Q4 2019 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Rush enterprises, Inc. fourth quarter and year and 29 <unk> earnings results.

This time all participants are in listen only mode. Later, we look at that day question answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then D. Ray on your touched on telephone as a reminder, this conference call is being recorded I would now like turn the conference.

To your host Mr., Rusty Rush, Chairman CEO and president.

Good morning, everyone and welcome her fourth quarter at yearend 2019 earnings release conference call on the call today are Mark Mcgwire Roberts, Chief operating Officer, Steve <unk>, Chief Financial Officer.

We were executive Vice President Jay Hazelwood, Vice President Controller, Michael Goldstein, Vice President General Counsel Gorbachev.

Now see we'll see a few words regarding forward looking statements.

Certain statements we will make today are considered forward looking statements as defined in the private Securities Litigation Reform Act of 1995, because these statements include risks and uncertainties 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.

It's include but are not limited to those discussion or annual report on form 10-K for the year ended December 30, Onest 2018, and in our other filings with Securities and Exchange Commission.

As indicated or a news release, we achieved their new revenues of 5.8 billion net income of 141.6 million or $3.77 per diluted share.

Gordon I didn't go almost 23.8 million or 64 cents per diluted share on revenues of 1.3 billion.

We're proud of our team for their hard work issue.

Our strong gradually there was some record high caught me Robinson.

Results were largely driven by execution or strategic initiatives.

I want to me and strong demand for most mortgage usibor.

In the aftermarket.

<unk> 1.8 days and on an annual absorption rate was 120.2%.

Our annual aftermarket revenues increased 5.6% compared 2000 18 million <unk> doubling the industry aftermarket growth rate in 2019 gross.

Great was primarily driven by investments in internal one customer facing technologies expanded all makes parts offerings and growth in our aftermarket sales thing.

Fourth quarter aftermarket revenues were flat compared to Fourq war in 2018 and down more than anticipated compared to the third quarter of 2019.

In addition to the typical seasonal decline in aftermarket activity, we experienced increased demand.

Energy medium duty.

And over the road customers good.

We expect industrywide demand for aftermarket parts and services in 2020 to be flat compared to 2019, but with our continued focus our aftermarket initiatives, particularly in an improved productivity through expressed services.

Expedite repairs and reduced customer.

And the investments we've made in distribution technologies, we believe our aftermarket growth will slightly outpaced the industry in 2020.

Turning now to drug sales in 2019, we sold 14986, new class a drugs up 2% over the previous year accounted for 5.3% of its own class a U.S. market.

Our new class eight truck sales grew steadily from the first quarter 2019, due before 2019, primarily due to healthy economy and strong as can be Ross most mortgage segments, we support.

In the fourth quarter 2019.

As predicted by C.D. research industrial industrywide.

New U S class eight retail sales decline had before for 2019 and our results were further negatively impacted by the timing of certain fleet.

Hey, Citi research groups that currently forecast in this class eight sales.

Hundredninety thousand units in 2020 down 32.5% from 2019.

Brookdales will really be in Scotland.

2020, primarily due to excess capacity of trucks in the market and solve for freight rates.

That said freight rates are expected to begin improve later this year and we have a strong vocational customer base that we believe will allow us to grow our class eight market share in 2020.

And medium duty class four through seven new drug sales reached 14470 units up 11.7% year over year accounted for 5.4% of the U.S. market.

We again achieved record setting here for class four through seven with drug sales.

Definitely outpacing the market you are continued ability to meet our customers' needs with a wide range of product offerings across the company.

Citi Research forecast you guys class four through seven retail sales to be 253400 units this year down 5.1% for 2019.

We expect solid activity from the customer segments, we support and believe our class four through seven <unk> results will be on pace with the industry in 2020.

In the area of network growth in 2019, we added four new wrote destruction relocations and purchased 50% of the equity in Rush truck centers in Canada Limited, which operates 14 international truck dealerships in Ontario, California, Canada.

During 2019 governing repurchased $58.3 million was common stock during the fourth quarter 2019, <unk> company repurchased 4.1 million of as common stock and adopt a repurchase plan that allows us to repurchase hundred million dollars is not through December 31 2020.

Additionally, we paid a cash dividend 4.7 million during the fourth quarter 2019 for a total of 18.3 million paid to shareholders during 2019.

Our share repurchase program and cash dividends reflect our confidence in our long term strategy and our commitment returning capital to shareholders, while growing our business.

We ended the year and a strong financial position, including 181.6 million again.

We have already implemented companywide expense reductions in anticipation of challenging market conditions. In 2020, how are we however, we do expect you're more administrative expenses to be sequentially on the first quarter of 2020 due to normal seasonal increases in employee benefits in taxes.

I would like to thank our employees for their hard work and commitment to our customers.

Do you have emerged.

Shelf was achieved strong financial results in 2019.

With that I'll take your questions.

Ladies and gentlemen, if you have a question at this time, please press star and the number one on Earth Touchtone telephone. If your question has been answered or you wish to remove here so from that Keith Please press the pound key.

And your first question comes from Jamie Cook with Credit Suisse.

Hi, Good morning, I guess, a couple of question, Hi, recipe and Steve.

I guess a couple of questions. Rusty you know the fourth quarter why you don't give guidance was well short relative to what the street had thought was it in line with your expectations I'm just trying to figure out if anything surprised during the quarter and then my follow up question to that is just given where the street is for 2020 should we think about the fourth quarter or <unk>.

Hi, good base to start to grow 2020, and then my last question you talked about energy you know aftermarket bottoming just what provides.

Competence, there and how would you characterize how much of his energy was in 2019 to your earnings as we think about yeah. Those markets bottoming. Thank you.

Okay. All right first love you asked was it what I expected, yeah, what I expect Jamie going up I could tell you back in September in August and what I expected August September area, but as a core unfolded.

And we got through the end the noble middling really in the Middle November December.

December was a difficult months it truly was I guess to add color not that it helps I've done a lot of I'm not a lot of checking around the country.

Over the last month as I saw what was happening, especially in December.

I don't think items along from that perspective, you know it was a little more as I said that there was the parts and service doesn't mean, we had some timing issues on truck deliveries I mean, you saw a big Q3 was right from Q3 was a big quarter was our biggest quarter anyway, but the big as ever and so and then to be honest without talking about Q1 in a minute, but we had.

Some timing of deliveries it came a little quicker than we anticipated in Q3, So I mean, we run or 3000 units from a truck perspective, when it was and so I I I knew we were going to be all and truck sales not quite that much going in but it was parts and service decline they've got my attention.

Really in December and we always have some seasonal decline.

This was just a.

Exasperated, a little more and you know in especially in December.

December was a very difficult month.

I will say this it's the trough, okay I'm confident in that.

From that perspective as well.

Sequentially, we're going to be up in parts and service now whether we're up it's the same rate as we weren't eight in 19 Q1.

Just want to pay a lot of hand to mouth I know, it's unfolding and frontlist when it's I feel better I feel a lot better now than I did on December 31 at the same time you know it's my window out there is not I can't look out that far a and C. As well as I would like to at the same time, you know January was for sure better above 10%.

And we're working our way through February and at the same time I feel better than I did.

That will be a trough from a parts and service perspective, and I'm not going to.

But your comment about you know should we look at that going forward.

The whole core.

I would tell you.

I don't expect to do worse.

I can't explain how much better how's that.

That would be the way I would view it right now when I look forward and when you talk about he asked about energy also energy.

Sure well it doesn't have the same effect on the company. It had four years ago. It has an effect.

You know, we're still in Texas, Oklahoma, Colorado, New Mexico, where there's a lot energy business going on so.

We were from the peak say a peak quarter in 18 to a Pete do it for off which was Q4 of 19 were now we've got two thirds Guy and we were all 656% from a peak quarter of 18 to where we weren't <unk> Q4 was the trough so I.

I can't see it getting any worse than that at the same time, we will have a few headwinds in Q1, two because it continued to drop throughout the year I mentioned that on the other calls right getting when I was cute recall is that it was down more than Q do you do dabbled in Q1, no I do believe it's Bob.

Okay from the reports I'm getting that doesn't mean, it's right what is bottoms.

[laughter] Lifeway, one direction to go Blue I hope, that's the case and that up.

With that area, but we do have some sequentially headwinds she wanting to were better than Q4. So.

That's one of the reasons when I was going start August talk I liked.

But it's you know me.

Good reasons when I look at early in the year from a parts and service.

I'll get it out or you know my probably flat to last year.

And there's a possibility of a slight down slightly down just because of those headwinds as other markets I talked about in my call minute ago, We're seeing stabilization I believe they're going to come back and the seasonality, we get pickups and will happen.

Just any any real growth, we haven't parts and service will probably be towards the back.

Of the year, the second half of the you're not likely surprises in the second quarter, but I can't see didn't say.

I believe I believe we I still have I have confidence that we can maintain where we were last year with some pickup in the back half because.

Yeah.

Folks reports and they might day, one going on there, but most people what would you can't get can.

People you know the different research firms that will reject got parts and service are calling for flat. Okay. This year when you and when you think about it you thinking about the needs of the fleet right. I mean, we just freshened up this fleet.

Was 19 was the second biggest here in history, Okay, and 18 was no slabs, so we fresh and everything up and when you have you got oversupply out there you know folks might not fit the fixes, but you add that we've done most blackrocks would generate acceptances and what's going on in the world.

It's just because it's just an industry our industry goes nice corrections every now and that's what will be correcting you know.

Over the next I don't think it's going to build lasting forever, but over a lot of this year you beat on broad truck sales perspective, the industry will be leveling out and taking into its not dooming gloom as an industry thing I believe it's driven and for US another some exasperate exaggeration because of the oil and gas sector, but at the same ban we have gone.

And worked on our January I mean, I'm getting that editor.

I'll wake up I'll wait for people ask questions I'll, just read a lot, but really I got my mind.

No, but again on the trucks I didn't say I think we can take some market share with a smaller market. We always have we've done. It every time historically, so you know I don't have the backlog I have.

More hand to mouth, but you know I feel pretty.

Pretty good about it so.

Okay.

I appreciate Christie. Thank you you bet.

You bet.

Your next question comes from Justin long with Stephens.

Thanks, and good morning.

So maybe circling back to that energy commentary. It is there way you could frame up what the energy related headwind in parts and service wise in 2019, and I know you exited the year with that business lower so what you're assuming for that headwind to to be in 2020.

As well.

Well, we won't be as bad as 2019 about that.

Yeah. The closer you get down so I don't you know it it's hard to get a few I'm wondering about the whole business.

[laughter] when it turns on and then give you much how you name. It does not give you much advance warning letters out when it turns down at that give you much advance warning either.

That being said I don't look for any big pickups.

You know there.

Inside of it I'm going to try to get these teams working on writer you little bit guidance for many BS perspective, what it was.

Last year.

I know, it's just it's the right now I believe is strong so Q4 I will look at his trough when it's down 65%.

The quarter.

As far as guides or what it cost us last year, nothing like it used to but probably somewhere between 40 50 cents last year youre compared to 18, okay.

Probably cost us somewhere between 40, and 50 cents last year and as we go forward probably half of that you know, but that'll all be directed upper early in the year, mostly so you know as we look back on last year.

2025 cents will be spread over the first two really first some in Q3, two but really Q1 Q2 or more heavily weighted you know probably 70.

5% over the risk it was in the Q3 I guess when you look at that when I said 2025 cents. So.

That's the best I can give you right there on that now that and that's just what we believe right.

It's got to come to pass, but I don't look for any big explosion in it and at least in this rest of this year with your does if something does happen.

That's right now that doesn't mean, we can't.

You bet or another is from imports and service perspective, but that's the reason why I call for flat right. Early on is because we've got it will become those headwinds here in Q1 in Q2, but I think we're capable of it.

And with the stuff that we've done I believe we're capable of it that doesn't leave as much room for growth, though our year over year I do believe we can get some growth in the back half the year when those headwinds subside from a parts and service suspected because I do believe most of all our other markets have stabilized and will grow and go out there to take some share in some of those.

That helps and just from a topline perspective in parts and service you are up about 5.5% and 2019. If you took out energy would you say that you were probably closer to the double digit I just wanted to get a sense for looking at the underlying market what the trend line. It may not be quite government really clubs okay. Okay.

Hi high singles somewhere in there okay.

Up in that regard remember this is not as your clients I mean, I'm going across thousands and thousands of customers is about trying to bucket malls not as easy, but we've got pretty good intelligence on out of it so Uh huh.

I will say somewhere very close to up there. Okay. So I've got a double okay.

Okay. No. That's helpful. And then you mentioned the DNA cut that earlier. So just wanted to get an update on where you are in that process and.

Any updated thoughts on the savings you expect in 2020.

Well as we go into the remember I mentioned I mean.

I'll get to GE and I would say remember Q1 is heavily weighted every year for the last 20 years with benefits and taxes. There's always some headwind there that comes shows up in Q1 net declines throughout the rest of the year.

Once we get through marks and that's just the way it gets all expensed through the balance sheet BNL. So if you see there we're going to have those headwinds, but outside of those headwinds from an operating perspective.

I expect to be God, we got we are pretty high Q3, Q2, Q4, we always have a pretty good quarter I expected to be.

Very similar to last year's Q1.

And then a view so it'll be brought back quite a bit from our Q2 in Q3 were a gionee.

SDMA will probably come down in total.

But DNA itself will probably be fairly flat to last Q1.

So those cuts went into effect some of them, though because what they were role in throughout this year. They all weren't immediate inside of it because it was or semi fixed and some contractual stuff. There's also personnel, it's a mix of stuff. So.

Wow likes we got we got benefit or some of it and Q4, we didn't get it all.

So lot of will some of will roll into this year. It's hard for me really define exactly what and we're still car monitoring.

The business and the expenses on a daily basis, and I'll just leave it at that.

Yes.

As to monthly or weekly, but we're paying attention closely to where we're at.

And we'll stay on top of that as we go forward.

Fair enough I'll leave it there thanks for the time guys.

Yeah, I mean, if I'm going to be one lastly, how you know I would we're sure believe we're going to be down now an annualized basis, okay, but new York spreading each quarter.

Sure I've got confidence in Q2 in Q3 being less than last year.

From a DNA perspective.

It's everything takes effect could gives Q1 down flat with last year, because that we had big win with increases in two and three don't look for that to happen again this year.

Okay, Great. That's helpful. I appreciate the time.

Okay.

Your next question comes from Joel Tiss with BMO.

Hey, I had like 24 questions, but you talked so much now I only have two.

I would go and Murphy absolutely perfect. So [laughter] can can you talk a little bit about about trait. Unlike what what is a trade navistar mean for you guys and in any like you know any sort of preliminary thinking around maybe parts or just how you go to market.

Well I think well I mean, it's going to look as you know, it's not a life, which those deals our lives which is right not add water mr. are right. So those things evolve over time, but I can tell you. This.

If you look at it it's going to mean long term more proprietary parts.

Which obviously will help parts margins okay.

I don't think now I'm not going to get into the details of what non when where and what when and how would you know given.

Knowing the.

Both Wagner, most European ownership mix and how they work.

They're driven towards proprietary.

So I would expect over time that time, though it takes things engineering that takes and they're already obviously they've already been collaborating on stuff right for the last couple of years, but you know I would imagine there's there's there's improvements in for purchasing those improvements and there will be proprietary is to continue.

He built in to the to the product, which will help long term goal.

From my parts perspective from a truck perspective, you know there's going to have a stronger obviously the way stronger balance sheet.

You know and I would expect.

There will be.

The ability to invest will be greater than it has been in the past. So I mean I I. There's nothing nothing I can tell is going to happen right now I can sit there, but again that continues to.

Fortify the belief with there are tailwinds in our Navistar distributorship, we still haven't bought I.

Let me if you really want to look right. I mean, you didn't ask questions I'll stay off of that you'll be able just does more talk.

About where were at their.

We got headwinds in parts and service right now, but that comes from that not having to any hardly any engines. So 2010 to 2013 14 right. Those are those are the products Weve worked do more parts and service business off. So what was always has gone out of the marketplace in the Maxxforce perspective.

And then you had a low market share for awhile. So we're facing those headwinds parts and service wise right now and those store that really have to go out aggressively go after different stuff than you normally one if you were just running down a path what usually happens with mostly in this country. The same time on your question, yes, it's good for the long term viability.

With that division for Us I still believe those are tailwinds in the organization get day, when they all come to pass, but we've seen it on the truck sales side working better last year.

Believe it will continue to help on the doug's inside this year.

And.

But smaller market, but hopefully we'll do it will do well with it.

Yes.

And then for first Steve can you give us a little bit of help of SGN as a percent of sales maybe like first half second half just kind of ballpark like how you think it's going to flow.

Thank you.

So for the year, obviously, when the when when truck sales go down since structures such hide hide individual dollar items in our revenue will go down considerably our SGN eight even though we're doing expense cuts will increase as a percentage of overall revenue so for the year.

It'll probably be in that.

13.5% to 14% range versus where where it was last year and you know the the spread of that by quarter is going to depend on the flow of truck sales. We expect the first half a truck sales to be better than our Q4 run rate. So.

It'll it'll be probably closer to 13 and a half when that first half of the year and we're gonna have to wait and see how truck sales them.

Unfold in the second half of the year so.

Hopefully that gives you enough to my without.

Thank you very much.

Okay. Great questions. Please press Star then number one and our telephone keypad and your next question comes from Chris with Buckingham Research.

Hey, good morning, gentlemen.

Good morning.

Just to continue in the talking about cost here.

Called out companywide expense reductions in the fourth quarter can you just provide a little bit more color on those actions.

And where those kind of deferred or permanent or how to think about that.

Well I think I mentioned a minute ago some of them.

No.

Obviously, there was some there was some personnel reduction.

So I mean without me.

Outside of technicians that was probably a 5% personnel reduction inside the organization I don't count technicians because.

They're mechanics, and technicians outside of that was probably a 5% personnel reduction across the entire network.

And all expenses were looked at.

In other areas and are continuing to be looked at from a semi fixed expenses and sometimes those roll in a little light so because you're on a because that could contracts and things like that you'll say well I'm not going to renew it for this much I want to kind of business from the coded out entirely so but those things don't all evolving okay. I can't break contracts right. So you have to allow so those things.

It would happen.

I again, as I said or we will continue to monitor I called for flat in the first core you know.

From a outside of the seasonal stuff that shows up in the first quarter, there's always a seasonal.

Plug it shows up there.

As a point employee benefits equity things like that the get Expensed hard in the first quarter every year. This company, so but I do believe we will be down in Q2 in Q3.

A year over year pretty good.

While flat and want to some of the stuff continues to roll them. So that's really where I'm at without me.

Look back at last that's on a gionee on an as DNA perspective, it's going to go down for her.

Good good result, less trucks, yes, part is directly tied to the sale of trucks. So you know.

That's what I believe and we will continue to monitor and if they're more measures that need to be taken we will take.

As I said.

I believe Q4 was dropped from a parts and service perspective slightly up in January let's continue that that message sequentially now.

Backwater sequentially.

We believe that's happening in February and we'll continue to work its way through March that we'll continue to sequentially be up in Q1 over Q4 that was withdrawal.

And on expensive same time.

You know I mean, I was having said it but.

I think bugs, there was going to be better in Q1, and I work youve or not.

Dramatically, but they're going to there were some timing is some stuff.

Fell into this year, so you know.

That's where I'm at [laughter].

Okay, and then secondly, if I could just ask about M&A, what the pipeline looks like and kind of how you guys are approaching that as we enter kind of a down cycle and heavy duty truck.

Well you know.

It really has taken a you know the downturn hasn't really taken a bag I mean, yeah. We didnt have the quarter. We wanted we wouldn't like it was a disaster I mean, it was to me, but give it back we're out what would what we've been on if I would call that trough I feel pretty good I look back 510 years ago. It.

At the company.

The M&A opportunities.

[music].

Our.

I haven't really shown yet well they show you better believe it they always do.

Everybody still going on or pennies from last year, but no feel the real heat. They may not have built as much as we did in Q4, they had a good year.

As the year unfolds I'm sure that.

There will be opportunities arise I have any right now if I didn't I wouldn't tell you anyway. So.

Sleep in it that [laughter], that's fair thanks to the color LC.

Well go [laughter].

I'm showing no further questions at this time I would now I turn the conference back to Mr. Rusty Rush.

Well folks obviously, we want committed long do we talking again, we're talking to you in April.

Obviously, I've got a little comment here milestones Golf Cup.

Corporate for poor wasn't what we want is I can promise we are laser focused I feel a lot better than I did for four weeks ago again, my window as little as Youre well have to bring them with the efforts and we've got going on throughout the organization on all sides of whether it be homesale sides on the focus on expenses.

Just really laser focus that.

Q4 was in a lot of ways of trial and.

Whether dramatic or not.

That was going forward that was the trough and we will we will produce before so we like.

You can count on that they go very much and we'll speak to you at April.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.