Rush Enterprises, Inc. Q2 2010 Earnings Call Transcript

Jul.22.10 | About: Rush Enterprises, (RUSHB)

Rush Enterprises, Inc. (NASDAQ:RUSHB)

Q2 2010 Earnings Call

July 22, 2010 11:00 am ET

Executives

Marvin Rush - Chairman

Rusty Rush - President and CEO

Marty Naegelin - EVP

Steve Keller - VP and CFO

Jay Hazelwood - Controller

Derrek Weaver - VP and General Counsel

Analysts

John Barnes - RBC Capital Markets

Tim Denoyer - Wolfe Trahan

Chaz Jones - Morgan Keegan

Tom Albrecht - BB&T

Peter Chang - Credit Suisse

Robert Kosowsky - Sidoti & Company

Bill Armstrong - C.L. King & Associates

Operator

Good day, ladies and gentlemen, and welcome to the Rush Enterprises second quarter earnings release conference call. (Operator Instructions) I would now like to turn the call over to your host Marvin Rush, Chairman of the Board.

Marvin Rush

Welcome to our second quarter earnings release conference call. On the call with me today are Rusty Rush, President and Chief Executive Officer; Marty Naegelin, Executive Vice President; Steve Keller, Vice President and CFO; Jay Hazelwood, Controller of Rush Enterprises; Derrek Weaver, Vice President and General Counsel.

Now, Steve Keller 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 could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2009 and our other filings with the Securities and Exchange Commission.

Marvin Rush

Let's update you on 2010. We were pleased to report that the company has continued to perform, delivering another quarter of widening profits. Our truck dealerships parts, service and body shop revenues increased 21% compared to the second quarter of 2009. This results in our absorption rate increasing from 95.2 to 104.3 for the same time period.

We expect that back-end business to remain strong throughout the year as more trucks are being put into operation with improving freight conditions. However, retail sales of new heavy and medium-duty trucks remain sluggish throughout the second quarter. New truck purchases continued to remain at least less than normal replacement cycles due to the general economic conditions and the transition to the 2010 emissions-compliant engines in new trucks.

General hesitancy by truck buyers to purchase new trucks did have a positive impact on used truck values. Company's used truck sales revenue was up 19% and used truck gross margin more than doubled compared to the second quarter of 2009. We expect used truck values to stabilize in the third quarter and our used truck margins to return to their historical levels.

Despite continuing new truck sales conditions, we remain profitable and continue to invest in our future. We formed the new Navistar division and completed the acquisition of Lake City Trucks. We also opened our new flagship truck dealership in Oklahoma City and acquired a Ford Commercial franchise.

As we look further into 2010, the industry experts currently estimate U.S. Class 8 truck retail sales for 2010 to be 108,000 units, up from 97,000 units in 2009. Current industry projections are for U.S. Class 4 through 7 vehicle retail sales in 2010 to be 115,000 units, up slight from the [114,000] units in 2009.

The average age of truck fleet remains one of the oldest on record, and we believe truck capacity is now in balance with freight movement. As a result, trucks are entering back into service and will need maintenance, indicating that parts, service and body shop revenues should remain at the improved levels seen in the second quarter.

Both higher used truck values and increased back-end revenues are strong indicators that an industry recovery is underway. However, we do not anticipate a significant increase in retail truck sales during the third quarter.

Recently, most truck manufacturers have reported increases in new truck orders, indicating that confidence is returning, which we believe will lead to a strong truck sales market in 2011, 2012 and 2013.

Our balance sheet remains strong and the company has been able to generate positive cash flow despite market conditions. We are confident in our strategy and our ability to execute it. Thanks to our employees we remain financially strong and a profitable company.

We're now prepared to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from John Barnes with RBC Capital Markets.

John Barnes - RBC Capital Markets

Rusty, can you talk a little bit about just the used market and the firming of used truck price? We're seeing it a little bit on both sides. The truckers are awarding used truck sales, but lower gains on sale of that equipment. Seeing from your standpoint that used prices are firming up. So can you just talk about the pricing environment there?

