Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Rush Enterprises, Inc. (NASDAQ:RUSHA)

Q3 2007, Earnings Call

October 19, 2007 10:00 am ET

Executives

Marvin Rush - Chairman of the Board

Rusty Rush - President and Chief Executive Officer

Marty Naegelin - EVP

Steve Keller - VP and CFO

Jay Hazelwood - Controller

Derrek Weaver - CCO

Analysts

John Barnes - BB&T Capital Markets

Peter Nesvold - Bear Stearns

Andrew Obin - Merrill Lynch

Chaz Jones - Morgan Keegan

Chase Becker - Credit Suisse

Gary Lenhoff - Ironworks Capital

Milan Gupta - Southpoint Capital

Andrew Casey - Wachovia Securities

Operator

Good day, everyone and welcome to the Rush Enterprises Inc. Third Quarter Earnings Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Mr. Marvin Rush, Chairman of the Board, for opening remarks. Please go ahead, sir.

Marvin Rush

Good morning and welcome to our third quarter 2007 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 and Derrek Weaver, Chief Compliance Officer. Now Mr. Keller would like to say a few words regarding the 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. Because these statements include risks and uncertainties, our actual results may differ materially from those expressed or implied by such forward-looking statements.

Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2006 and in our other filings with the Securities and Exchange Commission.

Marvin Rush

Now, we would like to give you an update on our progress. Let's talk about the third quarter results. In the third quarter, the company's revenues totaled $522 million, a 20% decrease from revenues of $651 million reported for the same period last year. Net income for the quarter was $13 million or $0.34 per diluted share compared to $16 million or $0.43 per diluted share in last year's third quarter.

Let's talk a little bit about the third quarter business segment results. The truck segment recorded revenues of $491 million in the third quarter of 2007 compared to $626 million in the third quarter of 2006. The Company delivered 1820 new heavy-duty trucks in the third quarter of '07 compared to 3512 heavy-duty trucks in the same period of '06. This significant drop in sales from 2006 to 2007 is the result of the exceedingly strong truck deliveries in 2006 as the industry prepared for the 2007 emissions regulations to take effect.

Revenue from Class 8 truck sales decreased approximately $168 million or 43% to $223 million in the third quarter of '07 from $391 million in '06. Looking forward, we expect to deliver approximately 7200 to 7500 Class 8 trucks in 2007, which would result in Rush being off approximately 37% in Class 8 truck deliveries for the year versus an expected industry decline of 47%. I am extremely proud of our 37% increase in our third quarter medium-duty trucks sales compared to the industry's overall decrease of 4.3%.

In the third quarter of '07, 1520 new medium-duty trucks were sold versus 1109 new medium-duty trucks in the same quarter last year. Revenue from medium-duty trucks sales increased approximately $16 million or 27% to $76 million in the third quarter of '07 from $60 million in '06.

This increase is directly related to the focus over the past several years to penetrate the medium-duty market segment in the areas where we operate, providing a knowledgeable, dedicated sales staff and offering a breadth of products to meet the varied needs of the customer base. We expect medium-duty sales to continue to grow as our medium-duty franchises mature in their respective markets and we strengthen relationships with our customers in this segment.

The company delivered 1032 used trucks in the third quarter of '07 compared to 999 used trucks in the same period of '06. Revenue for used truck sales increased $4 million or 8% to $53 million in the third quarter of '07 from $49 million in the third quarter of '06.

Despite the decline in Class 8 truck sales during the third quarter of '07, our parts, service, and body shop sales increased 9% to $116 million in the third quarter of '07 compared to $106 million in 2006, resulting in another quarter of solid absorption rate performance. Our third quarter absorption rate increased to 105.1%, compared to an absorption rate of 104.5% for the third quarter of '06 while the same store absorption rate increased to 106.1% year-to-date for '07 compared to 105% year-to-date for '06.

Let's talk a little bit about the construction equipment business. The company's construction equipment segment recorded revenues of approximately $25 million in the third quarter of '07 compared to $21 million in the third quarter of '06. New and used construction equipment sales revenue increased 23% to $19.5 million in the third quarter of '07 from $15.9 million in the third quarter of '06. Construction equipment parts and service sales increased 19% to $5.1 million in the third quarter of '07 from $4.3 million in the third quarter of '06.

Let’s talk a little bit about the industry outlook. Weakness in the housing market and the overall weakness in freight volume have prompted some large truck carriers to downsize their fleet. Additionally, large truckload carriers currently have excess inventory of trucks with pre-'07 emission engines that they have not put in service yet. These factors will cause the Class 8 truck market to remain soft into the beginning of 2008. We believe normal customer trade cycles and new diesel emission releases scheduled to take effect in 2010 will result in increased Class 8 truck orders beginning in the second quarter of '08.

The magnitude of the '08 and '09 pre-buy will be largely dictated by the general economic conditions. If economic conditions in the U.S. are good, we continue to believe that 2009 could be a record year for U.S. Class 8 deliveries.

We are now prepared to answer any questions you may have. Operator, please review the procedure for asking questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we'll go first to John Barnes of BB&T Capital Markets.

John Barnes - BB&T Capital Market

Good morning, guys. Congratulations on the quarter. Rusty, a couple of questions for you real quick. First of all, on your medium-duty business, how much bigger does your medium-duty business have to get before you feel like you start mirroring the industry trends? I mean, you've far outpaced the industry on medium-duty sales, so I just want to know how much farther you think you have to go before you start to feel the industry trends on medium-duty?

Rusty Rush

Well, I would tell you, I personally don't want to put a timeslot or a time segment on that, John, but again, we still have plenty of room for growth in our medium-duty arena. If you look out, we are still a maturing organization and I think that shows in the quality of the numbers if you look back from quarter to quarter to quarter.

And I really don't have a timeline on when we will mature out to the Class 8 to more mirror the industry. We like to think that we wouldn't mirror the industry totally anyway and we would always outperform the industry, whatever arena we are in. But we see nothing that we believe is going to continue to slow the growth trends that we have shown over the last three years really.

John Barnes - BB&T Capital Market

Okay. And can you remind us again, how many of your locations are you now selling medium-duty out of?

Rusty Rush

Well, we sell our medium-duty at every location we have. You must remember the Peterbilt medium-duty product is actually the largest medium-duty brand that we still deliver. So, even if we don't have access in certain market areas to other brands, we always sell the Peterbilt medium-duty product.

John Barnes - BB&T Capital Market

All right, very good. With this, I guess truck recession or whatever we want to call it these days and the falloff in Class 8 truck sales, can you give us an idea of how acquisition multiples come in at all? I mean are they starting to look more reasonable again or do you think it is still a little too rich out there?

Rusty Rush

No, I don't believe it will be too rich, I think, you remember, dealers are on the tail of the food chain, as I like to say. We deliver to the end users. The first part of the year, there was some carryover from '06, but right now, I am sure everyone is feeling the crunch every day as we go forward with the last Class 8 deliveries.

If you are tied directly to Class 8 sales without a diversification of an earnings stream, which I don't want to say, but some dealers are, I would imagine that the market will continue to get tougher as we go forward, as we wait for a ramp back up in sales, which I do believe, as we've stated in there, that we look for intake to possibly pick up, but it will probably be towards the second quarter of next year, that would be my guess.

John Barnes - BB&T Capital Market

Do you have any plans right now for a Greenfield Rush site? Are you contemplating opening up a new dealership from the ground up or would anything be done primarily through acquisitions?

Rusty Rush

No, we are always doing that. You can look back and historically, we will probably put in two or three new points every year. You must remember that they are normally in smaller markets surrounding a large metropolitan area such as we will be opening a new store later before year end in Pueblo, Colorado.

I have got two others on the drawing board right now that I'm looking at and one of them for sure I have approved. Although I don't want to talk about it, but Greenfield sites smaller markets that surround larger metro markets, as we've pushed our network out into that area of responsibility we have. So that is consistently going on. Actually in this quarter, we opened a small dealership already in San Luis Obispo, California, so that is an ongoing process all the time.

John Barnes - BB&T Capital Market

Okay. Last question. Can you kind of get real granular for me and tell me, I know Class 8 is weak, but where are your pockets of strength right now? You and I have talked a little bit about oil and gas. Where are your pockets of strength right now?

Rusty Rush

Well, that's one of the things we rely on is our diversity of geography, our diversity of customer base and our diversity of earnings stream inside these dealerships not just related to Class 8 sales. So, obviously with the housing markets what they are on the coastlines in Florida and California, also Arizona we are feeling that, we are feeling it in there, but fortunately with the diversification of the markets that we serve, the center of the country with oil and gas of course is strong, refuse is strong through the center of the country, Oklahoma, Texas, Colorado, the equipment store.

Commercial construction still remains fairly strong in these market areas and I look for it to remain strong through end of '08 in commercial through the center of the country, as we wait for residential to pick back up. But I am sure we are still later in '08 from our thoughts before we will ever see any pickup in the residential side in any of these coast markets.

John Barnes - BB&T Capital Market

Very good. Guys, nice quarter. Thanks for your time.

Rusty Rush

You bet.

Operator

And we'll take our next question from Peter Nesvold of Bear Stearns.

Peter Nesvold - Bear Stearns

Good morning, guys.

Rusty Rush

Good morning, Peter.

Peter Nesvold - Bear Stearns

Can you talk about pricing maybe and across all your products? So, on new trucks, how much of the price increases are sticking and maybe talk a little about '06 versus '07 models. Used trucks, we heard some cautious comments out of Ryder recently and then construction equipment because I think if there was something, if I were to try to find an issue, though it is hard to, I feel like on this quarter the construction equipment margins were a touch lighter than I was expecting.

Rusty Rush

Well, Marty, do you want to touch on equipment?

Marty Naegelin

Peter, do you want me to talk about the construction equipment markets first? Their pricing is competitive in the construction world; no doubt about that. As the markets interestingly enough have softened on the coastlines, our manufacturer has gotten more aggressive with its lack of discounting in our market territory because we have had a pretty dad gum good run. Year-to-date, we are up 18% in the market in our Houston territory. So, as a result, maintain the market share goals that we have been after. We have taken some margin deterioration.

That's not really alarming to us. It is pretty much along the lines that we expect and that we wanted to accomplish for market share reasons and profitability is still very strong in that organization as measured either by EBITDA margins or pre-tax margins. So, from a construction equipment market, we are real strong in Houston right now.

Rusty Rush

I'll attack on the used truck side, Peter. We are seeing signs of some softness out there in certain areas in used trucks. Is it a steep cliff, a falling rapid decline? No. But there is some softness in some markets. Fortunately, our product line that we use, PACCAR product line, and we sell all kind of brands of used trucks, don't get me wrong, but the majority we move are PACCAR products, are holding their values fairly well in their market arenas. They have historically done that during times of used trucks and devaluations.

On the Class 8 side, on new truck sales, manufacturers have gotten their build in line with the marketplace, so pricing is pretty much being passed through. Earlier in the year, there was some heavier discounting to try to keep the factories up and running, but even pricing cannot drive when there is no demand, cannot make demand where there isn't any when you have had the excessive pre-buy that we had last year because in my mind we've probably took 50,000 to 60,000 units out of '07 and delivered them in '06. So, the demand wasn't there and manufacturers have now gotten their lines in line. So, there is basically a price through with the cost of the new engines being pretty much passed on through. And that goes pretty much for medium-duty also.

Peter Nesvold - Bear Stearns

Comments in the release and also in the prepared comments about…

Rusty Rush

Peter, could you speak up, Peter?

Peter Nesvold - Bear Stearns

Sure. And maybe to follow-up on the comments in the release and then in the prepared comments about trade cycles, can you elaborate a bit on that and what is a typical trade cycle these days? Is it three years, is it four years, what really defines that? Is it just internal maintenance programs at your customers? Is it sliding residual value guarantees? What gives you a little more confidence in a rebound of demand based on those trade cycles?

Rusty Rush

Well, what gives us confidence is the fact that the majority of the trucks that were sold in '05 and '06, we believe will need, people will want to replace them prior to the 2010 emission issues. Most people, remember, it is hard to just give you a generic trade cycle because a lot has to do with what markets you are serving whether we are talking about truckload or the many different niche markets that we play in, which historically they hold their trucks longer in the construction business, in the refuse business. Those trucks are normally held anywhere from a 7 to a 10-year lifecycle, compared to the first owner on the truckload side usually carrying it anywhere from three to five years depending on application, whether you are running regional or you are running 48 states.

So, it is not so much to do with maintenance; it has more to do with where the product is being performing. So, we believe there will still be a fairly large truckload pre-buy in '09. It is just going to be condensed given the softness in their markets, but with some downsizing in fleets, I believe we are going to see some pretty good bankruptcies on the truckload side in the first quarter of this year.

Delinquencies have risen, so there will be a little cleansing going on too to get the fleet, the truck fleet out there from a truckload perspective back in line with where it needs to be from a freight demand, from a freight perspective.

So, I firmly believe that there is not going to be a problem getting the '09 pre-buy. It's a matter of size. I have spoken and said that I can't pick the size of the pre-buy for you at this time. It is just too hazy for us out there. But we do believe there is going to be a pre-buy and the further it goes before it starts, the larger the pre-buy will be in '09. Since most numbers for '08 have been ratcheted down, I do believe that that just pushed out the pre-buy and more into '09, which could make a larger spike in it.

Peter Nesvold - Bear Stearns

I can't say I disagree with you at all on those comments. Last question, you talked about maybe orders rebounding sometime around Q2 '08. When do you start to rebuild dealer stock? I mean, do you go below a typical, which I believe was probably typical 60-day inventories, given the freight environment and maintain 60 days? When do you start to, do you have to wait for that order to come in before you start filling up your, or adding a little bit to your dealer stock?

Rusty Rush

Well, I would tell you, Peter, that we will know demand. We'll see it. We don't, we typically keep more than 60 days first off. Because of the breadth of markets that we represent, if I strictly wanted to just sell truckload off the front line and not go into the markets that we dive into, I could stock a 60-day inventory. But to hit the different specifications for the different markets, we historically keep between 90 and 100 to 120-day supply stock inventory.

From a customer, reflecting back on your comment that we made about second quarter order intake picking up, we believe sometime it may be latter second quarter or not, but there is, we have more activity currently out there than we have seen, say, 60 days ago. There is more, there is still activity out there, more activity than what we saw, say 60 days ago. Now that doesn't mean that the customer base is pulling the trigger on the orders, but the activity level is definitely trending higher.

Peter Nesvold - Bear Stearns

But isn't that typical for October? I mean you don't get a lot of activity in the summer. So just seasonal…?

Rusty Rush

No, it's typical, but we didn't have any activity really all year. Peter, we were still, we had some, but very dampened, but we see -- it is typical to start talking, but it is nice to see anyway after you have come through the last six months of inactivity. Now like I said, that doesn't mean orders are being placed currently and you can see that in the order intake in September, but the activity level is picking up, which gives us hope that you will see order intake pick up sometime in the second quarter.

Peter Nesvold - Bear Stearns

Something's better than nothing.

Rusty Rush

If not sooner and that means delivery going into the latter half of next year.

Peter Nesvold - Bear Stearns

Okay. Thanks for the time, guys.

Rusty Rush

You bet, Peter.

Operator

And we'll take our next question from Andrew Obin of Merrill Lynch.

Andrew Obin - Merrill Lynch

Yes, good morning.

Rusty Rush

Good morning Andrew.

Andrew Obin - Merrill Lynch

I just have a question on the margins on parts and services. They sort of go up and down from quarter-to-quarter, but just looking out into next year, where should they be to the upper end of the current outlook or should they be towards the lower end? What drives the difference actually?

Rusty Rush

Parts obviously maintain less margin than service growth. So, when you get more service growth, you get some expansion in margin from a gross margin line.

Andrew Obin - Merrill Lynch

That's what I'm trying to understand. Are you saying, so, as I'm thinking about the fourth and first quarter given that we are sort of delaying buying new trucks, so does that mean that there is less truck utilization on the road, and so the margin would fall, or does it mean that people have to do a bit more maintenance and it will go up?

Rusty Rush

Well, if you think about it simply, as the fleet ages, you are going to spend more money on parts and service when the average age of the fleet gets growth. So, see, all our service work is not just to the truckload side again. It is dictated into these segments where they do hold their trucks longer, the vocational businesses that we talk about, the niche markets. So, those lifecycles are a lot longer, twice as long as the truckload side. But from a margin perspective, Andrew, I can't nail it to the exact point, but I would tell you to expect between 40% and 42% blended margin.

Andrew Obin - Merrill Lynch

And I am just going through construction equipment sales. I'm just a little bit surprised to see that you guys continue to grow the number. And I am just wondering, and I apologize if you have answered that already, I could have missed it, but what drives the increase, given all the bad news about residential weakness in the U.S.? And is it the market being different, is it the brand being different, is it you guys being different, what is going on?

Marty Naegelin

It's a little bit of everything. Andrew, this is Marty.

Andrew Obin - Merrill Lynch

Hi, Marty.

Marty Naegelin

Houston residential is starting to slow. There is no doubt about that. But the commercial market in the Central Texas corridor is very, very strong right now. If you combine that with a very strong oil and gas market and that is what drives Houston. The market for construction equipment units in Houston, our 20 county-area right now is about 2700 units and that is as large as we have ever seen it.

Andrew Obin - Merrill Lynch

And so, it doesn't sound like you expect it to fall off a cliff anytime soon?

Marty Naegelin

Not as long as oil and gas is $90 a barrel. I mean, it is just amazing what is going on over there. The year-to-date market is up 18% in construction equipment deliveries.

Andrew Obin - Merrill Lynch

Would that mean actually that you should see a pickup from those customers? That should offset some of the, I know you guys have been concerned with what is happening with the truckers, but wouldn't the oil and gas customers come in, in the first half? I apologize if you have said that already.

Marty Naegelin

No, that's the vocational strength we have talked about in the truck side.

Andrew Obin - Merrill Lynch

Okay.

Rusty Rush

Yes, as I addressed earlier, that is the center of the country, it is still very strong for us and what we rely on is that diversity of geography and diversity of customer base in markets that we serve.

Andrew Obin - Merrill Lynch

I can't nail you to $2 anymore because you have changed your share count, so I have to come up with a new number. Thanks a lot.

Rusty Rush

Thanks, Andrew.

Marvin Rush

Thank you, Andrew.

Operator

And we'll take our next question from Chaz Jones of Morgan Keegan.

Chaz Jones - Morgan Keegan

Yeah, hi, good morning, guys.

Rusty Rush

Good morning, Chaz.

Marvin Rush

Hi Chaz.

Chaz Jones - Morgan Keegan

Nice quarter.

Rusty Rush

Thank you.

Chaz Jones - Morgan Keegan

Let's see. What did I have left here? Do you guys still have any '06 inventory left on the lot?

Rusty Rush

Yes. It's obviously tailed longer than I want, but if you look at the third quarter, one of the nice things about the third quarter was that we had a pickup in the third quarter of '06 sales, pre-'06, pre-'07 engine sales.

Chaz Jones - Morgan Keegan

Sure

Rusty Rush

But we still carry it. It's coming down, but I look for it to help us during the fourth quarter also.

Chaz Jones - Morgan Keegan

Do you expect to be through most of that by the end of the year, Rusty?

Rusty Rush

Yes, most of it, which you are always going to have some stragglers. I mean, that's just, I don't care what year you look at. I can take you back 30 years, that is always the case. But as far as to get through the majority of the inventory, I would imagine we will get through the majority of it here in the fourth quarter.

And it's reflective, one thing you have got to look at, I want to go back. Remember, when you look at those truck sales and you say, wow, they went from 3500 to say, 1800 Class 8s. But remember the units we lost were the truckload big fleet business. We have large fleets we have not delivered any units to and it is very reflective, if you look at the margin on Class 8 truck sales quarter-over-quarter.

If you look at the margin from third quarter of last year to third quarter of this year, it is two points total higher. So, obviously you can see the mix changed into the more owner operators, smaller type mix of business. But it is really the truckload that we missed and that is where most of those units went into. So that's the lower margin business that we do.

Chaz Jones - Morgan Keegan

Right.

Rusty Rush

The truck margins were very high for the quarter, as high as I have ever seen them, but that is a mix issue. We still kept that diversity of customers that we serve.

Chaz Jones - Morgan Keegan

Okay. And then, maybe moving over to the medium-duty side, very strong quarter there.

Rusty Rush

Yes, sir.

Chaz Jones - Morgan Keegan

You gave some guidance in terms of expectations on the heavy-duty front for the full year. I know in the past you have said a target would be, or a goal, however you want to characterize it, 6000 medium-duty trucks in '07.

Rusty Rush

Right.

Chaz Jones - Morgan Keegan

Could you still do that?

Rusty Rush

I think that's a little, that's a little bit of a stretch. We are going to get close, but given where we are at year-to-date, we might be a couple hundred short. I would expect something in line with the third quarter…

Chaz Jones - Morgan Keegan

Okay.

Rusty Rush

…fourth quarter, give or take a few points. I am not going to, you are not going to sit there and nail me down, but we would have to deliver 1717 units. That might be a little bit of a stretch in the fourth quarter. But in the medium-duty business, a lot of those buyers, they are talking to their accountants right now and figuring out what they need to purchase for depreciation issues.

That market tends to drive a lot higher in December and so you'll see some buyers that maybe I don't see right now will show up here in the next 30 to 45 days as they try to figure out how to pay the government a little less money.

Chaz Jones - Morgan Keegan

So, you don't expect a sequential fall-off there in terms of medium-duty sales from third to fourth quarter?

Rusty Rush

No, not from third. We may not reach last year's fourth quarter because it was just huge.

Chaz Jones - Morgan Keegan

Okay.

Rusty Rush

But we will, I don't expect any sequential clip or anything in the medium-duty sales. I am not going to sit here and tell you guarantee that there will be exactly identical with the third, but they are going to be in that range.

Chaz Jones - Morgan Keegan

Sure, sure.

Rusty Rush

Okay.

Chaz Jones - Morgan Keegan

And then maybe jumping back over to acquisitions. I know we always spend a lot of time talking about acquisitions on the dealership front. Is there any activity out there in terms of your other ancillary services, whether that be insurance, construction, those types of areas where you are seeing some opportunities?

Rusty Rush

I don't know that we are seeing opportunities, but we are definitely wide-eyed and looking. Right. I mentioned, I think in last quarter, we talked about that we acquired an insurance book of business and an insurance agency on the West Coast and we are looking at stuff, but I really don't like talking about that until such times as we get something nailed down. But I would expect activity level from possible acquisitions to look at to accelerate as we still work through the next probably six months before we see any pickup in the real Class 8 order intake in my mind.

Chaz Jones - Morgan Keegan

Okay, great. I appreciate the commentary, guys.

Rusty Rush

And any ancillary businesses that are affected should also, there should be more opportunities show up and we are definitely looking.

Operator

And we'll take our next question from Chase Becker of Credit Suisse.

Chase Becker - Credit Suisse

I had a quick question regarding…

Rusty Rush

Could you speak up, please? I'm sorry.

Chase Becker - Credit Suisse

Sure. It's Chase Becker in for Jamie. A quick question regarding, just looking at your SG&A, I mean obviously you are coming off a depressed sales base here, but as we look out forward, what are your expectations in terms of how that should be trending? I mean, if we look back towards the end of last year, you are kind of in the high single-digits and now you are kind of running at around 12%. How should we think about that going forward?

Rusty Rush

Remember, as we have talked in the past, you cannot look at our SG&A and manage it. You have to break it into its pieces and parts. You have to take the S side and then look at it on the G&A side and that is how we manage it because the S side is so directly related to truck sales. And when you see revenue drop like it has, obviously SG&A goes up, but you have to view it, we look at just G&A and that is how we manage this business because the S side is the variable selling component that is going to ebb and flow with truck sales.

The G&A piece year-over-year, quarter-over-quarter from a G&A perspective, we were up 4.7% and that is how we manage it and that is on a same-store basis because remember you have got to strip out acquisitions out of there too because you manage off of same-store. You can't look at it that way. We have given guidance in the past that our goal was to stay in the 5% range from a G&A perspective. When you take 3.5% of that or better is inflation to begin with. Then you are trying to grow your business.

And the best way to look at the G&A is to look at the absorption rate and if you look at same-store absorption rate, we increased by a point. From where we were, we were up a point. So we are, year-to-date. So, we are very, very happy, which means our employees, our managers, our people are doing an outstanding job of managing in a tough environment.

Chase Becker - Credit Suisse

Congratulations again on that absorption rate. Last question, obviously, it doesn't sound like there is any significant difference for your outlook for 2008, I mean, I think you were kind of indicating roughly the same time period last quarter. Anecdotally, when you are talking to your customers, do you see any difference in maybe the trajectory to how that ramps up going into the third and fourth quarter or I mean are you at all concerned that, I mean, how firm are you that the second quarter is really when this is going to start picking up because it seems like over the last couple of months, the orders were getting better and then in September, of course, it looked pretty weak again. So, I mean, just what are your expectations and how comfortable do you feel with heading into that second quarter, that you are really going to see a pickup?

Rusty Rush

When you say orders were picking up for a couple months, I don't quite view it that way. I think yet again break it into its pieces and parts. You don't know how many of those trucks being ordered are for delivery currently or are those extended deliveries into the third and fourth quarter and next year, into the second. You never know that when you see that order intake number come in.

