Q1 2022 Rush Enterprises Inc Earnings Call
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Today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.
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Good day and thank you for standing by welcome to the Rush Enterprises first quarter 2022 earnings results call. At this time all participants are in listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised that today's conference.
Is being recorded I would now like to hand, the conference over to your speaker today, Rusty Rush Chairman CEO and President. Please go ahead.
Yes. Thank you good morning, welcome to our first quarter 2022 earnings release conference call on the call today are Mike Mcroberts, Chief Operating Officer, Steve Keller, Chief Financial Officer, Jay Hazelwood, Vice President Controller, and Michael Goldstone, Vice President General Counsel and corporate Secretary now Steve will say a few words regarding <unk>.
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. 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 31st 2021, and in our other filings with the Securities and Exchange Commission.
As indicated in our news release, we achieved first quarter revenues of $1 6 billion and net income of 93 million or $1 60 per diluted share.
We are proud to declare a cash dividend of 19 cents per common share.
We're very proud of our results in the first quarter, which were largely driven by the continued strong economy and healthy consumer spending for most of the quarter, while new truck much score excuse me, while new truck production capacity remains limited due to component parts supply chain issues, our class eight new truck sales significantly outperformed the market.
Our aftermarket revenues also greatly contributed to our financial results and were primarily driven by increased demand for parts and service support and our continued focus on our aftermarket strategic initiatives.
The acquisition of 19 dealership locations from the summit truck group in the fourth quarter 'twenty, one and the gain on sale in connection with the establishment of our joint venture with Cummins positively impacted our financial performance in the first quarter.
And the aftermarket parts service and body shop revenues were $543 million are up 37% and our absorption ratio was 136 three.
In the first quarter, there was a healthy widespread demand for parts and service, especially from refuse a large national fleets and some energy guys.
We continue to add service technicians, who are workforce and remained focused on our strategic aftermarket initiatives.
We flexed our supply constraints will continue through the year, but we believe parts and service demand will remain strong with the <unk>.
Expansion of our workforce with technicians as well as aftermarket professionals dedicated to large national fleets as we integrate our newly acquired locations into our network. We believe our aftermarket results will meaningfully outperform the market this year.
Turning to drive sales, we sold 3500 28, new class eight trucks accounting for six 9% of the total U S class eight market.
The industry is still plagued by the limited indirect production, we experienced healthy demand for most market segments, we support particularly over the road construction and vocational customers and we are pleased with our class eight truck sales results this quarter.
Research forecasts U S class eight retail sales being 244500, and 122 up seven 5% from 'twenty to 'twenty, one while we expect production capacities in drug allocation will limit our ability to meet the full demand of the market. Our backlog remains strong and we believe our class eight truck sales.
Will outpace industry growth in 2022.
Our class four seven new truck sales reached 20 141 year into the first quarter accounting for three 7% of the U S market.
The production capacity remains limited with some manufacturers increasing heavy duty production over medium duty.
Just curious helping demand.
Variety of market segments, especially vocational and municipalities.
Research forecasts U S class four through seven retail sales to be 263000 units in 2022 up five 4% from 21.
Looking ahead, we expect production constraints on class four through seven trucks to continue and we believe our results will align with the industry in 2022.
Our used truck sales reached 2395 years and the first quarter up 24, 5% year over year used truck demand remains strong nobody has began to retract slightly from historically high levels, we experienced in 2021.
Based on production capacity of new drug manufacturers those values may container to slightly decline through the year, we believe softening spot rates will be offset by new truck production rates, resulting in healthy used truck demand for the remainder of 2022.
Next week, we expect to close already to increase our investment in restaurant centers, Canada limited to 80%. This additional investment will allow us to more fully integrate these 14 locations into our dealership network and further strengthened the support we offer cross border transportation customers. Looking ahead, we are closely monitoring inflation.
Consumer spending and interest rates, along with other economic factors, which may impact our industry.
With growth opportunities at our new locations and with our continued focus on expense management, we believe our financial results remain strong this year.
