Rush Enterprises Inc (RUSHB) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Rush Enterprises Third Quarter 2019 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. Rusty Rush, Chairman, CEO and President. Thank you. Please go ahead, sir.

Well, good morning, everyone. Welcome to our third quarter 2019 earnings release conference call. On the call today are Mike McRoberts, Chief Operating Officer; Steve Keller, Chief Financial Officer; Derrek Weaver, Executive Vice President; Jay Hazelwood, Vice President and Controller, and Michael Goldstone, Vice President, General Counsel and Corporate 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, 2018, and in our other filings with the Securities and Exchange Commission.

As stated in our news release, we achieved quarterly revenues of $1.6 billion and net income of $39.1 million or $1.05 per diluted share. We're pleased with our financial performance this quarter, which was positively impacted by the continued successful execution of our aftermarket initiatives, by significantly outpacing the market on both Class 8 and Class 4-7 new truck sales. We are also proud to declare another quarterly cash dividend of $0.13 per common share.

In the aftermarket, our parts, service and body shop revenues were $455 million, or 6.5% over the third quarter of 2018. Our absorption ratio was a strong 120%. Given the modest increase in aftermarket activity in the industry, and the continued decline of energy sector activity, our aftermarket growth this quarter was a direct result of our strategic initiatives, which include our technology solutions, e-commerce parts ordering platform, expedited service and the addition of aftermarket sales representatives and technicians to our dealership network. We expect industry parts and service activity to remain stable in the fourth quarter, factoring in normal seasonal declines through the winter months. With the continued success of our execution of our strategic initiatives, we expect our aftermarket revenues to outperform the market in the fourth quarter and through 2020.

Turning to truck sales. We sold 4,318 new Class 8 trucks, up 30% year-over-year, and accounting for 5.5% of the total U.S. Class 8 market. Our healthy truck sales performance was driven primarily by over-the-road and vocational customers. ACT Research currently forecasts U.S. Class 8 retail sales to be 277,300 units in 2019. We believe Class 8 retail sales have peaked in the third quarter. And as a result, we expect our Class 8 new truck sales to decline in the fourth quarter compared to the third quarter. We are confident that our overall 2019 sales results will exceed 2018.

ACT Research forecasts Class 8 retail sales to be 204,000 units in 2020, down 26% from 2019. Historically, our Class 8 market share increases in non-peak truck markets, and we believe we're well-positioned to outperform the market in 2020 and increase our market share.

In medium-duty, our Class 4-7 new truck sales reached 4,566 units and accounted for 6.5% of the U.S. market. This was another record-setting quarter for us due to our nationwide inventory of ready-to-roll trucks and strong activity from construction and rental customers. ACT Research forecasts U.S. Class 4-7 sales to be 266,000 units this year, up 3% from 2018.

We expect some of our Class 4-7 truck sales -- we expect Class 4-7 truck sales will be down in the fourth quarter compared to this quarter, the third quarter, due to time making some large fleet deliveries throughout earlier this year, but that we will outpace the industry for the year. ACT Research forecasts 4-7 retail sales to be 257,000 in 2020, down 3%. We expect our results will be consistent with the industry.

Our used truck sales were down 15% over the third quarter of 2018. While used truck values are depreciating faster than what is considered a normal rate, our used truck inventory is at its lowest level of the year and we have confidence it is positioned appropriately to meet current market demands.

As always, it is important for me to thank our employees for their continued hard work and dedication, which helped us achieve such positive results this quarter.

With that, I'll take your questions.

(Operator Instructions) And our first question comes from Justin Long with Stephens.

So maybe to start with parts and service. Rusty, could you talk about what the energy headwind was for parts and service revenue this quarter? Just curious if it was similar to what you saw in the prior quarter. And you made the comment that your parts and service business should outgrow the industry going forward. So kind of ballpark, should we be thinking the industry grows low-single digits and you guys grow mid-single digits?

Well, take them in reverse. You're right on track. That's sort of what we -- how we look at 2020 right now, as of this day, everything's always, hit a ball. But yes, we do expect to outpace the industry next year. And we expect -- mostly folks are forecasting flat-to-book slightly up part sales, but we expect with all the initiatives that we've -- and service sales -- with all the initiatives that we put in place, we'll grow over the last 3 and 4 years, that we're still waiting for action, right. We have not seen the fruition of everything yet. It's still coming. We believe we still got that on track.

