Rush Enterprises, Inc.
Q4 2014 Earnings Call Transcript

Published: 12 Feb 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to Rush Enterprises, Inc. fourth quarter and yearend 2014 earnings results conference call. [Operator Instructions] I would now like to introduce your host for today's conference Mr. Rusty Rush, Chairman, CEO and President. Sir, you may begin.

[W.M. Rush:]

Good morning, everyone, and welcome to our fourth quarter and yearend 2014 earnings release conference call. On our call today are Marty Naegelin, Executive Vice President; Steve Keller, Senior Vice President and Chief Financial Officer; Jay Hazelwood, Vice President and Controller; and Derrek Weaver, our Senior Vice President, General Counsel and Secretary. Now, Steve will say a few words regarding forward-looking statements.

[Steven Keller:]

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 Annual Report on Form 10-K for the year ended December 31, 2013, and in our other filings with the Securities and Exchange Commission.

[W.M. Rush:]

2014 was a year of integration and execution. This led to a record-setting performance, including annual revenues, net income, Class 4 through 8 new and used truck sales and aftermarket revenues, lease and rental revenues and absorption ratio. As you have read in the news release, our net income for the year was $80 million or $1.96 per diluted share on gross revenues of $4.7 billion. These results are net of a reduction of $2.1 million in net income or 5% per diluted share related to the impairment of the company's aircraft. For the fourth quarter net income was $24.6 million or $0.60 per diluted share on gross revenues of $1.3 billion. In the aftermarket, we realized the full year impact of previously completed acquisitions, continued strong demand for repair and maintenance of aged vehicles and incremental work driven by record new and used truck sales. Our aftermarket revenues reached to record $1.3 billion this year, contributing to an annual absorption ratio of 117.8%. Our fourth quarter absorption ratio was 119.3%. We continue to grow our aftermarket solutions in 2014. We expanded our RushCare Rapid Parts call centers, added natural gas service, remain on target to launch our Momentum Fuel Technologies natural gas fuel system and are progressing on initiatives using telematics and a communication system that will help improve customer uptime, vehicle utilization and driver schedule. Moving on to truck sales. In 2014, our Class 8 retail sales reached 15,833 units, significantly outpacing the U.S. market and accounting for 7.1% of the U.S. market share. Large fleets continue to replace aging equipment and stock truck sales to small and mid-sized fleets continue to be strong. Our Class 4 through 7 sales were up 17.5% and accounted for 4.9% of U.S. market share. Our ability to offer diverse range of medium-duty products and a large inventory of ready-to-roll equipment continue to drive our strong sales performance. Our Rush Truck Centers dealership network has grown to a 112 locations in 20 states. This week, we completed an acquisition of Effingham Truck Sales, adding two international dealerships in Effingham and Mount Vernon, Illinois and Idealease commercial lease and rental operations in Effingham. Late last year we acquired assets of North Florida Truck Parts, Inc., and we're now operating it as a full service Peterbilt dealership in Lake City, Florida, and added new locations in Texas and Florida. This month we will relocate to a newly constructed facility in Cleveland, Ohio and continue to invest in facility renovations and new constructions to expand our service capacity. Looking in to 2015, ACT Research forecast Class 8 U.S. retail sales to reach 263,500 units, up 17.6% over 2014 and U.S. Class 4 through 7 retail sales to reach 206,500 units, up 3.4% over the last year. We expect demand for Class 8 trucks will remain strong, as fleets upgrade equipment and activity in construction continues, but expected expansion will be moderated by the ongoing driver shortage. We also expect Class 4 through 7 new truck sales to remain strong. We continue to monitor the price of oil and its impact on activity in the energy sector. We are already seeing signs of softening in this part of our business, but do not expect to know the full impact until the spring. We believe lower fuel prices that it will have a positive impact on some customers, the overall economy and consumer spending, which should help offset some decrease in our energy sector business. As in past years, we expect general and administrative expenses to be sequentially higher in the first quarter of 2015, due to employee equity compensation, benefits, payroll taxes and acquisition costs. Finally, I want to thank all of our employees and congratulate them on helping the company to achieve another record-setting performance. With that, I'll take any questions.

[Operator:]

[Operator Instructions] Our first question comes from Andrew Obin of Bank of America Merrill Lynch.

[Andrew Obin:]

First, a good question. As I think about your SG&A, it keeps coming below our forecast. It's very impressive. Can you talk about how is the system integration going and where should we think about it going forward relative to history?

[W.M. Rush:]

Well, typically, seasonally if you look back on it, historically, Q4 is our best G&A quarter. You got to divide S and G&A, so the answer to that question, I think our G&A was good in the fourth quarter. Now, as I always say, and I said earlier in my comments, the first quarter is usually the toughest quarter, just because how things kickback in. So this was nothing out of the norm from my perspective. What was the back half of the question?

[Andrew Obin:]

How should I think about it relative to history?

[W.M. Rush:]

We should have our SAP integration rolled out by March, finished rolled out. Now, I would expect the training cost and everything to continue to the first six months of the year, but we should be fully rolled out to all the stores. We have one more big one going on in March. So by spring we'll have it all complete. So going forward, the whole company will be on one business system.

[Andrew Obin:]

And just a follow-up question. Again, we're hearing a lot about energy folks asking for discounts, and your service business has been a huge profit growing for the company over the past several years. So how should we think without telling us how those [ph] sellers and competitors is competitive. But how should we think about gross margin in your service business going to the second half of the year, what should we think about it?

[W.M. Rush:]

Well, Andrew, there is no question that that is typical -- being from Texas, originally, for the 56 years of my life, I've been around the energy sector quite a bit. So I've seen these cycles numerous times. That is typical to discounts. They're typical at this timeframe, when you see old prices drop down like they have in the last six months. So, yes, we're seeing it, like I'm sure other companies are seeing it, as everyone is trying to get it, obviously compress before you don't even use the equipment or purchase equipment, whatever. Whether its rental or service that we're providing, whatever, that is typical at this time in the cycle. As I look at the oil business, and I said in my comments, obviously this is our part of what we do, you bet it is. The energy sector is important, but it's not everything in what we do. If I look at the oil business and we're right in the middle of it right now. So as I said, I think it will be spring before I really know the full impact of the company, we're monitoring on a daily basis, obviously, at that time. If you look at it from an EPS perspective or something like that or from that perspective, it could be up as much as 20%, but I'm not ready to say that at this time in full of that, but I believe it could be an overall impact from a yearly perspective. Now that being said, the offset to that is the diversification of the organization. When we still expect to deliver more trucks in 2015 than we did in 2014. We still expect our parts and service business to grow even [technical difficulty]. We've got some great things going on with the investments, it will come on track in back half of the year with our Momentum Fuel thing, which really is 2016, but we're really excited about that. Our customer interface we've really focused on the last six months, and we've got a lot of good things going on from that perspective. And obviously it's just one sector that we serve, right. Is it an important sector, of course. But construction will be better this year. The fleet business will be better this year. So from a company perspective, that's right now how I view oil and gas and its effect on the organization.