Also you look at the percentage of export orders. What was it? 10% last year and it is running 30% or so this year. I mean that is a huge difference. Those are going offshore. So, I really never saw any order pickup during the summer when you really broke it down into its pieces and parts.

I would tell you I am pretty solid on the fact that we will begin to see order intake pick up in the second quarter of next year, which correlates probably to deliveries in the third and fourth quarter. But again, I relate to how we are performing in this type of environment with only 1800 deliveries. And obviously, if you look at the last second quarter, third quarter, it speaks for the diversity of the earnings stream of this organization. So, till we get that huge ramp-up, when we get that, I think then you will see a change when those deliveries go up.

We are going to continue to try to grow the absorption. We are going to continue to work on our ancillary business. Our crane business is outstanding, our crane rental business. Our equipment store has done outstanding. So, we will continue to rely on those other pieces of the earnings stream and especially the parts and service side. Remember, that is where we get more margin than anything else in this organization.

People get so caught up in Class 8 deliveries and we look forward to Class 8 ramping up, but we are out to prove this year and through our execution that we can perform in an environment such as this where markets are off 50%, but our total earnings are not going to be off 50%.

So in answering your question, it's still a little hazy out there. This is what we believe. That it will pick up in the second quarter, the intake will. Is that a guarantee? No. But we will perform inside whatever environment, whatever hand we are dealt.

Operator

Mr. Becker, was there anything further, sir?

Chase Becker - Credit Suisse

No, thank you.

Operator

And we'll take our next question from Gary Lenhoff of Ironworks Capital.

Gary Lenhoff - Ironworks Capital

Hi, thanks. Rusty, you just touched on the question I had. Can you tell us what G&A dollars were in Q3 and what they were in the prior Q3 of last year?

Rusty Rush

Let me go here. Like as I said, they are up 4.7%. Let me pull the number, Marty.

Marty Naegelin

Let Steve or I answer that question. We break, as we said before, selling expense out of G&A expense and when reported, it is selling, general and administration. In the third quarter of this year, our G&A expense total was $54,874.

Gary Lenhoff - Ironworks Capital

Okay. Do you happen to have the number from last year?

Marty Naegelin

No. Last year…

Gary Lenhoff - Ironworks Capital

I'm sorry. You said it was up 4.7%?

Marty Naegelin

Yes, that's right.

Rusty Rush

Same-store.

Marty Naegelin

Same-store.

Gary Lenhoff - Ironworks Capital

Same-store.

Marty Naegelin

That $54,874, a $1.578 million was new acquisition.

Gary Lenhoff - Ironworks Capital

Okay. So, I can do the math.

Marty Naegelin

So, you can do the math there.

Gary Lenhoff - Ironworks Capital

Great.

Marty Naegelin

Now one other last little tidbit of information.

Gary Lenhoff - Ironworks Capital

Sure.

Marty Naegelin

Sequentially in total, not same-store, but in total, that $54,874 is down from the second quarter of $55,793. So, we look at it not just quarter to quarter, but sequential as well.

Gary Lenhoff - Ironworks Capital

Sure. That's very helpful. Second question, a portion of your sales across your product line, across your truck, and your truck sales and construction sales require third-party financing. I would be curious if you could give us some insight as to what you are seeing in the current financing environment. Do you have truck buyers, smaller guys who might be having a harder time financing acquisitions? What do you see out there?

Rusty Rush

Well, I would tell you that it is, the environment is still okay, it's decent. We have seen maybe, we do most of the financing we place, the majority, 75% or 80% of it is placed with two lenders and of course they are big players in this market. So, when you look at the other, your second-tier lenders, I have seen one pull out. I have seen another one maybe tighten some of their credit, their credit practices, but overall, it is not that bad.

You can see, but you do see rising delinquencies, which may foreshadow some tightening further in the credit market. If you look at it, it is pretty interesting to see that, it is interesting to see delinquencies up more on the coastlines. If you go back, they've basically doubled since the first of the year for the Florida area and the California area, while they've still maintained, they have gone up in the center of the country, but they are still half of what they are on the West Coast. And what they are probably two-thirds of what they are on the East Coast. The West Coast seems to run the highest delinquencies, but we are still doing an outstanding job on the F&I side.

If you look at the units, the lack of units that were sold versus where we are, we are up in finance and insurance quarter-over-quarter again. So that shows you that the business we lost was more the truckload business, the big fleets of we don't get involved in on the financing side. We have been able to maintain our F&I margins because the market sectors have helped carry that. We don't normally gather finance and insurance income off the large fleet truckload business.

Gary Lenhoff - Ironworks Capital

Do you know what portion or what percentage of your medium-term truck sales and construction equipment sales do require third-party financing? Is it the majority?

Rusty Rush

On the Class 8, in this type of environment, I would tell you Class 8 is probably 50 medium runs. Probably we penetrate I think around 25% to 27% right now. A lot of those are professional businesses that have strong banking relationships and things like that, the medium-duty market. Remember, it is a total different market obviously and dealing with a lot of different sectors. So, they are ongoing private small businesses, so they already have banking relationships, so your opportunities for financing are a little less.

Gary Lenhoff - Ironworks Capital

From pricing.