It is important for me to thank our employees for their outstanding work and for their commitment to our company and our long term strategic goals.
With that I will take your questions.
Yeah.
Yeah.
Hello, operator.
Yeah.
Thank you as a reminder to ask a question press star one on your telephone.
Draw your question press the pound key our first question comes from Justin Long with Stephens. Your line is open.
Thanks, Good morning, and congrats on a great quarter.
Thank you guys. So we appreciate that.
I guess to start with parts and service. So the growth there was pretty strong is there a way to help us think through how much of the growth in parts and service was organic and as you look at it over the rest of the year, how youre thinking about that organic growth rate trending.
Right.
It's a good question, obviously, we had the acquisition of summit in Iraq.
30% growth way, because not all same store basis, but.
It looks like same store growth was around 18% year over year, so quite strong right.
Somewhat accounted for about.
12% of that so as we look forward for the rest of the year I would hope <unk> going in than I was looking for high single digits, where we did a little better in Q1 I would expect we have a better start.
I don't know that we will ramp we're going to maintain and probably increase as we go through the year not sure a little bearish to historical is because we've got such a great start but parts and service still looks extremely strong here as we sit in the mill at the end of April and we anticipate that to continue so somewhere around that.
Same number I would tell you you know maybe that low double digit like we had from same store.
<unk> is where I believe that.
We our comps are going to continue to get a little harder.
No.
Because the comps go up right from last year. So even if we're in the high singles is still going to be growing because your comps go up as we go through the year. So we feel good about where we're at.
Than we anticipated.
But we do feel good about the market. We're in so we'll just let it play out but theres nothing out there that we see that's going to change that in the foreseeable future anyway.
Okay. That's helpful.
You mentioned it in the prepared comments, but spot rates have started to moderate here recently, you've got some macro uncertainties out there I think some are more concerned about the potential for a freight recession looking into 2023. So as you think about just stress testing the model in that scenario.
Oh.
Typically with the parts and service business, how would you expect that segment to perform in a freight recession.
I would expect.
I would expect us to perform well now does that mean, we will have the same growth rates of 18% same store opening will still going to stay in the double digits. Later this year or even want to order comps I can't say, we got into that recessionary type environment.
Great Recessionary type environment that we can maintain those those healthy growth rates, but I would expect us to be able to attain.
Mid singles.
Something like that because typically when you get in that environment sales do slow down in the age of the fleet News does go up so at the same time, there are more opportunities out there for parts and services swap market does go down obviously that doesn't keep up with replacement your fleet ages. So that's.
One of the great things about our business model is it gives us some balance with both of those right inside both.
Fast rising sales environment from a drug perspective, and also when you do get some type of recessionary freight recessionary.
Environment.
But it gives you you have that balancing act, so where your rates of what your growth rates are quite as strong. There's still solid you don't you don't have the falloff in parts and services sales.
If you look at our business model. That's the unique thing about the business model. That's why the shift over time to when you see 136% absorption that's over the top and bottom where if you'd asked me three or four years ago, we could get there I would have said no. So the more we strengthened net absorption ratio, which is all driven by parts and service.
The more we insulate the overall.
Impact of a freight recession.
Okay. That's very helpful. Last one for me is on OE production Rusty any thoughts on how that could trend sequentially over the rest of the year.
Well, if you look at HCP.
The class eight side, we were about 51000 or so U S. Retail they are running up to the two bodies of which I think maybe that's fourth quarter up to 72000.
So obviously, that's going to grow up I think it was a few June they're saying 50 657.
Obviously.
They believe that it will continue to go up as you know.
Parts shortages.
Hopefully the lesson, we don't think they go away and I don't think the manufacturers do either.
At the same time, you've got to remember one of the reasons that they only open up like seven or 8% I think is what I said year over year as we started seven presents a whole already this year.
Told everybody before that was going to be the case because what's delivered in Q1 typically is a lot of what's built in <unk>.
Tail on the dog, so we started off 7% behind.