Rusty Rush

There is no question, John, that used truck values since January have firmed up since the end of last year and beginning of this year. Values have obviously firmed and increased. And at least our margins being somewhat higher than what they have been historically is the fact that you got to remember we traded for these trucks roughly in the last quarter or last half of last year.

So as you sell out of that inventory in the first and second quarter of this year, as market values go up, you experienced obviously higher margins and higher return on the used truck sales. But we expect our inventory to get more in line with current valuations and margins to go down to where they were in the last two quarter and be more in line with our historical averages.

John Barnes - RBC Capital Markets

Can you talk a little bit about where your used inventories stand now? Do you feel like they're good enough to handle all the potential sales that are out there or do you feel like you're running a little bit light on inventory?

Rusty Rush

Well, I would say our used inventory is down. In fact, we're down $7 million from Q1, roughly of 25% from Q1. So keeping an ample supply of used trucks is a daily [venture]. We have a few buyers in the field as we look to acquire and to trade, obviously the trade. And that will be the key to this. As new truck sales pick up and people trade out of their inventory, I would expect our inventories to rise. But we look forward to that given the demand that we see in the used truck market.

John Barnes - RBC Capital Markets

In terms of the back-end operations, have you seen a major uptick in the type of service or are you starting to see more heavy maintenance on the equipment now as that average kind of dollar per bill beginning to tick up pretty substantially?

Rusty Rush

John, I don't have the exact numbers in front of me, but the answer is yes. Obviously, as the equipment is put back in place, not just on over the road, but we've had certain vocations that picked up also on our vocational business. We always reported it to be very strong. We've always represented we're very strong in certain vocational markets.

And we're seeing a couple such as oil and gas strong. But also oil and gas, and I would say just the over-the-road truck load side have picked up more than other sectors. We have not seen that type of pickup in the construction market.

So we look forward to today that that comes at the same time. So it's fairly broad, as I said, across the couple of vocations and across this basically the road carriers. So the average ticket obviously has picked up.

John Barnes - RBC Capital Markets

And then lastly on the back-end, in terms of the new acquisition, can you talk a little bit about where they stand in terms of their back-end operations versus kind of Rush as an average? How long and what does it take to get those dealerships up to kind of the Rush standard in terms of the back-end operation?

Rusty Rush

I know you're referring to the Lake City. But no. I would say historically they run slightly less than us. But we see a lot of upside. As I toured all their facilities before the acquisition, I saw a lot of potential for increased absorption rate as we get them up to our standards. Now we'll say that in their first month, they were up to where they had been running in the prior year.

I don't think we had much of an influence on that as you'd like to think. But in the first five weeks, n the second quarter of earnings, they definitely met our expectations of what we anticipated in the acquisition. But we're excited about the possibilities of where we go with Lake City and with Navistar in general from there.

Operator

Our next question comes from Tim Denoyer with Wolfe Trahan.

Tim Denoyer - Wolfe Trahan

In December, the parts and the service business, but you said a bunch of other was with trucks being brought back into service and at the same time capacity feels more balanced. Do they represent any risk of maybe some of that business not continuing? I mean certainly there is an uptick from parts and services as the economy continues to recover. But do you think there is any downside risk as fewer trucks are brought off of the fence.

Rusty Rush

No, I don't believe that at all, because obviously the trucks are older. They're not going to stop running once we put them in place. The more models they run, the more maintenance they require. So it's a not a one-shot deal. Our mix of business has changed immensely from the last two years. In fact, we don't want these sales away off, obviously because there haven't been new truck sales over the last couple of years.

So you see the upside is over in the customer service side. Do I see it flattening? Yes. You're not going to get the continued acceleration that we got in the second quarter, going into the third.

Tim Denoyer - Wolfe Trahan

Okay. And could you talk a little bit about the internal work that you do in the parts and service department when new sales pick up, the benefit you see there?

Rusty Rush

Yes, historically somewhere around 12% or so of our gross profit comes from the after-sale of new trucks on the work that we do on trucks, rigging in, preparing and putting bodies or whatever it might be depending on vocation they are going into.

So we look forward to seeing that pick up. Some does offset. If you look historically, even when truck sales have accelerated, our absorption rate accelerates also. It does not go backwards. It remains the same or accelerates slightly even when new truck markets are up.