Rusty Rush

Yes, their banks, they are getting them financed.

Gary Lenhoff - Ironworks Capital

Sure.

Rusty Rush

But they are getting them through their overall main relationship, but we penetrate just a hair under 30% of that medium-duty, of those medium-duty deliveries that we have that we facilitate the third-party financing on, but we look to grow that. We've put a lot of focus on that in the last year.

I can take you back a year and a half ago, we weren't 10%, but we have hired experts to take care of just the medium-duty finance business a year and a half ago and it obviously shows in our penetration rates. So, we are trying to capture every piece of the pie we can and all the ancillary things because that is where the truck is the engine that drives the train.

It is providing a service of financing and a solution to all needs for a customer that we are after because that is the better margin business and that is what a customer wants. It is no different. They want a solution and we are about providing transportation solutions.

Gary Lenhoff - Ironworks Capital

Great. That's very helpful. Thank you.

Rusty Rush

You bet.

Operator

(Operator Instructions) We'll go next to Milan Gupta of Southpoint Capital.

Milan Gupta - Southpoint Capital

Hi, guys. Great quarter.

Rusty Rush

Thank you.

Milan Gupta - Southpoint Capital

I just had a question. If you could shed a little more color on Q4. You've made a few comments here and there, particularly on the medium-duty side, but I was wondering on the Class 8 side and the other parts of your business how things might be trending, how you might fare versus the industry?

Rusty Rush

Sure. Well, Class 8-wise, I think we gave a range there of deliveries and if you back out the first three quarters, you can get, I would anticipate that our deliveries may be a little less than what they were in second and third quarter in Class 8. As I gave you a range, you would back into that somewhere in the, I understand, somewhere I gave you the range of 7200 to 7500 and we have delivered 5719 units. So, you can see the range in there.

I would anticipate, you never know as you get towards year end because, again, there is a lot of, there is some variability in there with stock sales. There is also, I can still sell you a truck today if you want to order one specifically designed for yourself. I can order you a truck and get it. So, I would think it would be within 10% where we were, if not, if we get a nice year end run, it could be upward, the delivery number could come in like the second and third quarter or it could be down 150 to 200 units.

I am not, but again, I'd say we will do better than the industry. I expect to end up the year 10 points ahead of the industry decline. So right in line with where we are at because the industry decline only steepens every month I look and ours does too, but we will outperform the industry.

Our market share in Class 8 in the markets that we serve is 40% higher for Peterbilt than the rest of the country. So, we believe we do an outstanding job representing our Class 8 manufacturer and we will continue to get more than our share than the national average.

Milan Gupta - Southpoint Capital

Okay. And then if you could talk a little more about just, I know you don't want to talk about the specific acquisitions, but just in terms of the types of things that you are looking at. Before I thought construction might be something you guys are interested in, but you guys are also looking at insurance and medium-duty, so I was just wondering how you guys think about priorities?

Rusty Rush

I would tell you that in all those markets you talked about we have got something we are looking at. That doesn't mean it is going to happen, but whether it be insurance, whether it be CE, whether it be the truck side, there are opportunities on all, but I really don't want to add a whole lot of color to it other than that.

Milan Gupta - Southpoint Capital

And you have got substantial cash balance. Can you talk about the size of things you are looking at and potential other uses for the cash?

Rusty Rush

Well, most acquisitions that we would do we would flow right out of cash flow and right out of the bank balance that we have and the cash flow that we will generate in the fourth quarter. So, I don't think they will require any debt or any other type of, we will fund it internally like we historically do. We went to, I think the secondary we did in November of '04 was to fund our largest acquisition ever and if that type of acquisition came about, we would determine the means with which we would fund it. But I don't see anything that large on the horizon right at the moment.

Milan Gupta - Southpoint Capital

Got you. But other uses of cash, potentially dividends or share repurchase, is that something you guys..?

Rusty Rush

Not right now. We still don't believe that is in the best interest of this company. As you know, I have got a stated goal to take this thing to $5 billion with a 20% ROE over the cycle and our powder is dry and we are anxiously, I don't want to say anxiously, but watching the market for potential acquisitions and we would prefer to take that cash and fund growth in the organization so we can return, to return better for our shareholders.

Milan Gupta - Southpoint Capital

Got it. Thanks.

Rusty Rush

You bet.

Operator

And we'll take our next question from Andrew Casey of Wachovia.

Andrew Casey - Wachovia

Good morning and thanks for taking my question. I would like to get your view on what rising delinquencies and your caution about Q1 truckload bankruptcies would potentially have on future used truck prices. And then, absent, if you can hypothetically look at this, absent an emissions change influence, what does that typical used trend usually indicate for new Class 8 demand? Thanks.

Rusty Rush

Yes, absent that, well, there's been some changing dynamics in the world in the distribution of used trucks. There are a lot of used trucks going overseas that weren't going there 5 and 10 years ago. There are lots of trucks being sold, especially it's more the generic type trucks that maybe some of my competitors sell, the more cookie-cutter type trucks going into Russia, into Asia, into South America. I don't have the numbers in front of me. In fact, I am really trying to gather them myself here right at the moment.