[Andrew Obin:]

So did I hear right, this 20% number -- I am sorry. Is that 20% hit to earnings from energy offset by other stuff?

[W.M. Rush:]

Yes, I didn't say it was totally offset. It could be more, it could be less offset. I don't know this early in the year. But when it all unfolds -- this may not be in Q1 or just Q2, but as it unfolds throughout the year -- and this is just an estimate. Remember, this is my estimate. I don't have other than doing this for maybe 35 years, that's what I'm going off of what I am saying. We take some of those assets, just because some of those assets come out of the oilfield does not mean they're not redeployed in other areas, right. But there is a transitionary period, and my guess, that's probably on them. I'm going to be pretty conservative with you. So that would be it. That's exactly what I said. But at the same time, I tried to show the other positive sides. You got to stare in the face of being factual. That's the only way I've ever done things. So that's what it is. We're prepared to do everything we can to offset that in other ways and I like to think we've done that historically in our past in our history.

[Operator:]

Our next question comes from Jamie Cook of Credit Suisse.

[Jamie Cook:]

I guess a couple of questions. One, I mean, you just spoke to Andrew in the potential 20% headwind. But, Rusty, can you just give us color what you've seen in January and February in terms of your customers? Has there been any orders that they were talking about that had been pushed out, just the conversations that you're having with them and how you're deriving the 20%, and I recognized it's an estimate. And then I guess, just my second question. In terms of more quantification on your offsets, how do we think about the contribution of the Navistar acquisition in '15 versus '14? Have you made more traction there? You talked about SAP being done mainly in the first half of the year, does that mean when we think about your costs in the back half of the year that should be down a certain percent? 3M, again, I'm just trying to get clarification of the offsets.

[W.M. Rush:]

Yes. I'll try to give you a little bit of flavor, Jamie. First off, let's go to your first quarter question, that was, what have I seen in January and the first couple of weeks of February? Just, what you would expect. Softening in orders, of course. There is no question that when it comes to a truck sales perspective, they are definitely going to be off. There is no question. The oil and gas sector truck sales are going to off. You can't run from it. It's just what it is. At the same time, the part I worry about more than anything else is what does it mean to back-ends of my business, right. It's as critical to the back-ends -- more critical to the back-ends of our business than it is the sales side is. So that's what we monitor very closely. We are seeing some softening, not like the order side, and that's the part that I really won't know till the spring. I won't truly understand it until we get into the -- I mean we understand it, I don't mean that we're naïve, but truly understand the actual impact as it continues to unfold on a day-by-day, week-by-week basis. And as we redeploy those assets, all the mobile stuff we do, we do a lot of that. And we do a lot in our rig up shops, in our other -- but we have other business too. We're not just in oil and gas. You'd think we were just an oil and gas company, if you watched the stock the last couple of months. So it seems to me it's already in there, but at the same time it will continue to unfold. Have I seen some softening on the service side? Yes, just in the last couple of weeks. But it's not like it's a 50% hit to it or anything like that, maybe a 5% to 10% softening. Okay?

[Jamie Cook:]

Okay.

[W.M. Rush:]

Now, where does that bottom at? I'm not quite sure, right. Where does that go to? I'm not sure. We're right really in the middle of it. So I'm not sure where that stops at. Where does the rig count stops from a bottom out at. With oil prices starting to come back, we get some type of stability in it. I mean I have my own -- everybody has got a theory right now, right. Everybody has got their own oil and gas theory on where is pricing going to be, where is it going to be now, where is it going to be 12 months. I have my own, I don't know if anybody wants to hear it.

[Jamie Cook:]

I do.

[W.M. Rush:]

I'm not an oil company, I'm just Rusty, right. I think you're going to continue to see it bounce around where it is for the next six months, and if it's not $70 bucks 12 to 13 months from now or better, I would be very, very surprised. I just believe we're going to continue to grow inventories. And then I think that a lot has to do with demand. There's global demand has a lot to do with this. Obviously, that was the big driver last year. Yes, we had supply. But we went into the year last year expecting growth in oil of 1,450,000 barrels a day at January, ended up only being 600,000 barrels a day growth in consumption, because of Europe and Japan and all those other. So there's a lot to do with global demand. But if you get decent some global demand, and we got to always understand about fracking wells. Fracking wells run-off anywhere from 30% to 60% after one year, if you stop drilling them, it's pretty easy to see that production is going to go down, right. I don't believe this is a three-year or a four-year deal, that's just my say, I don't think you're going to get back to $120 here or there, but I think you can get back to some stable prices a year or so from now, which should maintain activity. Now, how do people approach that, do they go backend, do they drill as fast and hard as they were, I'm not sure about all that, but I think you're going to see some stability, somewhat of a rise in the price 12 months from now. That's just my take on it, because I think -- and that lot has to do with demand. I'm not positive about global demand, but if global demand is decent, better than where it was, as we get into the back half of '15 and we get into '16, some of these other global economies maybe recover a little, since we're that one island in the world right now that's doing well, than I would see demand being up. And it just makes sense to me and that's just my opinion.