And that's inspiring. You asked about energy. Now energy continues to get worse. Now Q3 was down like 35%. We said or so, 30% to 35% first quarter, and now I think it's like 38% to 40% last quarter, if I remember right. And I'm going to say it's over 50% right now. I don't have an exact number. We're still compiling some of that, but well over 50% off. And it hadn't gotten any better during -- in October either. So I don't see a lot of upside, at least in the foreseeable future in the energy sector.

And I think that's one of the most important thing is that, from my perspective, it is the fact that the performance we showed was with huge energy headwinds. And you know we do have obviously some exposure to energy. But unlike in 2016, we're seeing some tough energy comps, we've been able to weather because the investments we've made in both systems and people over the last 3 or 4 years.

And then secondly, I know you put the wheels in motion on G&A cost cuts going into next year. Any update on what the size of that opportunity could look like? And how much of an impact should we see from that in the fourth quarter?

Well, it'll be -- it'll phase into the fourth quarter. Q4, historically, is always -- it's typically a good G&A quarter for us anyway. But I would expect the impact will be fully in place by the first of the year. We've tried to do it very strategically and precise, instead of just hitting the -- hit the button and say, and just, we spent the last couple or 3 months going through the organization to make sure that we -- you don't want to take any meat off the bone, you just want to (inaudible) try out and take some fat off the bone when you can. So we will -- from a dollar perspective, I really don't -- Oh, next year, once we get fully loaded, I'm open, a couple of million dollars or better a month as we go forward, try to help some -- offset some of the results obviously on the truck side. At the same time, rolling out parts and service business, we are on the way home we made mid-single digits, right. So between the -- and medium-duty market maintaining strong right.

I guess it's one of the things sometimes it gets overlooked in the organization that I realize everybody gets infatuated with just Class 8, but I realize it takes a couple of medium-duty trucks to make 1 heavy truck. But at the same time, we sell a lot of medium-duty trucks and the projections for that market to remain pretty stable and strong well through the next 3 or 4 years with the changing dynamics of the industry from a last-mile perspective and all, the other stuff going on in the industry. So we feel good about that. I know I answered a little bit more than you asked. But you know me, so.

And our next question comes from Andrew Obin with Bank of America.

Just a question on G&A. So just to clarify, you said that you can sort of take a couple of million per month through the end of 2020. Did I hear that correctly?

That's roughly the goal. So looking back on 2019, remember, not SG&A, G&A. S will naturally come down if truck sales go down. So --

I'm sorry, yes.

Current run rate to the extent we grow back in mid-single digits. There's some expense attached to that. So that's not taking current leaving at $2 million less a month for the entire year. We will spend money to generate that mid-single back end growth that we've talked to you about.

Right. But just sort of if I take what you said at face value, 15 months times $2 million, by the end of the year things stay flat you should be able to take $30 million?

No, I don't think. I didn't take 15 months. I since starting in January, Andrew. So that's 12. So let's start it there. And to Steve's point, remember when we created gross profit dollars in parts and service most of them spend 50% up to create it. Okay. So if we grow the same, I'm talking about we stay flat. If we stayed flat from a parts and service perspective did not grow a bit, then yes, that would be your number. But at the same time, if we grow parts and service, we do spend part of that but the good part is we keep part of it.

So you don't create it. And it's not -- total leverage without zero spent, right? So if we're up 5%, growth driver is up 5% then we're probably going to spend at least 2.5% of that 5% to create the 5%. So that's on top. If you just stay flat though, yes you can take the $24 million out of.

And then just in terms of profitability of parts and service, sequentially. I think looking back, I don't know, like usually parts and service sequentially is flat. And I know historically you guys talked about structural changes to parts and service business models that would enable you to grow gross margin there. So can we talk about sort of drop off in gross margin for parts and services in 3Q? And whether or not it means you can still grow its structure over the long term?