Tim Denoyer - Wolfe Trahan

And that was 12% of your parts and service growth?

Rusty Rush

That is correct typically. It's not right now, but that will be a piece that would help offset the fleet age coming down as new trucks go into play. As the fleet age comes down when truck sales do pick up, it's somewhat offset by the work that we perform on new trucks.

Tim Denoyer - Wolfe Trahan

And then last question on the acquisition environment. What do you see on a daily basis is there an increase in willing sellers?

Rusty Rush

Well, I would say that I don't want to get into a lot of detail about that, Tim, but obviously we're active in the marketplace and looking at, we would hope there were to be some more activity down the road.

Operator

Our next question comes from Chaz Jones with Morgan Keegan.

Chaz Jones - Morgan Keegan

Wanted to focus a little bit on the gross margin rusty in new and used, 8.6% is pretty stout from a historical perspective. Obviously mix drives that. Should we expect it to get a whole lot better than that moving forward?

Rusty Rush

No, I wouldn't. It was driven mainly by used margins. Okay. New truck margins were slightly up, but as we said used truck margins were dramatically up as we move out old inventory prior to the firming of used truck pricing.

I would say I'd not expect that to continue. It was mainly driven by used truck pricing, which was market-driven as we sold out the old inventory that we had traded for prior to the increase in values.

So I'd say it was a couple of cents driven in the earnings was driven by margin.

Chaz Jones - Morgan Keegan

So 8.6% we're probably not going to see anything really above that. As fleet sales at some point start to accelerate, that's going to start to come back down?

Rusty Rush

As you know, Chaz, you've bothered us a long time. It all had to do with mix. You can look back historically and you've never seen a quarter where actual numbers of used trucks sold was higher than new trucks.

From that perspective, it's somewhat of an anomaly. But again, it contributed to a very nice quarter, but the quarter was mainly driven by parts and service operations.

Obviously, as I've always told you guys, that would always be the driver that be the indicator that tells you new truck sales are following right behind as the economy recovers and as the industry recovers as a whole.

Chaz Jones - Morgan Keegan

Help me think about the heavy duty market in terms of, the forecast really hasn't changed here, but, yet may be to some extent, tell me if I'm wrong in sensing in your tone that the second half of the year may be not be as strong in terms of heave duty truck sales as you're anticipating at the beginning of the year?

Rusty Rush

No, I think they're going to be in line with what we thought. If you look at U.S. retail sales, through the first six months, they were still less than 50,000. I think there were 49,800 units. That's only tracking to 100. So if you get 18%, 20% increase over the first half, you're only up to a 110, right?

You're not hitting any big mark. And so percentages, you can't get caught up in percentages. So if you put in and deploy an extra 9,000, 10,000 units, which is pretty substantial on a 49,000 first half number, it's really not an absolute number.

So I wish to look for the number to be somewhere in that range. I really believe it's mainly going to be 11, 12 and 13 loaded. I really think when we get into 2011, you're going to see quite an acceleration in new truck retail sales in the U.S.

I know order intake has been somewhat strong in the last three months, stronger than any of us would anticipate it. But I'm going to tell you not all that was being built right away, okay? I have a feeling that it's going to be pushed out in the fourth quarter as we have said all along.

Chaz Jones - Morgan Keegan

I mean 4,300 to 4,700 heavy duty units I think was in your first quarter cue?

Rusty Rush

I don't know that we're going to get there.

Chaz Jones - Morgan Keegan

Yes, I guess that's what I was getting more towards.

Rusty Rush

That will be a very difficult task for us to get at. It's possible, but it's going to take a big fourth quarter push to get there. I don't see the third quarter going up much more over the second quarter, being much more in line delivery-wise. But again, I do believe that the back-end of the business will be stable as we go forward.

Chaz Jones - Morgan Keegan

Is Lake City starting to help that some as we kind of move forward though?

Rusty Rush

That'll help it some. From a unit perspective, I would hope that they would to drive to 250 to 300 units in the second half of the year. You're hoping somewhere in that. And that could drag some of it into the first quarter.