But there is a lot larger, so that helps absorb some of the trades that are coming back off the big years of '04, '05 and '06. So that gives me a fairly good feeling that there won't be, we won't have too much used truck side pressure that would dampen the pre-buy, simply because the distribution of used trucks has changed to a more global view than what it historically has been in this industry.

Now, as far as delinquencies, that is just, they normally rise this time of year anyway. But it is a little tough on the coastlines right now, so, I don't see it being anything, you want to go back to 2000. It was three times this bad, so I don't see it getting anywhere near what we experienced in 2000, 2001, 2002, when the overall economy, we were in the middle of a recession and we had all these effects going on, plus we had just come off a 10-year run by one manufacturer of shortening lifecycles because he was trying to buy market share. And there was more than one reason for what caused our industry to have the huge decline in 2001, and I don't see those on the horizon right at the moment.

Andrew Casey - Wachovia

Thank you very much.

Rusty Rush

You bet.

Operator

And we'll take follow-up question from Peter Nesvold of Bear Stearns.

Peter Nesvold - Bear Stearns

Hi, Rusty.

Rusty Rush

Hi Peter.

Peter Nesvold - Bear Stearns

Just one last question here. Can you talk a little bit about how many trucks you took into new inventory either directly into dealer stock or kind of passing through you to go to an end-user in 2Q? How does that compare to the number of trucks you accepted in 3Q, and what do you expect to happen in 4Q?

Rusty Rush

You are talking about customer order trucks there, Peter?

Peter Nesvold - Bear Stearns

No, I am talking about trucks that pass through you from an OEM. So if OEM XYZ, because I know you deal with multiple OEMs of something and generically. You know, how many trucks were delivered to you or delivered through you, and you can talk percentages, 2Q versus 3Q, 4Q? How does that trend?

Rusty Rush

Peter, everything is delivered through me. Every manufacturer I represent, we go through us.

Peter Nesvold - Bear Stearns

No, I understand. But I just mean, you know, maybe, I know the money does, the money flows through you. Maybe physically it doesn't, I don't know, but I am just trying to understand how does the year trend in terms of new equipment being shipped through you?

Rusty Rush

Well, you know, we bought less than we sold, if that's what you are asking. I mean, obviously, because we are working down inventories and you can see that in the balance sheet. It was fairly clear in the balance sheet that inventories have come down. I mean, we negotiate and handle the customer, every customer. I'm still trying to follow, we don't really courtesy.

If you're talking about courtesy deliveries, our manufacturers do not go direct. Maybe in the medium-duty business, there may be a large Ryder dealer or U-Haul dealer that we are not involved in, but I don't do any of that. Everything we do is generated by us.

Peter Nesvold - Bear Stearns

What I am trying to understand…

Rusty Rush

I'm trying to get a feel for what you're trying to understand.

Peter Nesvold - Bear Stearns

…another question. Just picking numbers out of the air, if you bought 250 trucks from your OEM and just picking a random number in Q2, did that go to 300 in 3Q, did it go lower? Do you see it going higher or lower going into 4Q?

Rusty Rush

I would tell you it was down, no question.

Peter Nesvold - Bear Stearns

It was down in 3Q versus 2Q?

Rusty Rush

Yes, no question. No question. We delivered more stock inventory and the trucks that were delivered in Q3 were purchased, a lot of them were purchased in Q2 because we had to prep them, get them ready for delivery and they flowed into Q3, which correlates to what I said about Q4 possibly being a little less in overall absolute deliveries. We will probably maintain stock deliveries we hope, stock sales where they are at with fewer sold customer orders if that is what you are driving at in the fourth quarter.

Peter Nesvold - Bear Stearns

Well, I didn't quite get that, so I guess it's a little clearer to me now that you accepted fewer deliveries of new equipment…

Rusty Rush

No question.

Peter Nesvold - Bear Stearns

But in 4Q, do you expect to accept delivery of more or less than 3Q?

Rusty Rush

In Q4, I expect to probably receive less, continue less and we finished off the tail earlier in the year of everything and I continue, and manufacturers tried to go out and sell some of the new engines with some heavy incentives earlier in the year and now everything is pretty much leveled out. Production is more in line with what market demand is, which has given inventory, which continues to drive inventory down. So, I would expect the inventory to continue to go down, not as dramatically as it did from Q2 to Q3, but it will continue to decline because when you look at our inventory, it is not all sitting on the shelf for sale.

We have always got a huge number that is in process of delivery, what we call IPD trucks that we are rigging up. But that number will continue to go down in the future, but again, the key piece is margins are up because the business we are doing is the higher margin business we do, which helps soften some of the overall. You can't look at it and say, wow, 3500 to 1800 as I stated earlier on the call. You have got to look at the margins and look at the mix of business also. But absolute deliveries from the manufacturer to us will be less in the fourth quarter than they were in the third. No question.

Peter Nesvold - Bear Stearns

Okay. Thanks again.

Rusty Rush

You bet.

Operator

And gentlemen, we have no further questions at this time. I will turn the call back over to you for any additional or closing remarks.

Marvin Rush

Thanks a lot, guys. Talk to you whenever you need to talk to us, just give us a call. Other than that, we will talk to you next quarter.

Rusty Rush

We appreciate your time. Thank you.

Operator

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Rush Enterprises Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts