what we have, even more than what our true inventory is. Most of the trucks you see that we have there in our floor plan or in our balance sheet, most of those are spoken for. They are either getting bodies put on them, they're getting this done or having that done. Those are sold trucks.

There is a piece of that that is true stock inventory. Remember, 80% or better of what we sell is ordered for specific customers, sometimes people lose sight of that. 80% of what we sell is for a specific customer. And so, we already ordered that way. Medium duty we stock more that are ready for sale. Medium duty we stock more, sales come out of medium duty than they do heavy duty out of stock. When I say 80%, I'm speaking about Class 8, but say 20% of our Class 8 are truly out of stock.

We would manage our true stock inventory to what we see the market trending. The problem is you're watching trend lines and behind in your mirror because you're already going through those months, but we will try to anticipate where the markets are as we go forward to the best of our abilities. From a true inventory perspective, as I said earlier, I feel fairly comfortable as to where we are at right now. Sometimes, what you see, what you believe is inventory, I like to see it higher because that means I've got more trucks in the process of delivery, which means I'll be cashing more. Again where 80% of your heavy-duty trucks are ordered for a specific customer, you don't want that to be down too low.

And I apologize if I missed this, but could you talk about your expectation for the non-energy component of parts and services in 2016?

To pick it up and do a better job. That's been the big focus. Most of the country, a little spot here or there, but the majority of all that, that we lost in Q4 was in the energy sector. There's a couple spots that were hurting a little bit, but the majority of it, 75% of the downturn in parts and service in Q4 was in the energy-related.

We expect the other part to be up. Our goal, especially with the focus in those areas, is going to shift towards rising our other piece, our other market segments, whether it be construction, refuse, over the road, medium duty customers, any of that, we're going to focus some of those efforts that had been focused towards the oil and gas areas in those parts of the country towards that. We've always been fairly successful with that. We will continue.

The one thing for sure is that Navistar network is still very new. So we've got a lot of things that we do on the other side of the house that we continue to implement on that side of the house and get better at over on that side. So I still think there's a lot of good upside left in that as we continue to integrate all of those acquisitions into our culture going forward.

I don't have a number for you as to what it will go up, but it's not going to go up enough to offset all energy loss, but it will offset some of the energy loss.

Got it. That's it for me. Thank you very much for your time guys and best of luck this year.

Our next question comes from Todd Maiden of RBC Capital Markets, your line is open.

Hi guys. So we talked about 1Q 2016 being down sequentially 10% to 15%, probably another step down in Q2, this is on Class 8s. And then are you thinking maybe level from another step down in Q2 and maybe you get a little bit of help, a little seasonality, in the back half? Is that how you're looking at the year right now? I know it's early.

I'm not ready for Q2 to be off of Q1 yet, to be honest with you.

Okay.

I'm looking for those two quarters to be flat and yes, if I was going to look right now having booked all the business, I'm hoping we would pick some business up in Q3 and Q4 and some of those deliveries and some fleet deals we're working on might come together and we might pick up some deliveries in Q3 and Q4. Right now, if you look at my overall year, and if I say the markets off 20%, then we're probably going to be off 22%, right at that same number, but that puts you in that $16,000 some odd last year. You knock out somewhere in the 15% to 20% range right now, unless I can still sell into it as I always tell everybody. I could get fortunate and we could sell into it and do a better job creating some opportunities. We're working at it.

So right now you're thinking 15% to 20% off year over year?

Yes, I would say that, that's where I'm going to range it.

Okay. All right. And then the fall-off in 4Q year over year in Class 8s, between the Navistar and PACCAR dealerships, did anyone bear the brunt of that more than the other?

Give me a minute here to look, hold on. What have we got, Steve? Yes, if you look percentage-wise, it was off about 25% on the Peterbilt side and on the Navistar side it was probably off more like about 35% in Class 8. But there's more volume on the Peterbilt side so that blended to 28%.

Okay, perfect thank you.

Our next question comes from Bryan Lee, Private Management Group Inc. Your line is open.

Hi Rusty, thanks for taking the question. Obviously, real positive comments on the Navistar side, but at the same time, you're still seeing another, say 12 to 18 months of over hang there. With that being said and a good new product out there with an underappreciated distribution network, do you see them finally taking share on the Class 8 side this year? And then second question is, obviously larger fleet guys are done adding to the fleet so it will probably be around flattish, but what are you hearing from your smaller independent customers and then if you could remind us what percentage of truck sales come from the smaller independent guys?

Okay. Well. I mean Navistar will continue to work itself out, when it comes to taking share, they might have a point or so in them, but I'm not looking for any five point rise. But it would be best if they did hopefully show up with a point or so. It's really important that they get back medium duty share as much as anything. Their growth in the medium duty and also maintain a nice growth on the bus side, getting back on that will be important to their overall profitability of their organization or managing where they're at.

What was the next question? I'm going to tell you that I would look for most of it, they're all feeling the same pinch right now. I will be honest with you. I'm seeing a little bit softer stock truck sales, a little bit softer ordering from the smaller fleets just like I am from larger. That number you saw come out, like I said, was only $14,800 in the month of January and that included Canada and the US from an order intake perspective, and I think that's pretty broad-based across.

I can't pick on one certain area as to where that is. I would say that hopefully we are working a couple of other larger fleet deals that will help us out later towards the latter part of the year. But right now, they're not booked or anything, to be honest with you. There's pockets, right? There's always some pockets across the country that are better than others. I've got certain areas of the country that are better than others.

Florida is in good shape. You look over across there, the West Coast is decent. When it comes to true order intake right now, it's this part of the country I'm talking from is feeling the biggest effects of it. As I said, I'm trying to give what I hoped a number of what will be for the year earlier and hope we can do better, but that's where I'm at.

Okay great, thank you.

There are no other questions at this time, I would like to turn the call back over to Rusty Rush for any closing remarks.

Okay folks, we appreciate your time and we look forward to talking to everyone in April with our first quarter results. Thank you all very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect.