Rush Enterprises Inc (RUSHB) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Rush Enterprises, Inc., third-quarter 2016 earnings results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Rusty Rush, Chairman, CEO and President.

Good morning, everyone, and welcome to our third-quarter 2016 earnings release conference call. On the call today are Marty Naegelin, Senior Vice President; Steve Keller, Senior Vice President and Chief Financial Officer; Jay Hazelwood, Vice President and Controller; Derrek Weaver, Senior Vice President, General Counsel, and Secretary; and Mike McRoberts, Senior Vice President and Chief Operating Officer.

Now Steve will say a few more 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, 2015, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved revenue of $1.1 billion and net income of $14.9 million, or $0.37 per diluted share. As we anticipated, our financial performance this quarter was negatively impacted by a sluggish energy sector, choppy freight environment, excess Class 8 vehicle capacity, and low used truck values.

We are seeing positive results from our expense reductions implemented in the first half of the year, and we will remain diligent in managing costs throughout our organization. Additionally, we continue to invest in our long-term strategic initiatives, including our all-makes parts and service technologies.

In the aftermarket, our parts, service, and body shop revenues were $336 million, and our absorption ratio was 112.6%. Continued softness in the energy sector, as well as the consolidation of several of our truck centers earlier this year, adversely affected our parts and service revenues. But we are seeing increased aftermarket activity on both coasts due to housing and road construction. We expect our aftermarket business in the fourth quarter will remain fairly consistent with our third-quarter results, after factoring in normal seasonal decline.

We remain focused on our all-makes parts and service technology initiatives. And while we are still in the early stages, the market is responding positively. We expect to see more significant financial results from these initiatives next year.

Turning to truck sales, both Rush and the industry US Class 8 retail sales experienced a decline of approximately 31% compared to the third quarter of 2015. Our Class 8 truck sales accounted for 6.5% of the total US Class 8 market. A choppy freight environment and general economic uncertainty, combined with an oversupply of used trucks and low residual values, continued to create challenges for Class 8 new and used truck sales.

We believe our used truck inventory is positioned appropriately to meet the current market environment, but expect used truck margins to remain below historical averages. ACT Research currently forecasts US Class 8 retail sales to reach 201,000 units by year-end 2016, down 20.5% as compared to last year. Given market headwinds, we expect Class 8 new truck sales could decrease more than ACT's current forecast this year, and our Class 8 new truck sales in the fourth quarter could be down slightly as compared to the third quarter this year.

For 2017, ACT Research currently forecasts US Class 8 sales of 154,000 units, down 23% compared to this year. We believe this forecast to be accurate. However, construction and refuse activity remains solid, and we continue to aggressively pursue incremental Class 8 truck sales from new customers, despite tough market conditions.

In medium-duty, our Class 4 through 7 new truck sales reached 2,469 units in the quarter, down 14% over 2015. The US medium-duty market remained flat over the same period. Rush's Class 4 through 7 new truck sales accounted for 4.4% of the total US market. Our medium-duty results were impacted by the timing of several deliveries and an increasingly competitive market. However, our medium-duty truck sales remained solid, especially with the construction-related demand, particularly in Texas and at the Southeast. Our ability to stock bodied-up trucks allows us to meet a wide range of customers and immediate needs across the country.

ACT Research currently forecasts US Class 4 through 7 retail sales to be 231,400 units in 2016 and 233,100 units in 2017. We expect our Class 4 through 7 truck sales in the fourth quarter to be consistent with our third-quarter results.

In closing, I would like to thank our employees for their continued dedication to our customers, while carefully managing expenses. Their efforts are sincerely appreciated as we continue to work through tough market conditions this year.

With that, I'll take your questions.

(Operator Instructions) Neil Frohnapple, Longbow Research.

Congrats on a great quarter. Rusty, just to clarify on the expectation for parts, service, and body shop sales in the fourth quarter, so you're expecting sales to be fairly consistent with the $336 million in revenue despite the fewer working days and normal seasonally lower activity?

Well, I think what we were trying to imply, that there's typically a little bit of seasonality, as you know, downtick in there. I think it will remain flat with fewer working days, so it will probably be less as a total when you look at the overall total, Neil.

