Rush Enterprises, Inc.
Q3 2014 Earnings Call Transcript

Published: 22 Oct 2014

[Operator:]

Good day, ladies and gentlemen. And welcome to Rush Enterprises Third Quarter 2014 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time [Operator Instructions]. As a reminder, today’s conference is being recorded. I would now like to turn the conference over to your host for today Mr. Rusty Rush, Chairman, CEO and President. Sir, you may begin.

[Rusty Rush:]

Good morning everyone, and welcome to our third quarter earnings release conference call. On the call today are Marty Naegelin, Executive Vice President; Steven Keller, Senior Vice President and Chief Financial Officer; Jay Hazelwood, Vice President and Controller, and Derrek Weaver, Senior Vice President, General Counsel and Secretary. Now, Steve will say a few words regarding forward-looking statements.

[Steve Keller:]

Certain statements we will make today are considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. As these statements include risks and uncertainties, our actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that can cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in our annual report on Form 10-K for the year ended December 31, 2013, and in our other filings with the Securities and Exchange Commission.

[Rusty Rush:]

As you have read in the news release, net income this quarter reached $23.5 million or $0.57 per share on gross revenues of a $1.240 billion. In the aftermarket, our parts, service and body shop revenues reached $340 million, result of continued demand for vehicle maintenance and repair, additional activity from increased new truck sales and service support in a broad range of market segments. Our absorption rate reached a record 120.2% this quarter. We continue to integrate and execute in our Navistar division and implement continuous improvement across all our operations. We expect parts, service and body shop revenues will remain strong through the remainder of 2014. But continue to watch the price of oil and its impact on activity in the energy sector. Moving to truck sales, the improvement trend that began in last spring continued through the third quarter. Our Class 8 new truck deliveries significantly outpace the market with market share climbing to 7.4% with U.S. Class 8 retail sales. Larger fleets continue to replace aging equipment to improve uptime and appeal to a wide range of drivers. Stock truck sales to small and midsize fleets operating in the vocational segment also continue to climb. And we saw a significant increase in mixer order intake and deliveries. Our Class 4-7 new truck deliveries accounted for the second largest sales volume in the Company’s history. We continue to see strong sales from our large inventory of ready-to-roll trucks, meeting the immediate needs of vocational operators. ACT Research increased its 2014 forecast of U.S. Class 8 retail sales to 227,100 units, up 21% over 2013 and forecasts for U.S. Class 4-7 retail sales to be 196,300 units, up 9.3% over last year. We expect demand for Class 8 trucks will remain strong as we’ve continued to upgrade equipment. But expansion will be moderated by the driver shortage. We also expect Class 4-7 new trucks sales to remain strong. We continue to make progress on our business system rollout, new facility construction and renovations and work to expand our solutions’ capabilities. Our new business, now called Momentum Fuel Technologies, is on course to launch the natural fuel system reaching a 3M tank technology next year. Finally, I want to say thank you to all our employees and congratulate them on helping the company achieve another record quarter. With that I’ll take your questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Jamie Cook of Credit Suisse. Your line is open. Please go ahead.

[Jamie Cook:]

Good morning and congratulations on a great quarter. I guess, first, Rusty, the strength on the truck side was pretty phenomenal and you guys mentioned in your press release you had some benefit from some large fleets. Do you think there was any pull forward there from Q4 or how do we think about the fourth quarter just given the fact that your third quarter was so strong? My second question is on the parts and service business, which was obviously another phenomenal quarter. How do we think about same store parts growth year-over-year, because you gave us that number last year? And then just what do you think longer term sustainable growth rate is for that business just because it’s been growing in the 20% to 30% over the past couple of years? Thanks.

[Rusty Rush:]

You bet Jamie, and let me start back at the front. From a delivery perspective, I expect it to remain similar and in line with the Q3 and Q4, no I did not really see any pull forward. Our backlog remains roughly the same, maybe up slightly. So, I don’t see anything that tells me that it’s going to -- it will be similar, there is timing issues obviously. But it will be very similar to that. From a same store basis, around 9% is the growth rate on parts and service so far this year which is we typically try to target, obviously depends – we will see if we could write a target between 7% and 10% from a same-store growth rate. As we go into each and every year just continuing to invest in facilities, we got a lot of facility expansion going on right now which will increase, I think we got over -- probably in the next 12 months, we’ll probably add 200 bays to existing facilities that we have already and are continuing to push different services and things through there. Through there I guess that we got close to a 100 million in facility expansion going on right now. But as we’ve always proven in the past that, that’s typically how we get our growth, it may have effected [sourcing] slightly down sometimes, when you open a new facility when you are doubling and tripling the size. But eventually it drives us to absolute [bowers] up as you grow into that facility. So we feel real good about where we are at from a parts and services perspective. If you look at the fourth quarter from parts and service perspective, I don’t expect gross profit to be quite as strong just simply because of all the holidays. The way Christmas and New Year’s fall this year on a Thursday and just makes a tough week. It's always better when they are tied exact right in with the weekend, but we don’t see anything that says there is any -- as I am sitting here we’re half way through the month of October, I don’t see anything it says we got this big decline or anything it's just how the calendar lays out right. So, you got a vacation and things like that going a lot during around the holidays, but as far as the strength of it is still there is just sort of seasonal effect.

[Jamie Cook:]

And I appreciate -- we are in the third quarter, but just in terms of 2015 can you comment on how you are thinking about industry retail sales to sort of agree with what ACT is putting out there and just sort of address sort of where you think we are in this cycle because next year will be six years. Typically truck cycles last that long or do you think we will extend beyond that? Thanks.

[Rusty Rush:]

I like to think that maybe the historical truck cycle, [I want to take it from you start at your last place] Jamie, I may beg to differ a little bit on historical being the norm now. And I am not trying to say the world is always changing right in front of us, but I don’t expect this huge peaks as what we have had in some of our past cycles, okay. I think ACT is 240 number is probably solid high-side, I think in my mind I think we can run somewhere between 220 and 240 here in ’14, ’15 and ’16. And if it goes to 220, I don’t, this doesn’t have that huge effect on our company or the changing in our organization I would hope it would be very easy to see for everyone over the last decade as we’ve driven ourselves to become a much more of a service solutions provider. Obviously truck sales is important to us but not anywhere near what they were historically, I mean you go back to a peak somewhere high-side of a cycle like this, 10 years ago truck gross profit would have accounted for 40%, I mean sorry 60% of our gross profits are better. Now parts and service still count for 63% of our gross profits in Q3 and given the amount of deliveries in the truck gross profit that was created that’s just huge but that’s the change in the organization. I mean we’ve talked about it for years and we continue to try to drive us – we are a service solutions provider, but we sell trucks too obviously, but that’s where the majority of our gross profits come from and that’s where they are going to continue to come from as we work towards trying to answer customer needs and provide solutions and to differentiate ourselves from our competition. But back to your trucks, I don’t see any 250, 260, 270, year, because I look back at it and look at it sort of like this. You go back to 90, you go back, remember the peak of ’06, ’05 and ’06, and then we go through but you get ’09 and 2010 and we were short 200,000 replacement units. But we have -- some of that was, we’ve not made all that back up yet, if you consider 200,000 in an average year. So, I see there is still, there is still a little tail on it here out past ’15. I would like to see just stay somewhere around where it's at right now and I’ll be comfortable with that I don’t think we’re going to have this huge peaks, we don’t have the emissions issues to deal with we had the last decade that drove a lot of that [outsource]. That’s just my opinions on it.

[Jamie Cook:]

Alright, great execution as usual. Thanks for the color.

[Operator:]

Thank you. Our next question comes from the line of Neil Frohnapple of Longbow Research. Your line is open. Please go ahead.

[Neil Frohnapple:]

Hi, guys, congrats on a nice quarter. Hey Rusty on the Class A market-share of 7.4% in the quarter very impressive. I know you guys probably have a higher mix of occasional business in the rest of the industry, so just curious of strength if in this market in particular allows you to achieve this record level of share anything else you can point to?

[Rusty Rush:]

Well I think from a vocational perspective it was pretty much in line with Q2. The increase in Class A deliveries was really fleet driven, okay. We still have, I don’t want to say, we have vocational fleet, but there is a lot of that small and medium business remain, small and mid-size fleets as I notated remained about the same, pretty strong. Those guys didn’t replace, the replacement in the smaller mid-size guy they held on to that equipment after the recession a lot longer than some of the larger guys and so we have seen that strength really throughout the year in all different market segments. But the increase really in the deliveries was fleet driven and it could be vocational fleet and over the road fleet, but that’s why there was margin deterioration in there also. So, that’s really what you saw on those deliveries. But 7.4% was -- that’s a pretty good number. And hopefully we’ll be able to maintain that as we go forward and in that we continue to be strong in our [fleet related] market share and the areas we represent them we are extremely strong. We are outpacing their typical market share. And as Navistar continues to gain ground and coming back from the past two years we look for that to maintain. Hopefully, as I’ve said I’ve told everybody 6%, so I was kind of proud of 7.4%, but I am not ready to say that can maintain a 7% going forward, but I wouldn’t rule it out.

[Neil Frohnapple:]

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

[Steve Keller:]

Yes, really only. But really this quarter is probably only little over $0.005 that was related to that, now that is going to ramp up. So as you think of extra models going forward that will ramp up probably more to like the last couple of [pennies] a quarter here till we get it out I would guess somewhere in that range. I expect that to ramp in the fourth quarter first and second for sure. Anywhere in the $0.02 to $0.03 effect on each quarter before we get to market sometime later next year and middle of the year.

[Neil Frohnapple:]

Great, and then just the final one here and you mentioned opportunities for markets turning Navistar side. Is customer acceptance for their new 13-liter engine continuing to improve in the market? Or any color you can provide there for performance feels [indiscernible] wise?

[Rusty Rush:]

Well, I think customer acceptance on both platforms. The Cummins engine platform and the 13-liter. Obviously, the Cummins was an easier starting point, right, or easier to sell coming out because there was a known quantity you had to gain that trust in the 13-liter of SCR. And I think that’s being done. Probably not as rapidly as the Cummins expansion has with Navistar. But I think both are on track to continue to work towards gaining market share as we go forward. The biggest issues continues to be the overhang of the EGR engines but we continue to work through that. And they continue to work through that and we work with them continuing to work through that. But the good part is everyday it gets little bit further in the rear view mirror, so we just keep working through it here over the next year or so.

[Neil Frohnapple:]

Great, thanks for the color guys. Appreciate it.

[Operator:]

Thank you. Our next question comes from the line of Art Hatfield of Raymond James. Your line is open. Please go ahead.

[Art Hatfield:]

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

[Rusty Rush:]

Overall, possibly I don’t want to -- it depends a lot of medium duty [sale] to get some tax drive in the fourth quarter. And I’ll have a better look at that here in the next 30 days or so. So, overall, yes, we’re fine there. Maybe a little more pick up in medium. But I have to see that. There is some when people look at the medium duty customer typically has a little bit more tax drive in the fourth quarter sometimes.

[Art Hatfield:]

Okay, and then kind of adding to that, your comments about you’re cognizant of lower oil prices and how that may affect purchase from the energy sector. Is there a kind of WTI price that you get concerned about? Or is it just kind of, as the trends down people will back off there really isn’t a number that you cross $75 where people really fall off a cliff?

[Rusty Rush:]

Well, I think if you got under that mark you’re mentioning and you stay there for a while, that would have might been some effect on it. And it’s not just so much truck sales as we have a lot of parts and service driven towards that too. So, we continue to monitor. We don’t see anything right now. There hasn’t been anything currently. And we’re not hearing anything, vibes or I am not getting any signals of any overreaction with what’s going on here recently. But obviously I just, the reason I put it in there, is obviously we watch it, right. But the good thing is fortunately we have worked very hard in the last 10 years as I think we proved out in 2013 when we [fell in] the tank the oil and gas business did that the we have grown to a lot of different market segments and we worked very hard and very focused on all those other market segments too. So that -- yes you can take a little hit here and there from one of them but you don’t get crushed unless they all go down right? So, I still feel pretty good. I seen nothing right now from our customer base that says there is any pullback. But we continue -- obviously we’re going to continue to monitor it always just like we did in parts and services.

[Art Hatfield:]

Fair enough, that’s helpful. And then finally just kind of I want to revisit your comments about parts and service gross profit in Q4. I get the calendar effect but when I look at Q3 versus the first half of the year that step-up. Was that just the culmination of better market you guys doing all the right things some of these acquisitions kind of hitting their stride? Or was there something unique that kind of stood out that was unique to the Q3 that may not be going on the go forward?

[Rusty Rush:]

No, I don’t see anything really which was unique to it. It was just the culmination, as you said, of a lot of those things some of it. I still think there is some runway left in some of the new stores, as to that we have run way in some of those an integrations on some of those integrations take a couple of years to give you and to really get them into your flow and how you look to operate and get into them, going after the market segments the way we do et cetera. I think there is still run way in that piece, didn’t really there was nothing standing other than just continue to execution by our folks. We have continuing investment and mobile trucks and mobile tax and going to customers and I have always said, when we go to sell product I am not going to ask you about the product, I’m not going to ask you what can I help you with, what should be the problem and how can I help you and that’s how we go to market man.

[Art Hatfield:]

Okay, perfect. Well just a follow up to that than. Think about this you may have never looked at and there may actually be no pattern to this whatsoever, but is there a pattern Q3 to Q4 that seasonal drop off in the margin related to kind of the calendar that you have seen in the past and if so, can you quantify it is a 30, 40 basis points or is it something you just, it’s just not there is not enough normal [fees] to the change in the season because of the calendar that you can see a pattern there?

[Rusty Rush:]

It's not margin, it just becomes amount of hours that you can a lot of times you can build, there is more, there is a holidays and the stuff, it's just that, I know there is not going to be….

[Art Hatfield:]

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

[Rusty Rush:]

Yes, sir, that’s how we appraise it, yes.

[Art Hatfield:]

Okay, perfect.

[Rusty Rush:]

It's just typical of Q4, but there is no -- don’t look for any huge down here, okay, I am just saying.

[Art Hatfield:]

No, no, I am just trying to understand how that, I think that comment on it's a working days issue more than it's a season hour.

[Rusty Rush:]

Even though you have got through -- really if you want to through and get the same amount of working days this year and have the calendar. The problem is as put in a Thursday Christmas well that just blows that week up.

[Art Hatfield:]

No I have seen it for years, yeah I understood. So, okay that’s helpful.

[Rusty Rush:]

I love Christmas but I like Christmas on Friday’s through Monday here from a business view.

[Art Hatfield:]

We like come on Wednesday because it blows up our whole week. Okay, thanks for your time Rusty.

[Operator:]

Thank you. Our next question comes from the line of Bill Armstrong of C.L. King & Associates. Your line is open. Please go ahead.

[Bill Armstrong:]

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

[Rusty Rush:]

That’s tough Bill and revenues are -- I mean from a truck perspective it's not, that’s a tough one. I mean I don’t have the systems that really tell me exactly what that is.

[Bill Armstrong:]

How about maybe from unit sales perspective?