But we're very comfortable with what they have on their order board. It's just a matter getting them delivered, et cetera, during the second half of the year. We're pleased with the acquisition so far.

Chaz Jones - Morgan Keegan

And then the last question. Lease and rental seemed to kind of accelerate here. Could you may be talk about that a little bit?

Rusty Rush

Well, last year leasing was actually one of the only definitions that was up year-over-year from a growth perspective, from the top-line perspective. So we expect that to continue. And actually the earnings side of leasing is a lot better this year as some of the growth that we had last year and continuing into this year is gaining hold and gross margins also.

Chaz Jones - Morgan Keegan

Do you think that the margins are kind of sustainable on the mid-teens?

Rusty Rush

Yes. I mean at peak, we've seen them over 20, but I wouldn't tell you that's the way it's going to be. You got to remember we run a very conservative leasing fleet. So when used truck values pick up, our gain on sale picks up. So you must keep that in mind as we go forward. So as we roll out of other inventory, you see a pick up.

One of the other indicators that we see inside leasing, in terms you have a truck business really is in truck sales should be, is our rental utilization has been at historical highs, really. I mean it is the top of where we are at for the whole first half of this year, and especially in the second quarter. So that tells you, when you got a heavy rental demand, the capacity is being used up from a truck perspective, and demand is there and truck sales will follow in line.

Chaz Jones - Morgan Keegan

Could you maybe just talk about the financing, and has there been any dramatic shift on the finance side just in the overall market?

Rusty Rush

No. One quick answer, no.

Chaz Jones - Morgan Keegan

Okay. That suffices it for me.

Rusty Rush

It's basically status quo as to where we have been. I mean, it's not where it was. It's much better as I've said. It's stabilized here late last year, in the third, fourth quarter of last year, but its pretty much been constant, stagnant from there.

Operator

Our next question comes from Tom Albrecht with BB&T.

Tom Albrecht - BB&T

I just wanted to get a feel, I think a lot of the '04 and '05 tractors, and maybe this is a marketplace question and not just Rush, have been largely sold. The '06 supply of used trucks is being bought. Where do you see I guess the greatest supply? Is it '06 through '08? Can you just talk about that dynamic a little bit because we blew out so many used trucks so quickly the last six months?

Rusty Rush

Well, I would say that probably what's left is mainly '07s, because remember '07s were built in '06. So they are four-year-old trucks. So we are going to be working through them. And there's still some '06s out there. You're right in your analysis that '04s and '05s have mainly all moved out, okay? What you are moving through is from a first time buyer perspective; what you are moving through is the remaining '06s and the '07 trucks. And I would say, '07 year model was the biggest in history.

So we will continue to move through that. When you start talking about '08 and '09, you start getting in some linear years, you know it was around 157,000 US retail sold in '07 which were the '08 models. And if you look at some of the things going on with CARB on the West Coast over the last year, a lot of the '08 and '09 models that may have fallen into the marketplace, whether it was through failures or whatever, or purchases, had been swallowed up, a lot in California to be honest with you, and other areas.

So your supply of '08 year model and '09 year models, which were 2007 technology is going to be even leaner than it would have historically been due to some demand that was created out on the West Coast especially for that technology.

So I think when you get through the '07 year models, you are not going to have even less that you historically had off of 157 and a 133 it was in '08 retail sales in the US. I hope it gives you some flavor, but really what we're looking at trading for right now is the remaining '06s and the '07 and some '08s, but not a lot.

Tom Albrecht - BB&T

Yes, that will probably be next years story '08?

Rusty Rush

Right and there is not going to be a whole lot, there should not. I doubt there will be a lot of them, Tom. So, used truck pricing stabilizing, or having an issue of used truck pricing as I look forward. I don't see there remaining much downside risk to used truck values to be honest with you.

Tom Albrecht - BB&T

Yes, I don't either. What about parts and services growth? You were up about 21% year-over-year. Are we okay to think about 20% to 25% growth based upon what we know with the economy today for the second half of the year?

Rusty Rush

Sure, if you're going to comp it to last year year-over-year. What we're doing I believe is sustainable. Okay? You are not maybe accelerating (inaudible) order that you saw. It's not going to continue to accelerate at that rate, we've already seen that. But stabilize? Yes, three and a half weeks into this month, it's pretty stabilized.

Tom Albrecht - BB&T

Right. And then two other quick things. Have you articulated an AR goal for this cycle? I think you may have but it gets lost in the shuffle, and then what about the third quarter, it's natural when a recovery starts to think about taking the numbers out, but it feels like maybe your earnings performance will be more comparable to what we just had? Not necessarily a big ramp up given the used dynamics you've already discussed?

Rusty Rush

Tom, you're right on target, okay? I'm not going to give an EPS, you know that. You can't look for the acceleration from the second to the third that you saw from the first to the second. I mean, we've got headwinds and things such as used truck margins. We've got the one piece of the seven-year cycle in the first half of this year. You see it once every seven years, Tom where that happens.

But we would hope that towards the fourth quarter new truck sales would pick up. But don't look for that type of acceleration. But we're right where we're supposed to be. We're right where we've talked about, 11, 12 and 13, talked about it for the last year. It is progressing as we anticipated it would, and we're very, very excited about 11, 12 and 13.

And 2010 is working its way just like it's supposed to. I've told you before, parts and service picks up, used truck values come in play, new truck sales follow, and when you got all the drivers that are out there, the oldest fleet on record, I don't care about miles, not as many miles were driven, yes, but age is far surpassing miles.

If you look at the trucks we're trading for, there are a lot higher model trucks than what I've typically traded for in the last four-five years. So it will come; it will come.

Tom Albrecht - BB&T

And the medium duty strength was a little surprising at least from our end. Was that one-time in nature or was that just reflecting the stability of that market not being dominated by four higher fleets but by general corporations?

Rusty Rush

Well, I would tell you this. At a time it was up some. Maybe over what your expectations were, but we don't expect it to be up in the third quarter. Some of the OEMs that we represent are trailing with their new engine products, okay? They are not even out yet. So some from oversees are not even out yet, and we're only going to be releasing in mid-August on out.

So I would tell you, it's going to be a little tough on absolute unit deliveries in the medium duty business for a couple of the OEMs that we represent, because they don't have product right now. Okay? And what happened is, we had purchased product, fortunately, probably more than we should have given the anticipation of having that gap. And we're basically (tough) sold half of it, okay, waiting on new product and for some OEMs.

Operator

Our next question comes from Peter Chang with Credit Suisse.

Peter Chang - Credit Suisse

I'm just trying to dig in a little bit on your Q3 expectations for your truck segment. It sounds like, with used truck inventories coming down and maybe less unit sales next quarter are we expecting new trucks to pick up the slack? I mean it sounds like you're thinking that those aren't really going to start accelerating until the turn of the year?

Rusty Rush

Right. No, I don't think the truck deliveries are going to pick up much to pick up the used truck slack. But we're comfortable that our back end, our parts and service business is the main driver of what you're seeing right there. When you start running a 104% absorption, that number is pretty reflective of that. That is the lowest new truck sales that we have had since the acquisition of ATS back in January 1 of 2005.

Yet we were able to produce a quarter that we're fairly proud of given what truck deliveries were, that we believe was pretty decent. So to answer your question, as I said earlier, things are going to stay about the same we believe throughout the rest of the year until truck sales start accelerating we believe late in the year - not necessarily in the third quarter, but late in year. So we believe we can, I don't want to get into earnings per share, but similar numbers to where we're at right now.

Peter Chang - Credit Suisse

Got you. And as far as building up your sales force to gear up for the turn here later in the year, would you expect to see that reflect in your SG&A line as a percentage of sales? Will you start picking that up next quarter?

Rusty Rush

Well, when you take this, we break it into two pieces; there's an S and there's a G&A. Remember, sales are pretty much variable, okay? That's a commissionable variable component cost of your sales. So yes, obviously if truck sales start picking up, the S part will go up because that is a commission driven expense.

And G&A, as I said from a parts and service perspective, you cannot raise parts and service without increasing your G&A somewhat. When you're handling parts, delivering parts, putting parts on, doing all the things it takes inside of our business, G&A goes up, and that's the denominator part of absorption.

