Q2 2023 Rush Enterprises Inc Earnings Call

Good day and thank you for standing by welcome to the Rush Enterprises incorporated reports second quarter, two 'twenty twenty-three, earning results conference call.

At this time all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.

Ask a question during the session you will need a press star one one on your telephone.

You will then hear automated message advising you. Your hand is raised to withdraw your question. Please press star one one again 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, President CEO and chairman of the Board. Please go ahead.

Well good morning, and welcome to our second quarter 2028 earnings release conference call on the call and Mike Mcroberts, Chief Operating Officer, Steve Keller, Chief Financial Officer, Jay Hazelwood, Vice President Controller, and Michael Goldstone, Senior Vice President General Counsel and corporate Secretary.

Now Steve will say a few words regarding forward looking statements.

The 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 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, 2022, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved second quarter revenues of $2 billion in.

Net income $98 3 million or $1 75 per diluted share. We're proud of the great corner at three for two stock split and a post stock cash dividend of <unk> 17 cents per common share a 21, 4% increase from our previous quarterly dividend.

In the second quarter, we achieved strong financial results due to revenue growth from large national accounts as well as ongoing pent up demand from new class eight and class four through seven trucks caused by limited new truck production over the past few years.

Our commitment to our strategic aftermarket initiatives and our continued focus on operational excellence.

Were also significant contributors and we are proud of our results in the second quarter.

In the aftermarket our parts service and body shop revenues were 651 billion up eight 9% and our absorption ratio was a record 139, 7%.

In the second quarter, there was healthy demand for parts and service, especially from refuse customers and large national accounts.

However over the road customers were negatively impacted by several economic factors, including high interest rates depressed freight volumes and low freight rates.

These difficult industry conditions are particularly tough small over the road carriers.

And they limited overall aftermarket growth commercial vehicle industry.

Through our aftermarket rep, nor aftermarket revenue growth slowed compared to prior quarters, the diversity of our customer base helped.

It helped us to mitigate these tough market conditions, and we significantly outpaced the industry this quarter.

Looking ahead, we expect aftermarket growth will continue to moderate throughout the remainder of the year and we are closely monitoring economic factors, which could have an impact demand for parts and service. However, we continue to add service technicians to our workforce, notably mobile take measures, which is a key element in our long term strategy.

With our continued focus on expanding our aftermarket offerings supporting national accounts, we believe our aftermarket revenues will remain strong.

Turning to truck sales, we sold 4300 class eight trucks in the quarter accounting for five 7% of the total U S market and one 8% of the Canadian market.

Low freight rates are impacting small carriers, but strong.

Excuse me strong widespread demand continues due to limited truck production over the past few years, although we are still operating within the confines of truck allocation work.

We are confident we are using our allocation in a way that provides the most long term benefits for our business and enables us to effectively navigate the current freight recession.

ACD research forecasts U S class eight retail sales to be 272000 602023.

Five 1% compared to 2022.

New truck production is improving but supply issues still exist that may limit truck deliveries in the third quarter.

However, due to pent up demand and customers beginning to seek new commercial vehicles ahead of emissions regulations and the associated price increases we believe our class eight truck sales will remain strong.

Our class four through seven new truck sales reached 30 477 units in the second quarter, an increase of 25% compared to Q2 I was wondering if wanted to.

Got it for five 2% of the U S market and two 6% Canadian margin waste.

We experienced strong demand from a variety of market segments and truck manufacturers that we represent have increased medium duty truck production, which has enabled us to outperform the market in the first half of the year.

ICT research forecast class four through seven retail sales to be for 248150 units.

In 2023 six.

Six 2% from 2022 demand remains strong for medium duty trucks and as customers prepare for previously noted emission regulations. We believe our third quarter sales will be fairly consistent with our second quarter results.

Any duty growth will outpace the industry in 2023.

Our used truck sales reached <unk> hundred 69 units in the second quarter up 14, 7% year over year.

Increased new truck production and saw freight rates.

Weak demand for used trucks in the second quarter.

Used truck values remain low load appears pricing has begun to stabilize.

With freight rates are not expected to stab substantially improved this year and with new truck production expected to remain strong we believe used truck demand and pricing will remain low through 2023.

We plan to continue to closely manage inventory levels until demand begins to increase and we are certain that used truck prices have stabilized.