[Jamie Cook:]

And I guess one clarification, I mean on my last question, which I trust, I know that you and your management team will do a good job controlling the things you can control, costs and stuff like that if the markets get weaker, but the flip side is the stuff you can't control. So can you talk about the Navistar acquisitions? And Navistar has had a harder time sort of gaining the traction and market share that they would have hoped by now. Can you talk about the conversations you're having with your customers? Do you expect that to improve in 2015? And then my last question is, how much of a, when you think about the Freightliners and the Volvos and everyone else talking about vertical integration of the driveengine, the engine and the transmission, do you think that's a disadvantage for us. Can you talk about whether that's as big of a deal as some of your --

[W.M. Rush:]

Let's talk about Navistar first. We've bottomed with Navistar. If you look at my backlog now it's continually growing up. Our backlog right now for this year is better than it was when I talked to you guys back in October. Okay?

[Jamie Cook:]

Okay.

[W.M. Rush:]

So if that's the indication of it, it's better. Is it still a difficult row to hoe? You bet it is. Nothing to do with the product currently, the product currently is a good product. They've got some great stuff going on. They're finally able to do some work with the truck. Remember, all they did the last five years, go back to 2009 was the EGR mess and everything else, so all the resources, 80% of R&D resources were dedicated to that, right. Now, we're focused back on the truck. We have become a truck company again, and not an engine company. So I am comfortable that Troy Clarke and his team have done a good job. They have. Its just tough headwinds or should I said tailwinds, however we want to look the 70,000 EGR engines that are out there. But it's just the facts. It's the facts. Everyday that goes by we continue to work with customers. The products that's out there, those used trucks, if they've got all the campaigns done and they're properly slotted in the right jobs, the trucks would work, but the perception sometimes is 80% reality, and the beat down over the last few years over EGR engines is tough to overcome. We are working diligently to try to get the valuations on those used trucks back up in the marketplace. I am personally working very hard with biweekly conference calls with those folks about programs and products, because that's been the toughest thing really to overcome is how to handle that problem. As I say in my typical language, the only good thing I can tell you as everyday goes by, it gets a little bit further than [indiscernible] appreciates another couple of dollars on somebody's balance sheet and hopefully gets closer to market value, that's the biggest hurdle. That's the biggest hurdle we've have to had with that. So I know its getting better everyday. So yes, there is upside in the Navistar division. There is no question about that. Where that is exactly, I have not pinpointed yet. We are still integrating those stores. I mean, god, it's like you take on, just bought a couple more, you have this week closing on Monday. It has constant integration of different cultures and different stuff and it takes years some times; two, three four years to get them into your process, as it's your way of doing business, and how the Rush way of doing things, so that's all upside. To quantify that into dollar and cents, I'm not going to do that here today, but I know its upside. I think, historically, you've known us for years that we always got broad upside to the business over time, right. So that's one thing I am proud of our organization and our people, not me necessarily, but the folks we have are able to do that. So that I know has upside in it. What was back half of your question?

[Jamie Cook:]

Vertical integration to disadvantage the transmission -- everyone is making a big --

[W.M. Rush:]

I see good and bad, that's not a path that Navistar can go down. I think there will be a path more in line with Volvo, Freightliner. I think, PACCAR obviously partnering with Eaton et cetera. That's important. That's going to be important. Integration will continue to be important as we drive towards 10 miles a gallon, which everybody wants to see some time in the next decade, right, from a truck perspective, if we can get there. So I think it's important. Do I think it's a total game changer and take someone out of the game? No. I do not, at all, because I think there are partnerships out there with suppliers such as Eaton or people like that, which you can form that can be just as good in the marketplace from a product perspective.

[Operator:]

Our next question comes from Brad Delco of Stephens.

[Brad Delco:]

Rust, I'm going to spare you a question about oil and gas.

[W.M. Rush:]

I figured that was going to be the whole morning. Like I said earlier, Brad, I feel like I'm trading like an oil and gas company recently, so I figured I might as well answer oil and gas questions.

[Brad Delco:]

If you insist, let me try to ask question that may have a positive spin to it then.

[W.M. Rush:]

I am positive. I feel good about the organization, if you can't tell. It is the kind of times you live for, man.

[Brad Delco:]

So let the numbers speak for themselves. So Rusty, if I am correct, you've been servicing a lot of this oil and gas business with the growth in your mobile techs, which I think has, per your prior comments, changed a little bit of the margin profile of the parts and service business. Could you think about that trend reversing, if you see less assets deployed in that mobile service technician arena, meaning would that ultimately be accretive to your parts and service margin?

[W.M. Rush:]

That's tough to say, Brad. It's not always to be in and just that a lot of what's going on is the integration all of our Navistar stores too. A lot more non-proprietary stuff, it's a different customer base. So it's not just been the oil and gas. I am not going to sit here and tell you that margins are going to go up, no. I am not going to give any from parts and service perspective, because we did have a lot of service, there were some costs involved. I don't anticipate margins going up on that business, no, not to answer you. I do anticipate parts and service growth, but I don't anticipate, which hopefully will maintain margins. I do not. Even in spite of everything going on, I hope to have parts and service growth picked up in other areas of the country, but maybe not in the oil and gas stores. There is no question about that. But I don't see any incremental margin necessary outside of our 36% to 37% typical range.

[Brad Delco:]

And then maybe just a quick follow-up. So you announced, I guess, you said there are two stores in Illinois on the international side that you just purchased closed Monday. I was under the impression that you're going to hold off on some acquisitions until we had sort of the completion of the ERP system, sort of insight. I guess at this point, if you're making these acquisitions are they just immediately rolling on to the new system or has that prevented you from being more aggressive on acquisitions? And could we expect that to pick up once we get through with this?

[W.M. Rush:]

Let's back up 12 months, it was time to integrate and execute up to 35 new stores in 2013. That was first and foremost what drove this. Secondly, yes, we wanted to get the system rolled out at the same time. The system will be rolled out in March. Just made the determination two stores weren't that bigger deal. We left them on their old -- we left them on the Karmak system, which we used prior in our organization. So we understand the system. We will roll them on later date, later spring or early summer on to the SAP systems. So I guess when I say we're completed in March, we won't be completed in March, because I'll have these two stores. But two stores weren't that bigger deal to handle. So I mean after this, if we're doing other acquisitions, this will be last acquisition that doesn't go directly to SAP. But you got to remember, the acquisition we did last year, when we bought all Chicago and Indianapolis, we left them on theirs and we rolled them in the back half of the late Q3 and in Q4. So this will be the last acquisition that didn't go directly to SAP. From now on everything will go direct to our normal business system. But two stores we figured, the other one Karmak, we're used to handling Karmak, it wasn't that bigger deal for us.