Well, I need to -- if we take this year. And first off I'll explain Q2 to Q3. We said in Q2, that there were some -- don't expect it to stay just there. We had some -- some purchasing went on in there, some strong purchasing discounts and rebates and stuff that flowed into Q2. But if you take the year as a whole -- I think it's better to sometimes look at it as a whole year. Sometimes everybody gets caught up in just these quarters. I realized that we're going to run about 38% for the year. And I don't think you can go back the last 2 or 3 years and find any 38% yearly margin in our parts and services business. I bet, I know you can't.

So we believe we made progress. Okay. And we believe there's still progress to be made. But it is not a just a direct jump, an automatic big step. It's a continual effort -- continuous effort. And I think you can see that in the last and this year's performance. And I think you'll continue to see it this year's performance. But it's not going to immediately jump overall for a whole year from 38% to 39%. It's not going to happen in 2020, but it can creep up. So I think you'll find by the end of the year when you look back, I think we're like 38.1% or so right now. So if we were to go a little bit under 38%, we would have been 38%. We grow in Q4 in there for the year, which would be the best year I think in the last 3 years or so.

I don't have it all front of me. But I know it's a whole lot better than what we were in '18 and '17.

And just if I could squeeze 1 more. People are asking if there are any onetime write downs in used inventory in the quarter?

No, nothing outside of normal. I think our margin was 9% to 8%, if I remember right it was actually up from Q2. So we've done a pretty good job. Did we take losses on trucks when we are sitting here, we do that day in and day out. That's all blended into that 9%, 8%. So if you see us staying in the above 8%, then we're probably not taking any losses outside of our normal stuff. I mean, and that's it. I don't want to hear how to manage the business. You don't win on every truck I promise you. Just like you don't on every used car in the car business. You don't win on them all. But that's always been blended into the number I gave you. So any unusual? No, sir. We feel good about the 1,900 units we have in inventory. And they're properly priced for the market.

And our next question comes from Jamie Cook with Credit Suisse.

I guess 2 questions, Rusty, one on the industry and then one on Rush in particular. Could you just comment what your customers are telling you in terms of when we should expect to see orders start to improve? There's a debate on whether it happens in the fourth quarter or do we have to wait until next year? And then your view on the length of the downturn whether or not this could extend into 2021?

And then my second question, I guess, is more specific to Rush as you're growing your parts service business. I guess I'm just trying to understand? And I sort of asked you this last question like your comfort level with the Street's estimate for 2020 or any context you could give to us? Because obviously, as the earnings hold up better, this is a -- this should theoretically be a rewrite story for your stock.

Well, that's -- I'm going to. I'll start with the truck market. It's probably easier for me then I'll get back to -- (technical difficulty) -- I want to approach it. As you know, I don't give numbers out, okay? So I'll build a model around -- you can build a model around the overall macro numbers and you guys get to do that. But let's -- I'll get back to that in a second.

As far as next year goes, it's still percolating up, in my mind. Obviously, you go back a year ago -- of '18 everybody -- the '19 was already booked everybody thought right. So in my mind that the year still percolating, we're on business. I feel solid that our Q4 while beating off in Q3 records use rate. I feel pretty good about Q1. I'm just not sure on some -- there's folks that are still debating what their purchasing is going to be like next year? Obviously, because if you looked at what's going on, contract rates are getting big up really good out there. I mean, guys are taking hits anywhere from 2% to 10%. And then the contracts are being -- tender rate acceptance are off, they're up 95%. There is an oversupply of new trucks in the marketplace, right? Now so that has to clean itself up. And the big guys are going to be fine getting through it. But as always, and in the last part of the cycle, you get the smaller mid-size, that's what came in earlier this year. That's why bankruptcies are up. That's why with more repos client growing right now.

So we're in the middle of trying to that getting cleansed up. So -- but that has an effect on what people decide to do next year. They may wait a little longer. They may take some replacement trucks. But everyone, remember -- these are the 2 biggest years since '05 and '06 ever in history. So there's a lot of trucks out there right now.

Freight has been steady, but with an oversupply of trucks the supply-demand has driven rates down. And people are having to deal with that. And I know you'll see that in some of the reports.