Okay, got it.

You are affected by the holidays.

Right, right. Okay. And then, Rusty, can you just help us frame the parts, service, and body shop revenue outlook as we move into next year? Obviously, the portion of aftermarket tied to new truck sales will likely be down, but then you have the initiatives in 2017 around all-makes parts, and I'm guessing energy might be a little less of a drag, maybe a positive versus this year.

So, considering all that, and I know it may be too early, but do you think aftermarket could return to revenue growth again in 2017?

No question. I mean, that's the plan, right, as we go forward. Obviously you're dealing with the market, right? And everybody likes to predict what the markets are going to be. But given the initiatives that we've really been working really hard on since Q1 of this year, but with a lot of behind-the-scenes work that doesn't -- is not reflected currently in the numbers, because there's a lot of work that goes into some of these strategic initiatives that we've embarked upon. The plan would definitely be for an uptick in parts and service.

And again, while I'm not sitting here and telling you there's going to be any oil and gas, I would expect that we have hit the bottom. I think we hit bottom about April, you know? And I would come if there's any pickup whatsoever, it will be more than what we've had here the last -- over the last eight, nine months of the year or so.

So I would tell you, given those initiatives, the initiatives we have going, a possible little -- I'm not here to guarantee any oil and gas pickup, but like I said, when you're in a bottom, there's only one way to go, right? So, we definitely are planning on having some growth on the parts and service side of the business next year.

Okay, that's helpful. I'll pass it on. Thanks, guys.

Thank you. I'm not going to get into percentages just yet with you, Neil.

Fair enough, fair enough. Thanks.

Jamie Cook, Credit Suisse.

Congrats on a nice quarter. Rusty, I guess a follow-up question: As we look to 2017, you mentioned on the parts side you think you'll be able to grow your business next year. How do you think about market share opportunities on the new truck side and your ability to outgrow the market for 2017?

And then my second question is, you've done a good job in terms of streamlining costs. Are there any incremental savings that we should expect in 2017 versus 2016?

And then my last question is more of a market question versus a Rush-specific question, in the sense that we've heard a lot of chatter and OEs have come out and said that they are taking production cuts in the fourth quarter. What do you think the risk is that we need incremental production cuts in 2017? Thanks.

You bet. Well, let's start -- where do you want me to start, Jamie? We will start with --

Start with my first one -- 2017, just your ability to outgrow the market on the new truck side, and then also savings, potential incremental savings, 2017 versus 2016.

Well, when it comes to the market, we would expect next year, our goals internally -- no guarantees here, but our goals internally, if the market is supposed to be down 20%, our goals internally are to only going to go down 10%, right? Given that we took a pretty good hit this year, probably -- we took a larger hit on the Class 8 side than the overall market went down this year. And I would like to believe that we can go down half of what the market is overall from a truck sales perspective.

Now, given the --

And which brand is driving that for 2017?

It would be both. It would be both brands. Obviously, and we can talk a little more in a bit about -- Navistar had quite an announcement since we talked last, but it would be across the board.

Okay.

From my perspective -- not either brand leading the way, but both brands going -- doing it equally going forward.

But I would look for us to be able to pick up, not take the hit; we're going to work very hard not to take the hit of the market. Now, that all said, getting trucks right now is sort of like add water and stir, right? If you want a truck, you can get one in a month.

So the backlog is not out there; we all know where the backlogs have gone. And my backlog is actually slightly down, you know? My backlog Class 8 is down about 7%, pretty much flat on the overall -- on the medium-duty side of the business. So our backlog is sequentially down a little bit.

I'm hoping that we can get a few deals; we're on some deals. But I don't think that customers are that pressured to order. When you can get trucks that fast, you know, customers are not that pressured to order because they're worried about leadtimes and things like that. So when you talked about possible incremental cuts -- well, I mean, I'll go first on expenses. We can always take more expenses out, I'm sure, but that will be market driven.

I'm pretty -- if we can maintain the numbers we've got right now, it will be very difficult -- backend numbers -- it would be very difficult for me to take more expense out without cutting service, okay? When I say that, customer service; CSI, our customer service index, would probably take a hit, and I'm not going to let that happen.