[Brad Delco:]

But just to clarify, so you're sort of back out in the market and you're looking and the fact that you haven't completely rolled out the ERP system and holding back?

[W.M. Rush:]

No. Timing in life is everything. There's a lot of trucks being sold. A lot of smart truck dealers just to ask them right now.

[Operator:]

Our next question comes from Neil Frohnapple of Longbow Research.

[Neil Frohnapple:]

Rusty, how are you thinking about parts and service business same-store revenue growth in 2015 for the overall company. I know you've talked about not really knowing about the headwinds on the oil and gas side until this spring. But do you think you guys will -- historically, I think you've done like mid-to-high single-digit type revenue growth within parts and service. How should we be thinking about that in 2015?

[W.M. Rush:]

That'd be our goal. High-single would our goal. Realistically, mid-single might be more realistic. We would hope we would still be able to, in spite of the oil and gas headwinds that we faced in certain parts of the country. So that's where we're at. I'm going to target mid, just target the middle right now, because I still got -- and as I said, and you said also you heard, I don't understand the full effects of it yet, because we will understand it better over the next two to three months, and then we'll see how good we are at executing in other parts of the country and trying to pick some of that back up in the stores that are affected most by it. And, so I'll go mid. Normally I would tell you, I want to do a little higher, but right now I would just say, it's taking the 5% or 6% range.

[Neil Frohnapple:]

And then given the robust market share of 8.1% in the quarter on the Class 8 side you guys are experienced. Can you help us with how we should be thinking about deliveries in Q1 also considering the softness in oil and gas?

[W.M. Rush:]

I'm going to say this, this is not really a reflection of oil and gas. The fourth quarter wasn't dominated in deliveries by oil and gas. We had a lot of fleet business in the fourth quarter. We had a lot of fleets, small and large, mid-sized fleets and other. First quarter deliveries are going to be off of fourth quarter. While I say, the overall year I project will be above, where we were in -- there is no question, I'm not going to deliver 5,000 Class 8s. It's probably going to be closer to that four number in that range. So we could see deliveries down sequentially, but up year-over-year, but down sequentially; up year-over-year big, but down sequentially in Q1. But I think, look, for the whole year to be more. So if that makes any sense. And it's timing a lot of times. Some of the large fleets, do a lot of trucks at yearend, mid-sized fleets especially, and making sure on their tax deal, things like that. So Q1, as I look at some of the stuff that's coming it's mainly more loaded into Q2 and Q3, and that's just timing. And when people want the trucks, when the product -- the winter time is not always the best time. In fact, if you looked at [ph] AX numbers, they're expecting it to be down close to 5%, Q4 and Q1 sequentially. So we might be a little more than that from a delivery perspective, but that's how I see it.

[Neil Frohnapple:]

And then just one last one maybe for Steve. Do you guys have the gross margin breakdown by truck in the quarter between heavy, medium, light and used?

[Steven Keller:]

Yes. The heavy was 6.6%, medium was 5.5%, light duty was 4.9% and the used is 6.2%.

[Operator:]

Our next question comes from Bill Armstrong of C.L. King & Associates.

[Bill Armstrong:]

So on parts and service gross margin within the Navistar dealership. I know they've kind of been less than the company average. What's the outlook for improving both parts and service penetration as well as margins in those acquired dealerships?

[W.M. Rush:]

Well, one of the reasons you see, the margin is more heavily weighted to parts, remember it's a [ph] blimp, right. So service obviously creates better margins than parts. And we sell more parts and when blimp makes this difference, than it is on the favorable sides of house. That's one of the tailing things. We see a lot of good upside. You look at us opening a new store in Cleveland, look we're 2.5 times the base. Some of these stores that I bought, do not have -- they're not facilities, I got facilities a lot larger than that. That facility, anybody in Cleveland, go drive by it. I know Neil's up there. He told me, he saw it, it'd be the nicest leadership in Cleveland. And all of a sudden we've put 2.5 times amount of base, so hopefully we can drive more service, right. That's what the investment piece is all about. We've got one going on in Cincinnati. We'll still have the old building, we don't have an old building in Cleveland. In Cincinnati, we're going to keep the building we're in, where we have everything and we're putting another 50,000 square feet or so there. So we'll rent it, it's only 30-some-thousand there, so we're almost tripling the size of our capacity there. But no, that will come on later in the year. These things take time, but that's where we're really focused on. And then getting into the mobile business. We're getting bigger in the mobile business, like we are in our Peterbilt stores. I can go to certain areas of the country where there is no oil and gas, where our mobile business is growing great. California, we're doing a good job recently. Florida, last year especially did a great job on the mobile side. So as we bring these practices into play, we can drive more service to match the parts side of the house, so that really is where our focus is. And then also it's the parts business, it's going after that all mix business, all that non-proprietary all mix makes business, bringing those in, and we're doing that across the whole company. That's just not on the Navistar side, we're going to be better with that. That is one of the things I am more, just say, excited about as anything is the parts business and how we continue to learn how to do a better job in the all mix business. Because when you think about it, say we're -- it's always I tell people think about this, if you've been in our territories, we're probably about 10% parts. We don't sell 90% of the parts in our area. Now, some of them we can't sell, because they maybe a Freightliner part or they maybe a Volvo proprietary part, there is a lot of open runway there for us to do a better job. And that's also not just on the sales side, but on the acquisition side of it, as we continue to grow our private label brand. So there is a lot of things that we're working on. And then as we're working on systems, I'm not going to get into all of it, but as we're working on customer touch points and how we keep people up and running, remember we're a service company, we're not just a truck sales company, that's what we really are about, that's what drives our sales. Our service drives our sales, always has, always will. And how we are with customers, and how we people know if they do business with us, we can keep them up and running, better than any of the dealership group in the country. Manufacturer's try to do it all, but it's very hard for them to corral 80 or 100 to 200 different dealers and make them all walk down the same path. It's pretty easy to tell my folks to walk down the same path. So as we continue to branch up and look at systems and using technology to interface with our customers at a faster, higher, better rate and keep them running, no matter what market segment they're in. I don't care if they're construction, refuse, over the road, et cetera, those are the things that we've been focused on and I've mentioned in the last couple of calls and we're pouring lots of resources into that. And I know, I'll give a long-winded answers always, but you get me a little excited about it. But I'm very excited about that piece of business and how more people who want to do business with us, because it make sense for them. And that's the focus and that's what those dots on the map are all about and I'm tying them altogether.