[Rusty Rush:]

I mean it sometimes harder to fall and find the small guy, right, it's among a few sand hole trucks or some water trucks or things like that. Let’s just say from a truck sales perspective I am going to say this year in that quarter no more 12% - 15% something like that from trucks, if you want to look back in Q3 10%, 12% [differentiate] in 15%, okay. And that would be tops to 15 probably more like 10 I am going to guess.

[Bill Armstrong:]

Okay. And then for Steve no one has asked this one yet, I was wondering if you had the breakout of growth margin on the heavy duty, medium duty, light and use trucks?

[Steven Keller:]

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

[Bill Armstrong:]

Okay, great. Would you have and have the same-store Class A unit sales for the quarter?

[Steven Keller:]

3,313.

[Bill Armstrong:]

Okay. So that’s still pretty, as it is a still very healthy increase then?

[Steven Keller:]

Correct.

[Bill Armstrong:]

Okay. Alright, great. Thank you.

[Operator:]

(Operator Instructions) Our next question comes from the line of Joel Tiss of BMO. Your line is open. Please go ahead.

[Joel Tiss:]

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

[Rusty Rush:]

I have told a lot of people, keep getting asked that question. It’s really no more than 1%, 2%, 1.5%, I don’t look forward that to change to be honestly I don’t see I think market-share is still important with all the OEMs and I think, I sure don’t look at any 3% to 4% increase in trucks [prices], okay, next year. I am going to tell you is just going to be a typical 1, 2%.

[Joel Tiss:]

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

[Rusty Rush:]

Okay. Let me see if I follow the question here.

[Joel Tiss:]

You got a lot going on. You’re integrating all these Navistar dealerships and as you look out three years from now all this work you’re doing. What is it going to turn into?

[Rusty Rush:]

I am not going to give you a number, because its turning like it always does.

[Joel Tiss:]

I don’t know. But just sort of like a little bit of a roadmap by the end of 2015.

[Rusty Rush:]

I would hope to be able to continue to drive absorption up, okay. Key is that factory member always sell out by the key metric. We’re going to get our share mark – we are going to get our trucks market share. I am always confident in that of the truck market. We know that I can’t control always where that truck market is going to be. But I expect our share to continue to increase driven by Navistar eventually over the next two years, getting back somewhere close to, hopefully close to 20% market share and also gaining their medium duty market share back that they have lost. Not just heavy but medium from a trucks sales perspective. From a parts and service perspective, I talked earlier about we continually try to drive between 7% to 9% of same store growth, that doesn’t mean we drive to 7% to 9% of absorption because it takes some incremental cost to drive that. But I would like to think that over time we can continue to ramp absorption up and it may not be evenly. But over the next three years, I’d like to see three years from now that we are running a 120% absorption. I mean if I’m able to put in those terms I’d like to believe that we could do that in three years by just continuing to provide more services and products and understanding needs of customers given predictive diagnostics that are coming on in our investments and all that in telematics and predictive diagnostics we’re investing a lot of money right now. We’re very focused on that. We’re very focused on being transparent with our customer. So I believe that with all these investments those are the kind of things, those are type of ratios I can give you that we continue to make this a larger service company and sales we are always going to execute in sales. I am very confident in that given our ability to service because the service drive the truck sales not truck sales driving the service. So, I don’t know if that helps any but that’s the track record and track record we’ve been on excluding 2009 recession that we’ve been on. I continue from a core expertise of this organization, that’s not going to change it’s only going to get stronger.

[Joel Tiss:]

So it sounds like I shouldn’t really be focused on the cost like a transitional high level of investment because if you want to continue to drive growth you probably going to need to continue to reinvest like the one [you are going to] change over the next five years.