But we're in that cleansing process. I know you asked me for when I expect -- we got orders that are going to naturally be -- will be a little better here in these next 3 months, okay. And that's just natural. They're not going to be 10,000 units again. But do they only go to 20, or something like that. I don't know where they get -- where this should be which is up in the 35 range or something like that. Not that crazy 50,000 that we were doing year or so ago. But you would look for to know that it's going to be real solid next year you look forward and to -- to come in, in my mind, start creeping up in that 30,000 range.

And I don't know if I see that just yet. But I'm not, I don't represent all OEMs. I don't know what all the OEMs are doing. And where they are set. We're taking -- I think there'll be more business booked. Will it -- I looked at ACT's number they put out a [204] I think for U.S. retail. I'll be honest, I don't see much upside to it, okay, if at all.

If anything I see a slight some downside in that number. But that's just classic truck sales. I mean, it's an election year. People sometimes don't enjoy not knowing what's going on. And the fleet's pretty fresh out there right now. So I might wait a little bit longer before I order. And this is just my opinion, okay. Back and I've seen it like happen like that before -- I'm getting old man at 61. So I've seen a few of these.

So many -- I think I can't pinpoint it. But I can tell you and I buy into the 204 at high end for U.S. retail deliveries next year, coming up 277 or whatever it should be this year, wherever it lands. Getting slight Q4 but it will get going down compared to Q3. So I mean Q4 will still be off in deliveries compared to Q3, not just me, the industry. So I know you're asking for when. I know I'm not giving you the exact because I'm not sure either right now. I really I'm not -- I know what'll work in business and I don't work -- we are pretty solid. But I still got a year to make, I feel pretty good, we're working, so -- I'm still working the first quarter, I can get you a truck right now, if you want one in the first quarter so, I mean it's back to back, we don't have these 9 month lead times anymore, it's back this more 60 day stuff, right. So --

Yes.

And that's just where we're at.

You probably don't want to be on the road if I'm driving a truck, but on 2020, I know you don't want to give an exact number, but is there any way you can help us with puts and takes? You talked about G&A, we can make our own assumption on, sort of, the industry but like mix, I mean like where you think parts service will be. Just so we can sort of better calibrate whether we're on track for 2020.

Well, I'm been -- I'm going to say mid-single. And you can take the middle of (inaudible) I mean, I'm driving better map, okay, we're going to, but I would, taking the proper approach, take that, and then remember like I said, I gave -- I think I gave the answer a second ago but I'm cutting [24 million] out G&A. But you got it earn back 2.5% of the 5% to the cost because that's what it cost me to get stuff sold and done, so you get a little bit of growth there, the G&A, and then the truck side, you're going to be on the truck side, right, you're going to take -- the market right now, they're saying 26% off. I've -- I got to say -- I will say that to 30% somewhere in there, I don't expect us to be off that much. My goal is to only be up 15% to 20%, 20% say 20%, I'm a bit more conservative or better, I -- we typically do a little better. But I don't have any oil and gas business either. So I'm hedging a little bit I am a little nervous about it but we've always come up with something in the past, history shows we did. So we got pretty good group of folks around here and we'll find something out, we'll figure something out, whether it's in -- in lots of market segments. But it's about good as I can get you to help you model and I would --I am just not going to really give -- I know that we're going to be way better than we've ever been in a dip like this before. Why, because of the focus of what we've done. And I'm confident in that, I'm confident in a lot of things, I just don't -- I've got a number in my mind but I'm not going to start today after 23 years of giving a number, okay. I've got wild-eyed target in my head right now. And it's a whole lot different than it’s ever been in the past, and I think it's very achievable.

Okay. All right. Thank you, I appreciate your call.

I know what you're looking for. I'm doing the best I can to color it up for you without having to start giving out as much guidance. But -- by the way, I look forward to seeing you at the conference in December.

I do too, so does everyone else.

You bet.

And our next question comes from Neil Frohnapple with Buckingham Research.

Rusty, can you talk about parts and service revenue performance on the Navistar side of the house? I'm just curious if the negative impact from the years on the market share was really low as lots of a headwind just given the share gains they've seen over the last couple of years, it kind of got behind at this point. And I guess as a follow up, do you view it as an opportunity in 2020 or is it still going to take several more years for you guys to start seeing that benefit?