As we look ahead, we expect new drug supply will satisfy that pent up demand for commercial vehicles by the end of the year. We continue to monitor economic factors, which could have an impact on our industry, but due to the diversity of our customer base combined with our continued focus on operational excellence and supporting large nationals.

We believe our overall financial results will remain strong through the rest of 2023.

Before we close it is important for me to thank our employees for their great work, we're providing an outstanding experience for our customers, while staying focused on our company's long term strategic initiatives.

And with that I'll take your questions.

Okay.

Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby will compile the Q&A roster.

Okay.

Yeah.

Our first question comes from the line of Jamie Cook from Credit Suisse.

Your line is now open.

Hi, good morning nice quarter.

Thank you Jamie good morning.

Good morning.

Rusty a couple of questions one.

I was interested in your thoughts you talked about people buying ahead of price increases for 2024.

Ahead of emissions standards I'm presuming, you're assuming the 2027 emissions, but can you just elaborate on what youre hearing about pricing in 2024, and the ability to get price just because pricing has been strong.

Your view on the upcoming emission standard what it means for <unk>.

The truck et cetera.

Second question My second question your margins.

For new and used truck sales were exceptional at 10, 1% and if you look at gross profit per truck selves.

Just at sort of record level, so I'm wondering.

How much do you have in backlog of trucks that sort of.

This margin level and how do we think about normalized margins.

Over that.

Sorry, 12 to 18 months. Thank you.

Well when we when I talk about drug pricing increasing.

Talk about emissions they sort of go hand in hand understand the whole country is not on the same.

Running down the same highway here, you've got car right in California, and we happened to have quite a few stores in southern California.

So that's where you really I think from a pricing perspective, youre going to see the biggest hits.

Isn't the carb compliant states as they roll in.

As I look from a pricing perspective.

Across the rest of the country, if theyre not running in California, or carbon second state I don't look for it could be anything like it has been.

Pricing will flatten somewhat maybe slight increases but.

The real increases will be.

Carb compliant states for now.

Until we get out to 2027.

As we all know.

Everybody ACD for sure we look at next year.

Possibly down up to 15% on from a class eight perspective, but 25% and 26.

Barring unforeseen overall economic issues in this country should be.

So it should be the biggest year ever given.

With all the new technology is rolling in the cost of them.

I think of what.

I just don't I think we're a little ahead of our sales with some of these loss myself.

From a technology perspective, I don't think were going to be really ready for it and I'm not going to get it all that right now, but from an infrastructure et cetera et cetera. So I do believe.

As to outside of any economic overall general economic issues in the country.

Youre going to see a pull forward like you probably never seen.

As people, especially when folks get to watch what goes on in California, and the rest of the country because I really don't believe we're prepared.

This change quite as quickly.

As you know they just settled.

EPA did.

So car buying some timeline stuff.

To be aligned both of them and we align once we get to 'twenty seven but they won't be at the Antelope. So a lot of that comment by me was really around.

The card space.

Not necessarily around the rest of the country by comes to price.

Just the ones that have to be clean idle approved et cetera.

Probably.

Technical for me, even but.

But thats, where the pricing the real price increases are going to come.

And those states more than I do believe the rest, especially next year with the overall market, possibly being down is what most people think and not bad.

This is no different than what we've talked about.

For the last two years, but.

There'll be a little bit of a breather till everybody really gets after it I think.

Place and accelerating their repurchases again before we get too.

The largest increases we've ever seen I know you asked me what how much.

I think it's a little early for me to tell because I'm getting different numbers across the board from people, but.

Upwards of $20000 or more for a diesel truck when you get out into 'twenty six 'twenty seven.

And a lot has to do with where youre at.

As far as margins and where we're at but I think if you ask me that question. Yes, you got to remember our used truck margins got back in line. Okay. In fact, our used truck margins were pretty good at 11%, we haven't see that skew to the last year. So as you know as we had.

Been fighting the abused issue, but as you know you go back remember we got we attack the used truck market immediately when we saw it go down in Q3 of last year. If you look back our margins were 1% that quarter, but we always do we make sure we manage our inventory properly in the market to market.

Every quarter.

Really every day.

So we are we're back in line and we're keeping up.

A better pace with the decline in values now.