So, it's a balancing act. Now, if we did take some reduction, like Q4 of last year was a very difficult quarter from a parts and service perspective. We took a 10% hit or $4 million of gross profit a quarter -- excuse me, a month, rather. So about $12 million a quarter. So we had to make adjustments in this year.

Now, I'm not planning on taking -- we didn't really get the big bounce throughout the year that we typically get, but we managed extremely well. I don't want to see it -- I'm monitoring very, very close there. I just had a call with all the folks last week, reminding them that we cannot take a parts-and-service seasonal per-day average hit. So if we do do that, we'll make adjustments as needed as we go forward. But I'm hoping that we don't have to, because I don't want to dig into those customer service levels.

And at the same time, I will say, we are continuing to spend money towards our initiatives, right? Those initiatives that I talk about from a technology, service-technology perspective and the all-makes parts business. Trust me, we still got the pedal down on the floor on both those initiatives. So regardless of where the market is, we believe those were the right, long-term things to do.

As far as the manufacturers taking, oh, more, you know, as you mentioned, there have been production cuts pretty much across the board. We'll just have to see what the order intake is. If it doesn't get any better, could there be more incremental or intake cuts next year? You bet. I think -- both the manufacturers I represent, from a Class 8 perspective, the two that I'm closest to, I think if ACT's numbers, which, for once, Kenny and I agree, we're both around the same number, that 154,000 US retail number. If we maintain to that level, I don't believe they'll need any more cuts, at least the two that I know.

Okay.

But if it takes a hit, if it takes another 10% hit or something, then there could be cuts, no question.

Sorry, and then one last question, because you brought it up -- I wasn't going to ask you, probably, but you brought it up, so I will. Can you just talk about your view on the Volkswagen/Navistar agreement, what you think that means for Navistar's market share longer term, and just how you think about what engine wins out under that scenario and over what time frame? And I'll get back in queue after that.

Sure, no worries. I don't mind talking about it at all; it's a great thing. I mean, did it mean something immediately? Not really. I can't tie a number to it and what it meant immediately. But as I tell folks, what it did do is take care of the long-term stability of Navistar. Okay? You can see it transitioning over 1the next few years probably with Volkswagen, I would imagine, having a larger stake and be involved in it.

So the most important thing I guess it did is when you walk out and you talk to a customer, your competition with other OEMs, and they say, well, this is going to happen to them and that's going to happen to them, now you can walk out with your chest bumped out and say, look, we're solid, right? We're solid.

And also, from an internal perspective, if I worked at Navistar, I can walk in that office every morning and say, we're solid. From a long-term perspective, it's going to mean a lot, I would think, when you get them back in a better position to be able to handle the engine-emission issues that come forward and have a proprietary engine into the next decade, because as you know, this next decade's wound up with like three engine government deals we've got to deal with in 2021, 2024 and 2027.

So, now, are they going to just -- no, Cummins isn't going to go away. Cummins will maintain a large portion of Navistar's business. And I would believe -- but it will be a balanced act. And I'm not sure how that all works out. But you would have to believe that, yes, Volkswagen will start integrating their engines in 2019, 2020, as they work towards integrating with Navistar and putting the two brands together to get the scale. It takes scale, and that was the one thing that Navistar was missing, was scale to be able to handle all the investments, the R&D investments that are needed going forward.

So, we're very excited about it, right, from a long-term perspective.

Okay, thank you. Congrats on a nice quarter, again.

Matthew Page, Gabelli & Company.

Congratulations. I was wondering if you could describe any differences that you're seeing in buying behavior between the larger and smaller fleets.

Pretty much a broad -- the larger fleets have had to slow down, for sure, right? I think if you go read some of the reports that have come out from some of the public carriers, obviously the biggest -- and this is across the board, though. No one's asked me yet, but I can't go without touching on used trucks.

The biggest overhang is used. I know people are probably having to make some adjustments inside of their depreciation schedules, given the devaluation of used trucks, right, in this part of the cycle. So, I think that's affecting everyone. I think it maybe affected some of the large fleets a little more.

We're still seeing, if anything, a little -- we're seeing still decent activity from the smaller folks. I think it really affected some of the large carriers more, just adjusting their fleets to that. And some people are having to hold their trucks longer, right? Given the fact that the values of used trucks are down, it's just as simple as that.