Well, it's only going one direction, okay, we've already troughed and we're doing better this year than we had. We're seeing improvement in that division in '18 and '19. And I think we're going to continue to see, it's not going to -- it's not going to be a rocket ship phase. But it's going to continue to improve. I like the performance overall, and it's not just because our sweet spot, let's get real. Our sweet spot is trucks through the right [mode] 8 years old, okay, 9 years old, that's where we -- that's our sweet spot from a parts and service perspective. And obviously, we're just starting to get in -- we're just starting to -- where we put colors in there 2013-'14, so really that 5, 6, 7 year old. So we're starting to build but we have a little market share, right. So you're not seeing the effects of [14%] market share you're still running up to 10. As for what we're looking at from a parts and service perspective. So it is a tailwind, there's no question. I've been saying that for a few years. And it is helping, it helped to make things, it's helping to make things, it's getting better every year. And I can -- it's always been hidden tailwind that's in there, that is they continue to perform better, we're going to do better obviously with all the location, that being the largest deal. So I'm not really quantifying for you, but I would expect it to -- there's more trucks in operation, more international trucks in operation all the [Macs] all, 90% plus, 95% of -- 90% plus of that Mac stuff cleaned out. And so, but it was low market share originally, right, so the last couple of 3 years, a couple years of better market share really does do a pretty new trucks, right. So you're not really get the P&F parts and service on all that, you are from when they were running on a 10% range. But as it gets busy -- I think I've already answered, it's going to get better, how about that? It's going to continue to get better (inaudible) share gains, all the things that you are seeing will flow into parts and services, we continue to going forward.

So that'll be a nice positive tailwind over time.

Very much to continue. Obviously, we're not as mature in those locations from a personnel perspective. From the way I was -- and it wasn't just product man, that was a beat down, but that was beat down from a personnel perspective too for those years, right. You had the choice to go to work to -- you're starting to see somebody to show up. When all you had was broken up Macs going still in your shop. But that's changed, that's changed, and we continue to, I mean, raise the level of performance. We do that all over the country but we have a lot of opportunity on that, in that part -- in that side of the house to raise the level of performance. And I feel really good about where we're going that way.

And can you provide an update on the Tallman Group JB, Rusty, just expansion into Canada or just any other M&A opportunities out there?

You bet. Well, personally I'm not going to tell you about a lot of the other M&A opportunities. Because that would mean I would be committing to something. But I will talk about Tallman we could do that in February, been very pleased with it. We've grown [100 million], the owner of state, there's a 50% owner. And everything is just as we expected it to be. And I think the opportunity might even be better than what we expected that was a (technical difficulty) we have the ability to later on to take on the whole thing. And we probably -- I see no reason we won't. But we're integrating some of our system -- and some of our system in them. And also bring some of our culture. And I think they're very accepting of it too. Because we've got a lot of stuff that allows us to go to market and achieve the results that we get. And so, a great group of people, positive performances, nothing negative about -- or anything, it’s been positive to our earnings. And it's not -- we're not shifting the whole -- well there's a lot of opportunity there, and they've got some M&A opportunity up there. And as a 50% owner, I would say we are involved there. So we're excited about that. And where that grows really over the next couple of years. Other perspectives of M&A around the country, well things get tough, opportunities show up, so my phone -- I answer my phone every day. So let -- so when it rings -- but I'll let you know when an announcement or stuff that's -- as we go forward, I wouldn't wait for any pretty big [slug] of M&A. But I think you'll see some strategic stuff back, I know you will. Just see some strategic M&A stuff out there, but until we close it, I don't really like talking about it.

And then one final one for Steve. I think you guys gave the used gross margin performance of [98], just curious on heavy, medium and light, if you have that handy?

Heavy is 7.1. Medium is 5.4 and light is 3.2.

And our next question coming from Joel Tiss with BMO Capital Market.

Can you frame for us, kind of, the longer-term opportunity on parts like what's your penetration of your installed base now, roughly? And where can it be, like, where is best in class, maybe, you know 5 and 10 years down the road, like what's the ambition, to be able to get to?