[Bill Armstrong:]

And with the energy sector and I was pretty clear how that would affect truck sales. But I imagine it might be a little more muted or might show a more gradual decline in parts and service just because you're still servicing vehicles that are out there in the field, is that?

[W.M. Rush:]

That's correct. The truck sale thing is the first thing to go, right. The CapEx budget is the first thing that's cut, right?

[Bill Armstrong:]

Yes.

[W.M. Rush:]

I realized we're not going to. So don't think -- if I'm going to look at it and tell you of our truck sales last year Class 8, this is a swag, like I've always told you, probably 10%, 12% of our truck sales were tied to oil and gas. It is very difficult sometimes to get your arms around that number. When it comes to the big guys, it's easy to see. But sometimes it's those tentacles. It's not the second tier guys, it's that third and fourth tier guys that are tied to. But I'm going to tell you somewhat on the high side 15%, and I don't believe it's that high. I mean that's a conservative number of our truck sales were tied to oil and gas. The service side does take longer. And the service side -- listen it's not going to zero on the service side. That's not going to happen. They're not going to just completely shutdown drilling wells. It's just where does it land. And we've spent a lot of time modeling around here on what different incremental stuff, and I'm not going to get into it during this call. That's for us to do, we run this company. But what it means when a service is off this or off this, and what it means when truck sales is off this, and so that's where my comments come from. They come from a little bit or factual, not just guessing, trust me as to what it means. But it's just estimating where does it end and then where does it pick back up again. So this is what I got to say.

[Bill Armstrong:]

Just a quick question for Steve. Do you have the fourth quarter same-store sales for Class 8 and for parts and service revenue?

[Steven Keller:]

Yes, one second. Fourth quarter, you asked for?

[Bill Armstrong:]

Yes.

[Steven Keller:]

Percentage wise same-store sales on the back-ends were up 17%.

[Bill Armstrong:]

And how about for Class 8 unit sales?

[Steven Keller:]

Same-store sales on the Class 8 side were up about 1,600 units.

[Operator:]

Our next question comes from Art Hatfield of Raymond James.

[Art Hatfield:]

Rusty, if I recall correctly, you said in 2014 that SAP implementation will be about a $0.10 headwind for the year. Does that come in as expected? And then the follow-up on that kind of how much of that do you think you'll recapture in '15, once implementation is done?

[W.M. Rush:]

Well, yes, that's roughly about right. That's what it cost us. Now, that should continue through the first half of the year, because I have still got, as I said, we rollout in late March and you just don't shut it off immediately. You've got training and stuff that goes on, when you put it on. You got to teach them how to use it. So the first half of the year that will continue at that run rate. The thing to be able to keep in mind, and I'm not trying to, but remember I'm still spending money on momentum, so I've got momentum that's going to accelerate a little bit and cost me a few cents. I would look for it to cost me $0.04 to $0.05 over the next six months or so, as I continue invest before I get to market. We'll be showing our prototypes and stuff at the ACT natural gas conference in Dallas in May. We're on time with that, and we expect to be to market. I know I have always said June, but really you're talking back half of the year, I think you've got to build up with those technologies, but we're very excited about that side. So I don't know if you're going to see a huge pickup there just because SAP is all rolled out, especially not in the first half. You might get a little bit in the back half of the year. By that time we'll be going to the market with momentum, but it will be gradual growth. You don't immediately walk out and sell.

[Art Hatfield:]

Do you think momentum -- does the lower oil prices change your outlook on how that may rollout? I know you've been conservative in your thought process early on?

[W.M. Rush:]

I mean, Arty, short term? Sure, you can say short-term, but the good part is, I'm not rolled out yet. The oil prices are down. I'm counting oil prices coming back up, but over the long-term, let me go back to my comments as they've been all along, natural gas is not replace diesel, period, remember that. Does natural gas have a place in the market? You bet it does. There are certain market segments where it totally makes sense and it not just refuse, there is a lot of beverage hauling and a lot of construction and mixer trucks and things like that, municipal businesses where things make sense. But I still am on track, I don't' believe that oil prices are going to remain in $50 a barrel in 2017, '18, and I just don't see that happening myself. And even if it did, there is still a marketplace for it. But I still believe that by 2018, that natural gas has a chance to be around the 10% mark of the trucks being sold as infrastructure continues to get built. And I think by 2021, it could be 15%. I don't see it going to 50% or something like that, but it does have a place. And we're still just as excited about as I was at day one, I am, because it's a long-term play, and I think we're going to be the best at what we do. You know why? Because service. Everything we do is about service. So I do believe that our service abilities will continue to shine even in this market like they would do in any market we get into. With all the touch points that we have and we'll continue to growth our touch points that we have on the map. That's what differentiates us on the truck side and I guess that's what will differentiate us on this, as we go from a long-term perspective. So I still think when we get out to 2016, I count on it being a nice contributor to the organization. And I would be very surprised -- I could be wrong, but I would be surprised if I am wrong.

[Art Hatfield:]

Quick question. I haven't heard that you addressed this or maybe you have and I just missed it, but D&A in Q4, big sequential uptick from where it's been. Can you talk about that number and what we should -- is that the right number now going forward?

[Steven Keller:]

Arty, the impairment charge for the airplane was $3.4 million pre-tax and that number on the income statement was in D&A line item. So to back that out and use what's remaining that would be the run rate to look at.

[Art Hatfield:]

And why was there an impairment charge on the aircraft?

[Steven Keller:]

We manage our aircraft by lots of different factors, right. We were looking at a possible trade. There is times when you should trade these things. And in that process, it came to our attention that it wasn't worth current market value. So accounting rules order that you write it down and that's what we did.

[W.M. Rush:]

Real quick, Arty, there was nothing out of historical. We don't buy used planes, have that for 20 years to get around all these locations and all these manufacturers and conferences you guys have. We typically aim for five to seven years, but we took a look at it, and so we got a problem, so we handled it.

[Art Hatfield:]

And you ended up keeping the aircraft though?

[Steven Keller:]

Currently, but I would expect --

[W.M. Rush:]

Because for maintenance reasons and whatever, we've had these things for 20-plus years for maintenance and reasons that make sense, we typically trade every five to seven years. And trust me I've trade for one year, its just a little upgrade, and I've never used one.

[Steven Keller:]

In the balance sheet there is an asset held for sale that's a new asset and that's the plane. And clearly we'll be looking to trade that.

[Art Hatfield:]

Well, that squares away a couple of questions for me. The other thing I want to ask you about, Rusty, is parts and service. And look, you've addressed the issue of oil and gas market. And I know, you're not fully knowledgeable on where that may go, but the other aspect that I guess could be a potential headwind is the fact that you are seeing so many new Class A trucks being sold and the replacement cycle may reduce some maintenance needs on some of the older vehicles you see roll through your shops? Can you talk about if you're seeing any of that in your business? And again, I understand you don't fully know the impact of oil and gas yet, but do those two things combine get you concern that maybe you can't grow parts and service in 2015?

[W.M. Rush:]

No. But I would tell you that oil and gas would be the bigger headwind. I am not so worried about -- historically, I've been through many upticks in truck sale cycles, never gone backwards once. The only time we went backward in parts and service was 2009 and I don't have to explain 2009 to anybody. So the biggest headwind is oil and gas. Vehicle sales, remember, probably 10% to 15% of our parts and service business is derived from the upbidding of not just oil and gas business, but other industries where you put stuff on trucks and get them ready, things like that. And then of course, what happens is your warranty, if you do have an offset, typically you may shift a little bit more warranty sales than -- the warranty sales go down, excuse me, I am sorry, just typically, but actually they go up, because you got more new trucks there that are under warranty, where your warranty of sales go down when the age of the fleet goes up, if you understand what I am saying. So that's never been the problem in the past.

[Art Hatfield:]

Is there a big difference in warranty margins versus kind of out of warranty margins?

[W.M. Rush:]

No. They are probably as good. The best thing is you know you'll get your money, right?

[Art Hatfield:]

Right. Yes.

[W.M. Rush:]

They got to pay it. So maybe a little bit different hourly stuff without getting all with details, but no. The answer is no.

[Art Hatfield:]

And getting last question from me. You talked a little bit about and gave some thoughts on where Class 8 vehicle sales could be for you in Q1, but for the year I think you'll alluded the fact that you do expect to grow Class 8 vehicle sales despite what you see with oil and gas, did I hear you correctly.

[W.M. Rush:]

It may not grow -- look, ACT is just like I am. Their growth maybe showing a little bit higher than mine for the year, but I do expect right now -- now, remember, I say this --

[Art Hatfield:]

I understand things change [multiple speakers].

[W.M. Rush:]

Remember all the Q3, Q4, not even all Q2s all booked. But you're in touch with your customers, you understand their plans, and based upon all the budgets and business plans that guys have been working on, with the field guys through the corporate, corporate through the field, they're in touch with what's going on. So yes, the answer is yes, maybe not to the same growth as what ACT has been, but I beat them every year, so one of these years, I guess, I might have to lose a few percent, but as long as I grow I guess I am okay.

[Art Hatfield:]

After '14's growth you're excused for one-year underperformed.

[W.M. Rush:]

I appreciate that Arty.

[Operator:]

Our next question comes from Joel Tiss of BMO Capital Markets.

[Joel Tiss:]

I thought your plane impairment was from bringing some rogue analyst or something on the flight and he puked all over the place or something?

[W.M. Rush:]

You've always got something insightful for me.

[Joel Tiss:]

Can you give us a little help on all this discrepancies? We're seeing a whole bunch of other truck makers. And component suppliers have reported and given us their 2015 forecast, and they're all over the place. And so can you just give us a little bit of sense like Navistar is looking for 2% growth, PACCAR's at 10%, and then everyone's looking for flat medium duty except for Allison's looking for minus 35%. Anything you can help us with there?

[W.M. Rush:]

Well, I'm going to tell you that, let's see who is closer to right every year. Let's go back look historically, I like to think that I'm usually pretty right on what I think. Not always. Not pounding my chest or anything here. But I think some people are more conservative, some people would be given their position in the marketplace, and some people might be are given where they're at from a product perspective and what they're dealing with. I mean minus 35% on medium, I don't know who they're talking to, because that's not -- by the way, when I said our first quarter deliveries would be off in Class 8, I didn't tell you our first quarter revenue is going to be up in medium, okay. So I don't see that. And I'm speaking strictly the U.S. Correct me, Joel, and I'm not sure, but you gave me all these numbers, so I'm taking them, but these are U.S. numbers you've given me, because that's what I'll speak about. I don't know that. I don't have all those on the top off my head here. But I can guarantee, our flat medium-duty business is not going to be 35%, it's going to be up this year, judging by early indications anyway. I mean as I said, I can't guarantee the back half of everything, but judging by early indications and what customers are saying. Because remember the medium-duty business, and I'll get over to the others in a minute, they touch more of the general economy, right. They are not the over the road guys. Yes, they're a leasing companies and this is general economy. So when the country is doing well, which is country is doing pretty well right now, that means the money is flowing down and people can go afford to buy product and that's what we're seeing a lot of our medium-duty side. I mean. I wouldn't be surprised if our medium deliveries, I said to the others they're going to be up 10% to 20% maybe first quarter. So that's not what I'm saying from our Rush personnel perspective. Secondly, I mean Navistar has the tailwind to the engines, as I spoke to you. It has nothing to do with the product now. There is just 2%, because we got headwinds, still trying to deal with those old EGR engines, right, evaluations in the used marketplace. And we're working very hard to get those evaluations up and change perception into what we believe is reality that there shouldn't be the big hit that they're seeing. If we get that done, I will expect their market maybe growing better in the back half of the year. That's my thoughts. I would think their upside is in more in the back half of the year. PACCAR, like myself, we're usually pretty conservative in our approach and what we give out. So if it grows, I mean ACT's got to growing what? 17%, 20%, something like that, this year. That's probably best case. I don't see flat in the first half or down a little bit -- or excuse me, in the first quarter actually, down a little sequentially from Q4, when I was looking at the numbers this morning. So I mean, I'm just running around, my numbers are what I believe. I believe will be up maybe not as much up on Class 8 deliveries as we are in medium-duty when we end up the year but up.