So, instead of -- if you're typically on, say you're on a four-year cycle, you might have to go to a 54-month cycle or something else, trade cycle, just because it's hard to -- you can't fight the market. And the values are down. There's an oversupply of used trucks right now, my friend. So that's probably the biggest thing, and that affect everybody. But I think it's probably affected some of the fleet even more. I think that's what you've seen in some of the order intake numbers that have come out so far.

But we'll get a better idea of where everything's at over the next three months as we watch -- October typically is the start of order season. I'll be interested to see what the order intake was in October, and break it down a little more once I see it come out here in a few days, so.

All right. And then just to follow up on that, have you seen any changes in content level of trucks that customers are buying?

No, sir. I mean, if anything, it's added content, right? With all the technology that continues to come out, whether it be people are seeing all the technology -- and I'm not a super expert on it -- to help with their insurance and their wrecks and the things like that, I think just the side-avoidance and all the different stuff that's out there on the market and continues to come on the market, right?

Technology is just an amazing thing. And now we are always -- obviously the truck business is always behind the car business about 15 years. Well, let me tell you, we're catching up quickly, I think. And it's better for everyone, right? What I mean that, because it just makes -- whether it's from an engine perspective, whether it's better fuel mileage, better safety. So if products are introduced to the market and they can, say, bring an ROI on them, and there have been products that have been introduced over the last few years, customers will take them, okay? It just has to bring an ROI with it.

Perfect. Well, I appreciate the color, and I'll see you next week.

Brad Delco, Stephens.

Rusty, you made a comment about I guess looking for new customers. I'm assuming that's on the Class 8 side. The reason why I ask, you had pretty strong average selling price in the quarter. I'm assuming that's because of the construction and refuse market. Is that correct?

And then, I guess your assumption for average selling price in the fourth quarter, is that really what's driving the only down slightly -- I don't imagine you have any fleet business in these numbers, right?

Not really. There's some, but not a lot, okay? That's why when you've seen some of the fleets that we didn't have as big a mix of this year, that affects margins, right? Because obviously large customers buy -- when you're buying in volume, you can buy probably at a better price than -- if you're buying 500, you get a better deal than if you're buying five, right?

So, there is some fleet business involved in there in the fourth quarter, but we expect it down. I expect deliveries to be down. When I say slightly, what does slightly mean, right? We could be down a few hundred deliveries, okay?

Okay.

But I think we were up -- because we were up a little bit more, because some of that's just timing, okay? A lot of times, it has to do with timing, too. So when you start talking about moving a few hundred units here this way or that way, it can just -- timing of a couple deals can move it. But I would -- we'll be down -- I would expect us, right now, to be down a few hundred -- a couple-three hundred units or so.

Okay.

But I could be off, too, depending on timing, again. But I think when you look at the backlog, and I'd say the backlog in Class 8 is down 7%, that's sort of indicative, right? So 10% off, 7% to 10%, something like that, you can sort of read that into deliveries.

No, that's great. Thanks, Rusty.

And then Steve, I know each fourth quarter we do see a step-down in SG&A. To the extent you could provide us details on what could be expected this year, could you provide that? And if not, if we don't necessarily see that trend, why would that be the case?

You'll probably see some step-down; that's normal. It depends on how -- we've told you guys, a lot of it is based on some of our internal self-insurance accruals and adjustments and true-ups to their actuarially determined amounts. So, that depends on your experience and your activity in those various insurance programs. That's the largest driver of it.

And the other piece is just some benefits and taxes and things like that, that expire as the year goes on as people reach different earnings amounts. So you should see it, but that number varies from year to year and depends upon the experience you have in those insurance programs.

So I can't tell you the amount; I can tell you that nothing's changed in our process of how we approach those and how we book them from a quarterly flow into our numbers.

No, that's great; that's all I wanted to hear. And then maybe finally, and maybe this is a follow-up to an earlier question, on the used truck market, I mean, that is a big topic, I think there was a comment in the press release about seeing used truck margins sort of below historical norms. Can you kind of define that? How long do you think that's going to happen? And what impact, if any, is this having on your lease and rental business? Have you had to change any sort of residual value expectations or change depreciation in that business?