Okay. I'm going to have to rub this for you. I know when we started this journey we got on. We were less than 4% on the parts market, okay?

Right.

We said right we're running 6% on average or better and heavy around 5.5%, where we are, and we just got the opportunity so to make it work too, right. So that was a huge focus and still is a huge focus of ours. That's why I believe we continued to outpace the market the last 3 years. And we will continue to derive confidence in what we're doing. So our goal -- I don't know was to get to the -- was to get close somewhere between 5.5% to 6% by 2022. I don't have where we're at right now, but I've got -- I think it's around -- I'm roughly around 4.5%, 4.6%. So we made some progress. We were under 4% like 3.8%, 3.9%, we're up to about 4.6%, okay, of the overall parts market. And our goal would be to get somewhere, but my goal is aim to 6%, but I want to hit it and say 5.5% to 6%, somewhere in that range, because you know, it's an evolving deal. But I feel really good about the initiatives we got out there, and I feel really good about, some of the tools that we put out in the field. I feel really good about our people. I mean, I think they're all on board with achieving that number over the next 3 years, by 2022. So we can get somewhere between 5.5% to 6% by 2022. I'm going to feel pretty good about it. And we continue, obviously tied with service growth at the same time.

I feel that we have the opportunity with our facilities to continue to expand, whether it would be through mobile or embedded technicians or across the country in every area. Not just -- guys, we see a lot of different things going on not just in our shops, but outside of our shops. And we do it -- in some areas we are better than others. We're working on getting all our areas up to the highest level when it comes to those initiatives on the service side. So hope that gives you a little flavor on the numbers.

And then any acquisitions you can make to accelerate that or this is all sort of necessarily needs to be more homegrown?

Well, our goal was at very -- when we started, we had a little bit of M&A in there, but not a lot. You got to remember --

More for software and stuff like that, though, right, more capability.

Oh, you bet, you bet. So think about like this. There's one out there that's not even in there. Remember the Tallman numbers, they're not in by numbers. Okay? That's an investment because it's a 50-50 deal. You don't even see the 800 trucks they sell or about whatever, you don't even see those numbers in my numbers or their parts and service numbers. Okay, that's not in there. So one day that will be in my numbers automatically, okay. You didn't see half any Canadian dollars to an investment going to the underline but really truly we will, I have up to 5 years to win your why can't even handle between year 1 and year 5 to bring them all in and I'm not going get into the details -- to bring them all in underneath our umbrella. So that's exciting. That's already, that's already built-in deal, okay. But you're not really seeing -- you can see just the small investor but only half of it around down there.

So and they haven't even got to be able to use our tools and stuff, they got like 14, 15 locations and not a lot of them smaller than what we have, but it is the Ontario, we got all of Ontario -- I don't have all of Ontario, that's why we've got some opportunities, but they have Ontario, Toronto area, and they've been able to do some small in there. Anyway, there's one that's already built in, and we'll get here sometime in the next year or 2 I hope.

And our next question comes from [Shawn Kim] with [Kipbelly].

Just 1 follow-up question for me on the parts and service business. So roughly how do you view your OEM partners expanding their respective parts and services business? So for example, with Packard expanding their TRP business, would that represent a potential headwind for your aftermarket business?

No. No way. I don't see that as any headwind. This is, it's a strategy of theirs. We have a strategy, maybe not totally where we participate buy and sell TRP parts. Okay. Maybe not every piece of their (inaudible) but we are a participant with both OEMS and their strategies, okay. That (inaudible) and we work very hard to start (inaudible) maybe OEMs also. We participate all the way around so that's not a headwind, that's a partnership on our part also. Even we're not a TRP store we sell TRP parts and promote them. They'll just with (inaudible) sell parts for that was throughout the same way. (inaudible) They both have -- private label stuff and we support both of them.

Ladies and gentlemen, this concludes our Q&A portion of today's call. I would now like to turn the call over to Mr. Rusty Rush for any closing remarks.

Well, thank you guys for -- and joining us on the call today. I know it will be February before I talk to anyone again. So I wish everyone a very happy holidays and safe holidays going forward and we look forward to talking to you in February. Thank you.

Ladies and gentlemen this concludes today conference. Thank you for participating. You may now connect.