2021 already now that will that will in the Q2, they will probably it will take that.
It remains somewhat flat and then built the pickup will come later in the year, so sequentially they're banking on.
Short parts shortages.
Besides somewhat not totally go away and get up to around 72000 in Q4 deliveries. So.
Yeah.
I am inclined to hopefully do agree with them I will say.
A year ago, when they started our go through where they ended last summer, but it hasn't it's.
It's not as rough as it was.
The toughest time.
From a supply side issue was really right at the end of summer early fall last year right.
At September August September timeframe.
Yes Russ.
But most manufacturers are up from their production.
Time last year, so I would expect that to continue that trend line to continue just as ACD has through the rest of the year.
Okay. Thanks for asking I appreciate the time.
Thank you.
Thank you. Our next question comes from Jamie Cook with Credit Suisse. Your line is open hi.
Hi, good morning nice quarter.
I guess a couple of questions. One could you just elaborate on the strength that you saw in your class eight shares and the market share strength, where that was coming from and sort of how sustainable.
Do you think that is.
And then the follow up on that obviously the margins skew on the on the truck side, we're very strong understanding that was probably a lot.
But just the sustainability of that and then I have a follow up question on the industry after that.
Sure Jamie.
Yes, when it comes to the numbers we were of the $6 nine number I gave you in the class eight market.
I don't know if that market rises I don't know if we maintained six times, we maintain over six same store was about six two okay. The other was the summit acquisition, which I think they really.
She'll do a better they should actually be up a little over a year.
Those forward, but we would expect.
Is that are manufactured there picks up their production pace faster.
And some others that Tonight.
I would tell you that.
Nothing save the absolute number is for sure is sustainable and I think theres some top side to do that okay. Remember were on allocation, we know what we're getting.
I would tell you that we do believe we had a push it late year end, which flowed into first quarter, while we have such a strong first quarter compared to the market, but I do believe there is no question.
That will I believe we're going to at least maintain the same absolute number but I really think we've got some upside to it.
Given we're on allocation, we can see pretty far out what we've got coming sometimes it's just a matter of timing and mix and bodies and things like that because some of them take 90 days to 120 days to get to when you get into vocational stuff, sometimes to get your product delivered to the end user in the over the road stuff comes quicker but.
We feel good about being in solid fixes this year when the year finishes.
I'll go into a little bit better so we feel good about that.
And he asked me about what was last quarter, marking the largest yes, I'll use margins, especially used margins were.
Even though margins were sequentially about flat you used were slightly down volume was good.
So absolute dollars were strong.
As new truck production picks up.
You've got to believe that's going to put pressure on us volumes and margins.
The same time it is gradually I think there is like an offset gonna have okay.
I do believe like I said, we're at least going to do what we have been doing as a whole not quarter to quarter, but as a whole when you look at the back half of the year for class eight deliveries I think we will do as good or probably better than what we did in Q1.
Used margins came down from Q4 as I said I don't look for them to drop dramatically right now, but they should start.
Ending count as.
New truck retail deliveries go into the marketplace.
That will offset some of the use that we have seen over the last 12 months the huge demand. So I don't see it slipping right at the moment.
But I do see a gradual decline in used margins going forward not not typically.
We're still probably 50%.
Huge percentages that we typically do.
But I don't see that all falling away to begin with I think it was.
Still remained strong in Q2 or pretty much for sure I'm pretty confident in that and we'll just let the year play out as new truck deliveries.
And see how it effects because a lot is going to have to do we watch the spot market a lot with us and obviously, it's down a little more than typically the spot market is typically to add a little bit in the first quarter was a little bit more than it typically is so.
There is a direct correlation to a lot of drivers between that and the used market. So as I said I mean im not I don't want from anything.
We will continue to monitor that because our terms are really good.
From an inventory perspective, so we'll just keep watching it.
I'm real proud of the used truck team they've done a great job.
As far as parts of the organization, sometimes don't get them.
The accolades and say, sometimes deserve with the used side and the leasing side and just been outstanding over the last 12 months, so anyway I'll take it.
Yeah.
Follow up like you said, you're on allocation, obviously and I know, there's some macro indicators out there that are concerning but like what are customers, telling you about wanting to place orders for 2023 and or when do you think the OE start Q.
<unk> opened up the order books for 2023.
In particular, given we've underserved market I'm wondering if at some point you get better visibility.
Thanks.
You bet I don't mean, I think really most Oems have not as you know opened up their 2000 Twenty's reorder back Okay, I think thats pretty across the board from what I'm told.
Access to a couple of them not all of them but.
Most of them.
We have not opened it up I expect it to open up here as we get into summer.
Okay.
The way through the year and you should have a better a better vision as to your cost right.
Bob.
Some are slightly opening, but I think they're big they're going to be cost.
They're going to be cautious conservative.
Right now after the pains that we've been through.
The manufacturers Andrew over the last year right what manufacturer margins have not been what people were looking for in a robust environment because of all the issues. When you go back to the chip steps to this that and the other so.
We're being cautious and it might be something we're taking a few orders, but most of it I expect to be fair by the time, we get to June July probably full open.
With everybody.
Should have enough insight as to where they are going to be hopefully.
From a cost perspective in 'twenty, two 'twenty three because customers have.
But I hope you're all Oems.
All Oems have dealt with surcharges this year so.
Trying to get their margins back in line.
So they don't want to really go through that again surcharges are not fun for a customer or a manufacturer or me in the middle of the Beaver. So it's better off to what we historically do price of product delivered at that price, but the environment is not really allowed that so sometimes that can create some angst on all sides and let's just say that.
Okay. Thank you great job.
You bet. Thanks, Jamie.
Thank you again as a reminder, if you would like to ask a question press Star. One we have a question from Andrew <unk> with Bank of America. Your line is open.
Good morning Rusty.
Good morning, Mr. Robin So nice to hear from you this morning.
So I have a question so so.
So historically.
Figure out how much money you make in any given year your quarter or is it fairly.
Q1 tends to be the weakest and then it's relatively flat from there so.
To start out you made back 40 plus.
So that if we multiply that by four.
We got a number north of five bucks easily.
No no no no no.
I don't know John .
Good morning, Greg.
So Jamie I think highlighted the fact that.
Probably new truck margins on new and used truck margins gross margins, probably not sustainable long term because of the mix. So let's say those sort of step down.
Mid to high single digits.
Where they were historically and you yourself said that even in a freight recession, probably between volume and continuing and inflation.
I don't see you're lowering your labor rates.
Probably you can still experienced growth in your parts and service business next year and then on top of it I would imagine that SG&A. This year has been tough because labor shortages and efficiencies.
Probably streamline SG&A volumes stay relatively flat so I put it all together.
What is the run rate once the good run rate for earnings normalized earnings for rush, because the number I come up with is sort of.
Well north of four box and I'm, just asking is that the right way of thinking about long term earnings power of new and improved rush.
Andrew.
Way, you've danced all around to get.
You know I'm not going to give you direct earnings.
Guidance I will give you a macro guidance and unifying follower of the Golan.
I'm not asking I want to make sure I'm not asking for guidance I'm, just sort of thing, but if volumes this year.
A little bit above average right. Your service business will continue to grow you can make our SG&A more efficient.
Let's say that Sierra has above average, but all I'm asking is that it seems that normalized earnings structurally should not be.
Half of what they should be.
But not that far off.
No troughs, if we get into a trough Andrew there is no question.
The company has been way better shape than they historically have been to take the trough okay.
I don't know what that number would be if we get into overall assertion in 12 to 18 months. Some people say no question no question, where weather it better.
Your math was pretty good for this year.
Out of you.
During the $1 44.
I don't know im not running from any of that and as I said, we expect the year to remain strong. So you can read into that how you want.
The good thing is we do have those books people never valued properly we do have a bulk tied back in some different revenues like you add in an acquisition.
From last year that I think we're just starting to integrate into the company.
It's going to be accretive.
You know you start you've been able to weather some of those types of ups and downs that you are going to deal with we always know nothing ever go straight up forever, especially in this business, but yes. The earnings power of the company is in better shape to weather a long any types of troughs that come at it I mean, the numbers speak for them.
Sales.
Even as used going backwards, which is going to.
Maybe it gets offset with more news right and parts and service.
You guys got from there, which is good for obviously not good for overall for the whole country I don't think.
Obviously, good for any of the people reporting from that perspective, if you maintain margins percentages.
So I think we feel good and even when you have an inflationary environment. Nevertheless, wherever there is what three years Max so when we come out of this.
We have that piece, if we do have a trough downstream.
<unk> slowed things down.
I have very confident.
We will prove out that this model is way different than what it has been in a trough past cycles. That's all that I'm not going to get to our numbers, but I am confident anybody can look at these numbers.
Understand that the company I mean, when we finish this other 30% of Canada, where we have over 150 dealerships now okay scattered Brian to provide a different <unk>.
<unk> than anybody else no one's going to compete with us from a national network perspective, So I think there's so many things that we're just scratching the surface on some of the scope.
<unk> acquisition, the Canadian acquisition, we're spending money on rolling them onto our systems, we still haven't even I don't want to get off of exact numbers with you. But these are things people need to know I mean, navistar still has to get their market share back there are still a tailwind outside of everything outside of the great results Youre seeing in the organization that are there.
And I know they are there.
Yes.
The mineral side too I mean, we performed quite well and we're.
We're excited about both sides of the house that we've still got upside in both especially on the Navistar side going forward with new ownership and the capital that's being put into it and the products and stuff like that.
They can take their market share up fairly dramatically over the next three to five years. So anyway, Andrew all of those are good things. The model right now says our troughs there was a lot better than what it used to be a lot better so.
Let it play out and you were doing really good all the math this year.
No.
I try and then another question given that.
It does seem to model is more stable.
Do you think in terms of capital allocation in the next trough a rush could be more aggressive in terms of share buyback given that the service model is a lot bigger in the balance sheet is in fantastic shape.
How do you onboard think about sort of what's the game plan looking forward, if things do get weaker on capital allocation and perhaps being more aggressive on buyback.
As you know for the last five years or so we have come out and said, we're going to return to shareholders, 35% to 40%.
Obviously, it makes up two ways right dividend.
We have a share repurchase we are we authorized another 100 million back versus December and I can tell you. We've already last year for example, and that other $100 million won't have spent 35 million to several one while we're all in Maple and I've already spent $36 million. This year. So we are we have accelerated our <unk>.
Purchases somewhat.
We will continue to do as we get to.
Typically we'd really re look at our dividends situation in the second quarter at the end of the second quarter and we will do that again, we don't forget it every quarter. We look at at the end of the second quarter at our shareholder meeting we will do that again this year.
Our meeting in May prior to the end of the second quarter obviously.
So, yes, I mean, and especially our groups.
We're going to be my goal.
Real crazy probably by the end of the year.
To be debt free with cash at the bank other than floor plan. So that means on a $700 million leasing fleet base plus everything else nothing we won't know anything so we're pretty good shape to weather any kind of analyst rising rate environment.
Floorplan is controllable you turned it three to four times a year. So our cash flow should still be extremely good. We don't have a lot of major real estate projects going on.
Other than maybe we find another acquisition, which I.
We don't have anything at the moment.
We will look, especially if the market takes a hit there is no question that we would put more back to repurchase I would think you know I think we're undervalued right now just look at the numbers.
Way undervalued, but.
I'm not I'm not I'm not here.
Investment community.
Each of our business so.
Trust me, it's all out there and it's all in front of me I'm looking at it.
The board I'm sure, we'll be looking at and so were my whole team as we go forward. So.
But we are under 200 million in cash at year end and no debt you better believe it we looked at it we've taken any especially we will continue down the path. We have been returning those rate returning like we have but if something was to happen in a market where it even got more undervalued, but I believe that would be all over it.
And the last question I know people have asked about freight but a lot of your business is vocational trucks waste energy can you just give us a sense where the.
These markets what are you seeing on the construction market.
Because.
Look it's always appreciate it you have a ton of experience to your comments on inflation are fantastic and I appreciate but what are you seeing outside of freight.
As I said in markets like commercial construction in.
Structure oil and gas you know you're in Florida, Texas, California, the three biggest market in the U S. Midwest could you just tell us what you're seeing sort of quote unquote really not real economy, but outside of the trucking market. Thank you sure Patrick.
It remains strong obviously, let's not to oil and gas is oil and gas and will never be what it once was people are much more.
Disciplined, let's say no matter, what's going on the Geo political area right now.
I know in Texas are going to be much more disciplined now has our service business start to pick up somewhat.
It adds but from a capital expenditure perspective, we haven't seen dramatic increases on the capital expenditure spend at all.
People are just working on their <unk> and.
And using it and so we've got a little pick up around that arena from a service perspective, I mean, it's not huge but it didn't pick up so that's nice.
Overall construction remains housing remains strong I mean in Texas and Florida.
So still big driven housing markets.
Look from Florida to go backwards anywhere for a long time because.
An aging population of move in that direction from the northeast continuing.
No state income tax in Texas, or Florida, I mean, how he views driving down the highway here people keep board here.
So I mean that just bolsters the economy around here. So the economy here in San Antonio Austin, or Dallas, or Houston is still remains extremely strong much more diverse but I remember the days. When this was all oil driven right. While it's not anymore, okay and that economy is much different I mean Navistar for example, just opening up a plant in San Antonio.
We know what the past was doing in Austin and many many other projects like that here in these areas, California remained strong.
Having the basin out there on the order of 30 plus million people out there.
And Paul got eight.
So that whole area continues to remain strong due in California, Arizona remains strong there's still there's a lot of construction going on around there right now.
So I mean, its pretty broad base, we still had even our Midwest, we're doing well up there seems to be their economies. They are a little bit different I would say that here when you look at.
When you look at Illinois.
Uh huh.
Idle, but right now the stores are doing well too and again those are in that but a lot of the navistar is towards Georgia is doing good.
Those stores like I said before if the best tailwind driven because I think youre going to see them be able to increase market share over the next few years I mean, I know as the goal of tradeoffs.
And I don't know if backlog is going to maintain their is trying to grow there.
Good about the manufacturers I've got supporting me.
Or else I don't know I've only been in Kansas, Missouri, Arkansas and aspirin.
Three months, so I'm not a big freight Dr. Trades, you would ask me not to talk about that but those are big countries over the road, we've got a couple of areas.
Areas. So we feel good about that they contributed nicely in the first quarter and we expect that to continue and even increase as we bring our systems and our stuff over time on an add water and stir thing, but we do believe that we bring something to the table with that the power of the network and that pretty much covers I can't go over all the states that we'd be here, while I mean.
<unk> been extremely strong this year, we're running real well up there I think we've and again thats another navistar area for us as things got tailwind in the future. So.
I mean I haven't seen her painting the picture of Roses everyday Sun never set but at the same time. These are true things I've seen all they are just they set the organization up.
To better navigate the troughs that we know you get the business I don't care, who you are.
So we feel so good about it's a very balanced very balanced and Gulfstream when you look at it from a money market segment.
Overall.
Just an overall perspective from my perspective.
I know that your team worked extremely hard to deliver these results. So the credit goes to them.
Certainly thank you to address that the team has done an outstanding job across the board.
Across all brands and all the people and all the suppliers and all of the partnerships that we read that we represent with many but it is the people that made the difference for US there is no question about it.
Thank you and I'm showing no further questions in the queue I'd like to turn the call back to Rusty rush for closing comments.
Okay, well. Thank you very much and we look forward to speaking with everyone in July with our second quarter earnings release call. Thank you you guys have a good start to the summer gumming up scene.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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