No. Well, first off, let's talk about -- the answer is no, we haven't. But do we constantly pay attention to it? Yes. Has it cut into gain on sales? No question. Has it put us in a position where we feel things are out around? No, it's just cut into gain on sale, right? From -- we're not getting what we were getting a couple years ago or a year ago, back when we got to the summer of 2015, because that's when used trucks started going down. And as far as margin, we're going to be down a couple of points, I would imagine. I've got to move volume, right? So I would expect used truck margins to be down a couple, 2 to 3 points going forward.

When does that end? I don't have an answer, my friend. I got this answer for you: It's not going to be anytime soon, because we enjoy what I thought was one of the more longer good used truck runs. We ran for almost four years of really good volumes and good margins. That said, there's a lot of trucks laying around, a lot of used trucks, man. And that's not going to go away anytime soon.

The used truck market, I always, I have told all of y'all for a while, it's pretty simple. Just look back and see what was sold. You can't re-create used trucks, okay? Just look back at history, and it's pretty easy to see what was sold and in what years, and to lay it out. And you want to say the over-the-road business, is typical -- that first owner is a four-year owner, which not all are. But you've got to peg a number somewhere. So, is it a four-year owner? Well, let's see: 2013, there was only about -- and that will be what will come back in 2017? That's only 188,000. 2014, it was 227,000 US retail. That would be -- if you say it's four years, that means that's '18 comeback number.

And remember, that's not everybody. Some people run them eight, 10 years, some it's a [peg and a point]. And then the [250 3-year], and it was 2015, we haven't even got close to yet. And there's a lot of used trucks out there. We have had a drying up of export. Export typically, I think, from my perspective, was 25,000, 30,000 units. Well, that may not sound like a lot, but that's a pretty good relief valve.

So when that dries up, which it has, and you just continue to put more pressure on it, there are a lot of folks with used trucks right now. And I don't think they've all been put on the market yet. So I don't see -- and I'm not preaching doom and gloom; I'm just telling you reality here. The reality is, they've got to work their way through the system.

And the reality is, the dynamics and demand for used trucks are less than the supply side. And so, I always tell people -- so does this continue? Well, what happens is, it eventually reaches a point where the values will stop.

We don't have to wait till 2019, trust me, for devaluation of used trucks to stop. It's not going to be that long. But what will happen is, it will reach to where you can buy -- whatever -- you can by three decent used trucks for the price of one new. So it will create an entry point for some people into the market. Or some people will look at -- it will affect your new truck business some. But we'll look at it and say, well, a good-quality 400,000-mile used truck, I might buy -- if I can get three of those for the price of one new, I might do that, or 2 1/2 or two or whatever that number is. And the market will sort itself out.

And when that happens, that will be about when you're down at the trough. But until such time and until there's enough demand, we all know freights been choppy this year, guys. I mean, I didn't see any public carrier that has told me how great freight was this year, or how great their gain on sale was on used trucks. To the contrary: There hasn't been anybody. So we're just working our way through it. I've done this numerous times in my career, trust me, and it will work itself out, I'm sure, like it always does.

But until then, we will monitor ours very closely. And I think you can tell that I've got to keep pushing them through the system, because if you -- I don't want to have any large, big used truck hits. So we're very much on top of it. And believe me, we've got ours properly balanced. But that cuts into margin to do that, at the same time.

So, I know I gave you a long-winded answer, but I was very much wanting this morning to talk a little bit about used trucks, because I don't think sometimes people understand the overhang that's out there and the detriment to new truck sales that we'll deal with next year. That being said, we plan on managing our way through this as good or better than anybody.

No, I believe so. Well, thanks, Rusty for that detail. I'll hop back in the queue.

Mike Baudendistel, Stifel.

I just wanted to ask another one on SG&A, because that's really where the positive variance was in the quarter. I know you said it was going to probably go down a little bit in the fourth quarter, but as we start to think about 2017, is that $142 million roughly the right run rate to use, or is there going to be some natural inflation there?

Well, we're pretty seasonal. And by the way, welcome, nice to -- I haven't met you yet, but look forward to the conference in February.