And there is also commissions driven to the back end, to our parts and service sales people. Because we have a large parts sales organization out there, well over 100 parts salesmen, outside salesmen throughout the country that are commission based also that help drive this.

So sales commissions will go up if sales revenues and sales profits go up, from a truck perspective. And somewhat on the parts and service side, that follows also.

Operator

Our next question comes from Robert Kosowsky with Sidoti & Company.

Robert Kosowsky - Sidoti & Company

I was just wondering, what would make you bearish on 2011? Like how bad would the economy have to be in order to lever demand up, say, 25% versus 2010?

Rusty Rush

Well, to me, if the economy is bad it's still going to be up 25%. You're getting into percentages again. I don't see any way, if not a 135,000, 140,000. I'll look for a bigger 2011 from the truck retail deliveries.

So to me, that's various economy right there, because industry conditions are such that industry drivers are going to be there. I don't see any way, because the age of the fleet and what's going on out there.

If we only had a 130,000 or 140,000 U.S. deliveries, that would be a high aggressive point next year. When you look out, there are projections out for 170, and I'm more in line with those kind of numbers.

Robert Kosowsky - Sidoti & Company

Any thoughts on OEMs getting the entire 2010 price increase for you and what's kind of the dynamic there?

Rusty Rush

I believe this is unlike in 2007 emissions. This one will have to be passed mainly through. The economy was a little bit more robust back in 2006 than it currently is. And margins at the manufacturing level last year were driven down to just barely above a breakeven number. So I do believe that engine pricing will be passed through to the customers.

Robert Kosowsky - Sidoti & Company

And then just one last question, kind of more broader, what is the difference between Peterbilt and international dealership from like a revenue mix and kind of margin on new truck sales, used truck sales, just compare and contrast a little bit?

Rusty Rush

The difference is not enough for me to get into and drive into all the different revenue streams here on this call right now. But as far as the model goes, you're driving for absorption and truck sales at the same time. There maybe 0.5 point difference here and 0.5 difference there. But it's not enough for us to get involved in right now.

Operator

(Operator instructions) Our next question comes from Bill Armstrong with C.L. King & Associates.

Bill Armstrong - C.L. King & Associates

Medium-duty sales were also above of what I was looking for. So what was driving that? You had a pretty big increase year-over-year.

Rusty Rush

Well, obviously, as I said a little bit ago, I think some of the old technology that we had, we had more inventory than our competition. We did go out and purchased some in the last half of last year in anticipation of what we thought was going to be a gap of product that we have been experiencing as we sit here right now.

So because we had inventory and maybe some of our competition didn't, that helped obviously drive some sales in our direction. So that's really the reason if you want to know the truth. It's not so much of demand issue. We were prepared for it possibly better than others.

Bill Armstrong - C.L. King & Associates

How many buses were included in that medium-duty number?

Rusty Rush

Let me get that for you. 101.

Bill Armstrong - C.L. King & Associates

And did Lake City have any material impact on your revenues or earnings during the quarter? I know you don't have it in there for a month.

Rusty Rush

Probably that was in there for five weeks. We closed on May 24. I wouldn't say material; it was accretive. But I mean in only five weeks, how accretive can you really be. But we're pleased with the acquisition as anticipated. It has performed as anticipated, and we look forward to be helping the growth of that organization as we go forward.

Bill Armstrong - C.L. King & Associates

Is mix between Class 8 and medium and used similar to Rush or are there any material differences there?

Rusty Rush

It's similar. I think they may mean we could do a little better job with some of their medium. But it's similar. The numbers are in those five weeks are similar to our breakouts. But I think we see some upside in certain areas, as I mentioned earlier. They do a good job, a very nice job. The organization is a fine-run organization. But we do see some upside in certain areas across the geography.

Operator

Thank you. I'm showing no further questions at this time.

Rusty Rush

Well, until our third quarter earnings release, if there are any other information we have, we look forward to seeing you. And thank you all very much for participating.

Operator

Ladies and gentleman, thank you for you participation in today's conference. This concludes the conference and you may now disconnect.

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