[Rusty Rush:]

I’ve got new stores going in the existing markets, let’s talk about it. We’re going to open up a new store in Cleveland that’s probably going to triple the size, 2.5 times of size of their ability. And that’s going to open in the first quarter. I’ve got a store going up in Cincinnati and I am going to continue to use the old store to move my leasing company and a separate medium thing being it’s a little store now I am tripling the size of it, it’s going on right now. Whereas [Denver] is going to triple the size of it. San Antonio is building and I just saw the other day over 50% complete to more than double the size of its capacity. So, these are going to be continuing investments. We’ve always done that. When you reach the certain threshold of absorption, it’s time to reinvest and build. So those costs are going to continue to be a part because that’s taking care of the market. As you put more products into there, you bring more services you got to make sure you got the facilities whether they’re the fixed facilities, whether it’s the mobile stuff, everything else there. And on top of that remember I don’t need to say I was done doing acquisitions I took a little breath this year. So we can integrate and execute so you can rest assure. And I think we historically show, don’t think that we don’t have some thoughts about some other areas of growth in this country we’re in. So and I’ll just leave it at there.

[Joel Tiss:]

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

[Operator:]

Thank you. Our next question comes from the line of Jeff Monat of Seven Locks. Your line is open. Please go ahead.

[Jeff Monat:]

Congrats on a nice quarter. I wanted to understand little bit more about potential capital returns to shareholders, buybacks, and the different share class issues that have exited in the past. Can you just discuss that little bit more?

[Rusty Rush:]

Well, we’re still currently under $40 million repurchase that we’re in the process of. That’s really where we’ve decided to focus that and also focus our cash on more acquisitions and growth opportunities, as I’ve talked about in reinvesting in these facilities. Right now, that’s been the focus. Obviously, other things that you touched on are always under consideration and thoughts. But I really don’t want to get into where we are at and our thought process and those right now going forward. But they’re obviously on our radar. But from a repurchase continuing investing in acquisitions that’s really where our focus is going forward. We may not have done many acquisitions in the first part of this year but that was because we killed a lot of them last year. But we truly will be looking to continue to fill up our map. That map has the key thing that we have those stores and I mean that there is still some room for improvement on that map. So we can continue to touch the consolidating customer base in a way that differentiates ourselves from everyone else. But those will be the two big issues. But the other two issues you touched on don’t worry they’re constantly under revision -- review.

[Jeff Monat:]

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

[Rusty Rush:]

Yeah, I think there is, I think there is. We will continue to monitor that and look at that. We have, as you may know we have some covenants and some links in our franchise agreement, and that’s why it's there to begin with, that’s why we have two class of stock to begin with because some covenants inside [works] our franchise agreements. So, as we continue to work with those and monitor that we’ll also make sure to keep all that in mind.

[Jeff Monat:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Barry Haimesof Sage Asset Management. Your line is open. Please go ahead.

[Barry Haimes:]

Thank very much, great quarter guys. Rusty, I had a follow up. You commented before that some of the small mid-size companies and it’s like how long are they in the recruitment longer and that there are kind of more back in the market this year. I wonder if you give us a feel for what inning are they in their fleet replacement are they really just starting and you have another couple of few years for those guys to recede or sort of little further along than that just any color if you give us will be great? Thank you.

[Rusty Rush:]

Sure, from our perspective we’re probably in the top of the -- bottom of the third, top of the four. We haven’t placed five innings yet so we can’t [kick it out there]. I am going to take you somewhere in there, probably bottom of the third, top of the four, you want me to look at it like that, because there is still more of that to come. Some just -- wants credit, once you have more capital liquidity in the credit markets. Not that the underwritings gotten [back], but at least there was more money out there and access to capital appeared over the last 12 months that coupled with confidence and new technologies, that have now for three to four years that they can see the people that have invested are getting better field mileage et cetera. And then obviously the maintenance cost of the product that they had. All those have calumniated to this point but we’re probably three innings through it and something like that, this is [swag] on my part.

[Barry Haimes:]

No, I appreciate that color. Thanks so much.

[Rusty Rush:]

You’re welcome.

[Operator:]

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

[Rusty Rush:]

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

[Operator:]

Thank you. Ladies and gentlemen thank you for participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.