[Joel Tiss:]

And what's the disconnect between very strong orders? And what looks like still kind of flattish pricing on the new trucks?

[W.M. Rush:]

Well, everybody wants to sell everything they can and increase production. So that comes to a discipline, right. That means there's got to be discipline between manufacturers and holding prices and not raising production when you're starting out. And I'm talking about the end. I think production levels will go up some, and I think customers are just -- not everybody is asking for the same increase. I think the dynamics are pretty unique out there right now. And I realize when you're talking about gross margins that from a manufacturing perspective haven't hit what people expect, but I just think its somewhere in that, it lies in there, in that area right there.

[Joel Tiss:]

Can you just maybe you or Steve, where are we in the integration process, because I think someone else asked sort of around the edges before too. It sounds like you get more comfortable making acquisitions again. Are we kind of 70% of the way through or is there a lot more to bring out?

[W.M. Rush:]

Other than the two stores that we bought this week, we'll be completely done at the end of March. Now that doesn't mean I won't still get money through the second quarter, because I got to finish up all the training and everything else. But we should be done, this should be the last acquisition we did this week, that we will ever go to some other systems, stay with the Karmak, and not bring on to SAP.

[Joel Tiss:]

But I'm more trying to get at the benefits like the flow of profit benefits?

[W.M. Rush:]

I hear you there. That might be a 12 month curve sometimes and then even more than that. Remember, we've just started rolling in the fourth quarter; we've just started rolling out in our dashboards. Remember a system is nothing more than a highway and information. It's how you take that information and utilize it to the best in your business. We have just started rolling out to our mid-level managers' dashboards. For every key metric -- not every, but not any percent of the key metrics they need to see, right in front of them every morning they walk in. There is drill down capabilities, but you don't have to go through layer and layer and layer to find out information about your customers. Then it's a training exercise. This is a couple of year process, it's not just an add water and stir deal. But it's ongoing right now, because once we get the system rolled out, like I said we just started rolling out the dashboards in Q4, and we're continuing to roll them out now where they will have dashboards for people to operate off of that, gives them information that I'm going to tell you no other system provides anyone in the truck business like ours will. That they can go and understand the customer touch, understand real-time information where it's not historical it has been in this industry. Remember we're pretty antiquated industry. So historically the business systems that we're operating were always big look back. So as you're always looking back at last month and figuring out this about your customer, this and the other, ours is going to be that real-time part and then it's up to us to utilize that to create more revenue for your organization. So I know I am not giving you as a six week answer or two months answer, but it's a continual evolution of integration. So that should be another driver, that continuous to drive our parts and service business. Remember, driving your parts and service business to grow every year except for 2009 is not easy guys, it is not easy. So you have to continually invest. I go back 11 years ago, and we went out, we would sell in 300 medium-duty trucks the year, so we sell 10,000 this year, but we've been doing it year-after -year. Do I understand what all that medium-duty business exactly contributed to absorption? No, I don't. Do I understand exactly what this business system is going to contribute to growth and absorption as we go forward? No, I don't. Do I understand what mobile exactly contributed with all its pieces an0d facets and different stuff? No, I don't. Do I understand what telematics and the things we're going to be rolling out in customer interface? I don't understand each one individually, but I know that consistent effort, that consistent investment on our part, and if you don't know the organization, go back and look at it, has always been there and those of the thing that we'll always continue to do. And those are the things that are going to continue to set us apart, that's all I can tell you man.

[Operator:]

Our next comes from Tim Robinson of Susquehanna.

[Tim Robinson:]

Rusty, I just wanted to get your view on how you see the current truck cycle playing out? I know the general view heading into fall, was that the market would be less cyclical than prior cycles?

[W.M. Rush:]

Right.

[Tim Robinson:]

So given the strong orders in the fall and everybody raising their 2015 numbers, are you worried that that's really a pull-forward from 2016, 2017?

[W.M. Rush:]

I believe 2016 would be less than 2015, no question. But think about it like this, is that I think it's going to drop under $200,000 or it would be down at $210,000? No, I don't. I still believe there would be enough pent-up demand and enough growth. I'm in line with a $235,000, $240,000 number, somewhere in there. That would be the best view we've had, I don't know, since 2006. When you start looking at in the '17, I think there is a lot of economic things you've got to look at and truly understand where it will be at. I don't know if I can get out that far for year right now. But I also believe it's -- you mentioned the order intake, right, we go three months in a row, October, November, December, we top 40,000 units. And like you said when it's going to stop, it's going to stop. Then we hit 35,000 units last month, and we hit 35,000 in January. I mean, wow, when you look at it, but I think I'm not sure if that's -- I'm told that some people started accounting form differently than they did in the past. I'm going to leave it at that. So when they used to maybe get account from in just 12 month periods, they now account for every order they get. So as I've got a two-year deal, they just book it all in there. So I'm not sure if that's right or not, but I was told that. And then I think some of it with some people was driven by some OEMs making sure that their dealers make sure they have some slots out there. They may not be all sold. They'll sell into them. I understand how that works also. So they were good order months. I don't know they were as good as what you really saw the numbers come out, that's just my opinion. But I'm comfortable what 2016, maybe being off 25,000 units or so. I think that the economy will continue to foster that. I think there will be enough pent up demand. I think that across the general sector, I personally think, by that time, we're going to see -- what's the biggest driver of trucking? Housing, right? I think housing is going to continue to get better, personal thinking, for the next couple or three years. So I think housing starts, which will continue to help dramatically, help that to continue to grow.

[Tim Robinson:]

And then could you just talk about your outlook for the different vocational markets in 2015?

[W.M. Rush:]

Construction up, no question. Obviously, I think, I've touched on oil and gas enough. When I look at vocational, medium duty is like a lot of vocational businesses, right. Whether its landscaping, whether its refrigerated units, its just a lot of different things without me going into -- a lot of box trucks, a lot of different kind of trucks that you sell. I look for that to continue to be strong, as I said from that perspective. Refuse for us should continue to be pretty strong, as strong as it has been, if not better. I think our penetration into many different refuse companies has grown dramatically over the last year, not just tied to a few. I think the product and quality of our low cab forward product from PACCAR, from Peterbilt has improved and I think we will continue to work on that. I think that along with our fuel systems that we'll be coming out with will help us continue to grow in that market. So other than oil and gas, I don't really see any downside in the vocational business in the next 12 months to 18 months, 24 months.

[Tim Robinson:]

And just last question. Are you seeing a material change in customer acceptance of the Nav-ProStar with the 13 liter engine?

[W.M. Rush:]

We've had good results. The headwinds are the old trucks, man. The headwinds are the used trucks, but product is not the issue. The streamlining of the organization, Troy and his team have done a good job with, as both my Class 8 manufacturers have done great jobs with their markets. There's no question about that. Peterbilt guys have done a great job. Well, they're faced with a whole different task obviously, but given where they started a couple of years ago, they're doing as good job as they could. There was no secret sauce, again to figuring that out. It's the used truck headwind is the biggest issue they deal with. I think the acceptance of the 13 liter engine from customers that my people have talked to and told me about has been, just to answer the question, has been good with an FCR configuration. It's just the old stuff.

[Operator:]

And our final question comes from Kristine Kubacki of Avondale Partners.

[Kristine Kubacki:]

You talked a little bit about in the last question. I wanted to ask you a two-part question. One, on the used truck side, so a broader picture. Can you talk about what's going on there on the used truck side? And obviously, are you worried about that we're going to see a significant amount of supply coming on in 2015? And then, secondly, you talked about the residual value challenges with the Navistar out there. Is there any risk to you? I know, obviously, we're seeing Navistar take a significant amount of those onto their balance sheet, but is there any risk to you there? And then you talked about also getting those residual values up. Exactly how is that possible?

[W.M Rush:]

Let's take the overall market, and then I'll dive back into the Navistar piece. Of course, used as always, people always ask, what's the used market going to do. So as long as general economic conditions are decent, it's pretty easy to figure out. Let's look back four years ago and see what we sold, right. You can't recreate used trucks. Used trucks were created in the past. And the other is demand issue, right. That has to do with economy, what's going on right now. Two issues. You already know what your supply side is. What's the demand issue? Where we are from the demand perspective? As we look back and we look at a truck built in 2011, it's a four-year-old truck, which we'll say is a typical over-the-load trade cycle term now. If I remember correctly that year was around a 173,000 units. So no questions, I think it was 173,000, 198, 000, 186,000, as I'm reflecting my memory over the last few years and then this year. I would tell you that, yes, supply is going to come up. But I do believe that through '15, I don't see prices increase, I don't see values, I do believe there will be demand and I think values will stay. Now, remember, when I say that, that means the truck compared to age wise. When I say 48-month old truck compared to 48-month-old truck, next month will be a 49 month will stay pretty flat, maybe a little bit of decrease. There could be a little bit of decrease, but as long as we've got some decent overall economic conditions, I expect demand should be pretty good. '16 we'll have to see what '16 brings. I guess, it was 198,000 U.S. retail that year. So we'll have to see if the economy is still good, we can still see the same stuff. When we get out about four years from now, we'll figure that one out. But that's not what we're worried about right at this moment. Navistar, you asked, how did they get -- what did you do? If you look, I don't see a risk to us, no. I know how may MaxxForce engines I have in my inventory. My inventory is, if you look, I'll just tell you, you can go look at my used truck margins. They were down in Q4. We made sure, as we do every quarter, that our inventory was at the right price it should be, so that was a contributing factor to my margins being down, was making sure that our inventory was mark-to-market there. We do that, that's standard practice, but obviously in Q4 we've taken extremely hard look at it, as we go into the next year. So I am comfortable with the current inventory. What we have to continue to do is build acceptance of that used product. That used product is not as bad when all the campaigns are done, when everything is done on the truck that should be done, put in with the right warranties and build confidence back into it. That product can be sold and should not be valued, if the values is at now, if they're accepted in the marketplace, right now. Its perception and the things that have happened of the past, they were realities too. But I think they figured out fixes that when campaigned properly and done properly, that the product runs well and runs good. And the spread between the valuation of it and other products is way too big in my opinion. So what you do, you take it out, you build confidence in it by putting warranties on it, doing that, making sure that putting good financial programs together, so that it makes an inviting piece. So you close the gap, it probably will not bring the values, it won't bring the values of other products, but there shouldn't be the gap there is now. So you go out, you approach it. You take it, you put in front of customers and you stand behind it. And that's what really -- this is not an issue, as I think they addressed on their Investor Day, it was going to go away in the next two months. This is probably still got two years to deal with. But as I said, the good part is, it gets smaller everyday, but you've got to go out and attack it and show confidence, and I think that's what they are trying to do. And I know we will partner with them in our Navistar stores and do the same thing.

[Kristine Kubacki:]

One last question, on the warranty period. Is it kind of standardized or is it variable, depending on who you're selling it to?

[W.M. Rush:]

It will be variable depending on mileage on trucks and things like that and what used warranties. They cost money, but you want to put that on the show, you'll charge that to the truck or however you work it out, to show that there is confidence in the product, right. And that's extremely important. But it also has to meet what the market value is. And right now it's a multi-pronged approach. I've had quite a few conference calls with those folks in a while recently about that, and I am very open about it. And I am going to be -- we have to do that, we have to get back market share. They have to get back the share and find the rightful place in the market, in spite of these headwinds. And that's the biggest headwinds, as I've said over and over the steadier work. There is no question in my mind. The product they have is a good product. And so it's just the headwinds that will be the overhang of the EGR engines. That's what it is. And so you've got to get -- but the gap is too large in my opinion, between what's its valued on the wholesale market right now and what it should be valued at. Should there be a gap, yes, but it shouldn't be as large as it is. And that's why the values that they were originally depreciated at do not match what markets are. So we have to get that value out. At the same time, those balance sheet deal they come down every day, right. Everything in the industry depreciate, you're not building them anymore. So hopefully you'll narrow that gap and eventually get where you can help customers trade into new vehicles, build up confidence in the secondary market and it all comes together.

[Operator:]

And at this time, I am not showing any further questions. I'd like to turn the call back to management for any closing comments. End of Q&A

[W.M. Rush:]

No specific closing comments. Just we look forward to talking to everyone in April. And I'm sure we'll be happy to talk to everybody. And thank you all very much.

[Operator:]

Thank you, sir. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.