Remember, we're always going to be the highest -- our highest -- and I break it in two pieces, my friend. I mean, you haven't followed us that long. But I take S and put it to the side, because S is pretty just variable, right? That's going to be driven a lot -- well, it will be driven almost totally by your truck sales, okay? So that will -- and so as you're managing the business, I've got to manage the G&A piece as just the G&A piece.

Yes, we typically -- our best, as we get through the year, our best G&A quarters are always typically three and four, and our worst is Q1, because everything kicks back in, from payroll taxes to a lot of other taxes to -- just a lot of stuff kicks back in early in Q1. So we're going -- you will get an uptick, no question, from our equity programs. Everything, it kicks higher and harder in Q1.

So, we'll look -- I'm not going to say, but historically, I would look for it to be in line with normal, percentage-wise, increases, okay? In Q1, and then we'll work it down as we typically, or as we go through the year or not, we won't have that big hit anymore.

But that being said, I'm going to manage to the market. As I mentioned earlier, if we can maintain our parts and service profits from a per-day perspective -- I understand holidays, and I'll give that up -- but as I've told my folks, that we've got to maintain and we can't go through what we went last through last Q4.

Now, I don't anticipate that. I anticipate some possible softness. But last year in Q4, from a profit perspective, 75% of it was oil and gas related. What we took was parts and service gross profit hits.

So, hopefully, we'll be able to maintain. And then it will be just like we typically go through year with a bump in the first quarter and then we work through it the rest of the year from a G&A perspective. And like I said, S is going to be totally reflective of truck sales.

Great, that's helpful. And maybe just a high-level one, since I am new to following you, is could you just talk maybe a little bit on your strategy of how you grow the parts, aftermarket and service revenues? Or what levers do you have to pull there to increase your market share?

Sure. Well, we've been fairly open strategically. We're going after the all-makes parts business in a big way. We're not the only one out there, though. But we are putting a lot of initiatives in place. And I don't -- you know, I talked to you -- I really don't want to talk about all some of my industrial, what I would call -- what I like to think advantages, but the leverage, that's what were going after, okay? And we're going after the all-makes parts business, and we're going after connectivity with our customers from a service perspective with some of our initiatives. We've got some great stuff going on out there that really hasn't come to fruition from a revenue perspective. But it is working for a lot of our customers on the service side. But we're keeping them up and running.

The better job that we can do of keeping our customers on the road, whether they are hauling freight, picking up garbage, pouring concrete, drilling oil wells, whatever they are doing, the better job we can do with service connectivity through telematics, through our call centers, through all the different things that we offer and have continued to roll out throughout this year, and we have not -- and I'm personally going on the road for about three or four days myself and get in front of a lot of customers here in about three weeks, and make sure that everybody's aware of some of the things that we have going.

And back to the parts thing: We are working extremely diligently to go after that all-makes parts business, because that's the biggest piece of the market out there, and that's probably the most opportunity that we have.

So, without going into all the strategies and stuff in detail, which I don't really want to do, because that's for our folks, just understand that we believe -- I wouldn't be talking about it if I didn't think we could achieve it.

So over the next -- it's not, like I said earlier about something else, it's not an add water and stir thing. It's not instantaneous gratification. But it's something that once you get those initiatives in place, once you're going after it and your people are focused and dedicated to it, and you've supported them right with the right tools in the toolbox, it's achievable, trust me. I've never seen this organization -- when we set our mind to something, we get it done. And I'm looking forward to delivering for the Company and for our shareholders and everyone on these initiatives over the next few years.

Great, thanks very much.

Andrew Obin, Bank of America-Merrill Lynch.

A question on margin on parts, it's sort of trend towards the lower end of history. And I thought part of -- sorry, part of the sort of downward draft historically has been from the fact that you had field service technicians. With shale business, like, relatively low, why is it still towards the lower end, and what does it take to mix the margin up in this business over the next year or two?

Well, okay, when you say parts, Andrew, are you referring to parts and service? Because that's --

Yes, I'm talking about -- obviously, yes, the way you guys report it, sorry.

The way I report it, splendid. Well, honestly, it's pretty consistent the last year. And given that the biggest hit we took last year -- I was just looking at the numbers -- from Q3 of last year to Q3 of this year, the biggest hit we took was service. Parts sales are down a little, but service is way off, right? And a lot of that had to do with the oil and gas business, okay? A lot. And when we lose more service than when we lose parts, service is a much higher return than the parts business. So that's a mix, right? There's a blend in there.

But it's fairly consistent. I mean, we've been running around 36%, give or take a half a point, for the last year and a half or two. And it's moved; one time it was down to 35.7%; one time it was up to 36.9%. But it's been really, around the last couple quarters, 36.1%, 36.5%, 36.3%. And so that's really about what we're running, blended-wise. So I don't see that as being -- now, if you go back eight or 10 years, it ran a little higher. But it ran higher, but there was competitive pressures and it's a mix of business, most of it, if you really want to look at it.

We've probably taken a little bit of parts hit, and sometimes we might have taken a little bit of service hit, but we are out there -- we might have to discount a little more to get a large customer service business. And a lot of that, if you go back there, we also ran a whole lot less absorption rate 10 years ago. So, I can't cash percentages, but I can cash dollars. So, we have to manage our way through that. That would be the best answer I could give you.

I wish I could get my margins back to what they were 10 years ago. I used to run close to 40%. But to go out and capture volume, sometimes you might have to discount a little more. And if you grow your parts more than you grow your service, then that's a lot less margin than the service margin.

But this range should be fairly consistent? We shouldn't -- because when -- field services will come in, right? I mean, if rig count keeps improving, I would assume the techs will go back out into the field. So does that mean that in two years we can have additional margin pressure on this business?

We could have additional. There's possibly additional margin, but I don't ever expect it to get back to 40% right now, especially if we're achieving our parts initiative, because that's going to bring a little lower margin business with the higher dollar piece, right?

Right, but should I be modeling it -- but can it go down to low 30s?

No, no. You just keep it where you've got it, how's that? Where we are running right now would be what we anticipate, because we anticipate growing our service business and our parts business. Really, if you look at next year, our internal growth budgets are the same, okay? So we would anticipate it staying around where it has been running for the last year and a half or two.

And just to clarify, just a follow-up question: On your commentary, you gave a very long, good answer, long answer, exhaustive answer, on --

I tend to ramble a little, I know.

No, no, no -- on used equipment, so I just don't want to belabor that, but I would imagine that used equipment is an additional incremental negative going into 2017. Yet at the same time, you seem to be pretty confident with your macro outlook. And it seems to have, as far as I can tell, unchanged versus the prior quarter.

So, given a little bit more negativity on used pricing, how comfortable are you with the 2017 outlook for macro?

I don't put any upside in it, okay? If there's anything, slight downside. But I think -- look, if you look back, even when we had -- okay, forget 2009 and 2010. I always tell folks, if you go back, back in the day, and take 2001, and I'm not calling it a recession or anything, but take those as -- not -- pretty stagnant growth. But when we had a little recession back in 2001, 2002, for three years running there, the average Class 8 market was -- because I don't count 2009 and 2010, excuse me; those were abnormal. But you can go back to two times before when you hit that part of the trough. Typically, around 140,000 was the average bottom.

I'm hoping that as long as we don't have an extended recession, I'm hoping the bottom is in this 150-something range, right? For US retail. And I believe that it can maintain, but I don't see a lot of upside in it. And the biggest overhang to me is used trucks again. And I know I gave a long-winded answer to it, but I was trying to make sure everybody truly understands.

And that doesn't mean we're not going to manage our way through it. And that doesn't mean I don't think we can -- I don't give earnings outlooks to anybody, but obviously our goal is to maintain, in spite of 20% headwinds in the Class 8 truck market next year, okay, at least be able to maintain and grow some of these other parts of our business, and manage our expenses diligently, and produce a decent year for everybody.

Well, Rusty, you have great execution, and your market cap is back over $1 billion today, yes?

Hey, there you go. That's a good thing. I remember when it wasn't quite there earlier this year, but I'm not in charge of that. You guys are the shareholders. I'm here to help run a business with 6,000 other people, so.

Congratulations.

(Operator Instructions) Joel Tiss, BMO.

So, I wondered if there's any color that's worth talking about. Is there any kind of initiative from the OEMs to push down production a little harder in the first half versus the second half, to work on cleaning out some of the excess inventories? Or is it just more kind of steady-as-she-goes and let the market clear itself over time?

Well, I think we'll be able to give a better read on that, Joel, when we see what the next 60 to 90, next -- when we get through December, and know what the order intake number is, it will dictate -- it will tell me what to do, because the market will drive the OEMs. Trust me. I don't see any big initiatives to get out there and help relieve the inventory levels that are there right now. I do see production coming down, but I think it's more related to the backlogs and order intake, right?

And if we don't get any more, as I said earlier, I would believe that the 154,000 US retail, which ACT has out there, and that's right in the ballpark with my thoughts currently -- then I would expect that the two OEMs I represent can manage through at the rates. I think they've both come down some. And you all are more cognizant of that, and I will let them speak for themselves, but I think they've both come down some in their production. And I think they would be at rates that would be sustainable inside of that market.

Now, if we take some hits and it goes down 10% on the outlook, then I would expect everyone to have to make adjustments, because I think they're doing the best -- they're where they could be for the market that's projected out there right now. But if you don't get any order intake and you continue to eat away at backlog, and your lead time shortens, then you have to continue to make adjustments. So as I said, though, I don't see much upside to it next year, I really don't.

But I think that it should fall about where what ACT says. And what I say, I still think we will have that type of year. The only issue is, for some people, that's 100,000 less units than we did in 2015, right? That's basically 40% off of 2015 from a retail sales perspective on the 8 side.

But I think that both the OEMs, again, that I represent are geared for that currently. But, if it goes down any more, then I'm sure they would have to make adjustments.

And then I wonder if you can frame for us the incremental benefits on the parts initiative in 2017 over 2016.

Well, Joel, I'm looking, as I said, for some growth, right? I'm not going to put more than what we typically look for. You know, typically I can say 5% or 6%. No, I'm looking for higher-single-digit growth next year on parts and service. Now, no guarantees, but that's what we're looking for internally.

I think it will only accelerate as the year goes on and the initiatives get hold. We're just -- really and truly, I mean, I started talking about this, what? First quarter of the year? But I probably got out a little over our skis, thinking, okay, it's like, here it is, instantaneous, right? Well, it doesn't quite work that way.

And as we continue to gear up, I'm not going to quantify it other than what I did just a second ago. That's about as good as you're going to get out of me for quantifying it. But I wouldn't speak about it if I didn't think we couldn't achieve it. And it could be, as I said, when you look at the organization, if Class 8 is off 20% and we want to maintain our results, that should tell you we've got some growth in there somewhere.

And then just last, with the market under pressure, is it time for you to go back on the offensive and look at continuing to consolidate the industry? Or it's still too soon after you did your own internal restructuring and you need to let everything settle out?

Well, referring back to when we did, those were just needed to be done, whether the market was up or down, and probably should have done them earlier, because I had stores within 30 miles of there, and that was just really most of that, other than one, was mainly all on the Navistar side. And it just goes back into the heritage of the organization. And they had too many dealers on top of each other, and we had too many stores too close together. And we could still, with today's technology and mobile service and technology and handling parts and e-commerce and stuff, we could still take care of customers without having the brick and mortar there that we historically had.

So that really didn't have anything to do with stymieing us looking for deals. I would expect as every day goes by, that the opportunities would increase next year. But they've got to make some sense. And given the growth of the organization in the last 20 years, I got a lot of the map covered that I want covered. So my opportunities get less and less.

But, there are some out there, areas of the country that we would like to have some more stores in. And we will be focused on those areas and see if the opportunities arise. But as always, as I've always told everybody, it takes more than a willing buyer. You've got to have a willing seller, too, right? And typically these things are bought and sold based upon lack of succession in the Company, because they are all private.

So, but, realize that if the opportunity arises, yes, we would grow. And we will be watching diligently to see if something pops up.

Great. Thank you very much.

I am showing no further questions at this time. I would now like to turn the conference back to our host.

Okay. Well, folks, we appreciate you joining us today. We'll be talking to you -- I guess it will be a while -- in February, with our year-end results. Thank you all very much.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.