Decline in values and as I've said on used is still more than what I would think would be normal normal depreciation, but it has slowed slightly from the big drops it was taking okay.

But the demand is not real good eager I mean, we had a nice demand quarter, but we wholesale a lot of trucks.

Keeping everything Sharon, but we were still able to bank margin.

Because we have got in our inventory.

And keeping it in line and still being able to sell a lot of new trucks trade for trucks and so we felt we felt good about that so I don't you said well how long can you hold it all.

All the time tells I don't see even with the market going beyond next year I don't see any big decline could it declined slightly you bet, okay, but I don't see theres, not some 20% decline or anything out there for sure.

So that'll be it'd be a little more we'll have to go back to selling trucks again for a while I think there next year.

And back then we get into Q2 Q3 I mentioned.

I think most of the pent up demand will be taken care of but theres. Other taco out in August I Ramble, a lot. There's good things on the horizon right. We havent. We havent spent any of that money has not been invested in the year.

And all of the infrastructure rebuild yet I mean that money is still to be spent well that means there is going to be trucks, we have bought two in different sectors.

As I said.

Over the road sector has been hammered just go read all the public reports so whenever you read there you could multiply it when you're talking about small carriers you don't see so.

We'll be back to selling drugs again.

But yes, it may create a little bit more.

Competition out there, but I don't see any big big heavy decline across the board because I don't see us getting I don't think were going to go back to a 1% used margin, which blends into all of it anyway.

Okay alright. Thank you so much I appreciate it nice quarter Theres always Derrick Thank you Jamie.

Thank you.

Our next question comes from Andrew <unk> from Bank of America.

Hey, Rusty Steve good morning.

Good morning.

Hey, just a question.

I think in this cycle you guys have talked how SG&A.

Is it a big focus for the company and as you think about volumes into 'twenty four.

How do you think about controlling SG&A right because I think the message was that historically you guys have done a fantastic job on controlling SG&A right out of the downturn, but in the prior cycles.

We're happy to sort of let it go I know you've changed how you control SG&A in this cycle, what kind of implications does it have going into 'twenty for sure.

Well first off remember, we break it into two pieces, where SaaS and SG&A.

There is nothing more than a derivative of a rapid directly correlated to truck sales. So percentages remain pretty constant at what the percentages of truck sales. So if truck sales go down and that's going to go down.

Okay.

If I go up it's going to go up so.

Barry just creates a distinct correlation between those two.

G&A Wow.

Let's go back and just think about this there's one thing I think a lot of businesses I know we have co.

Covid was an interesting time 2020, right we learned a lot.

And I think we've managed to carry some of that discipline.

Over into the last couple of years, and we believe we will be able to continue to carry that discipline from an expense perspective.

We are this year would normally be a year, where what I would call quality of earnings would be.

Getting worse than.

What it is we have become a lot better.

Expense managers, not just here at corporate but our people in the field.

<unk>.

Very much more disciplined in our approach.

And the technology, we have allows us with our systems to really measure and monitor stuff I believe unlike and better than anybody else. So we have our own SAP system that we continually invest in it gives us all the real time stuff and then.

Just sort of like some sports teams.

Got a salary cap, okay, and our people know it sometimes can be a little difficult, especially in the heat of summer but.

<unk> spend is tied directly to the gross profit.

<unk> gone up I mean, I think there is a <unk>.

Percentage, we can spend going back there is a certain percentage of it needs to be cut.

No.

Thank you.

I know we are in better shape sure man.

Manage any cyclicality that comes at us.

In a softer market and I think the most important thing is not just the G&A piece, but I said it in the.

In the call around the press releases the diversity of our customer base.

And I know I'm not going to jump off G&A here, but when you look at just $3 carrier's reports.

They are getting hammered okay.

Got it bright spot rates down 20, plus percent well that's the used truck dive.

Lots of small carrier of the owner operator.

Yes.

And even the big truckload guys in a big LPL.

<unk> morning, David.

And then exist start three months ago. This has been going on for a year.

And that's still the biggest sector did utilize it to small carriers are still almost a third of our business. The unforeseen thing. So that's why I was especially proud of the results.

We made.

We were slightly back in G&A in Q2 from Q1. So obviously, we made some investments and I would expect us to continue to make the adjustments.

As dictated by the market.

So with that diversity of customer base I'm, telling you there is.

Our continued focus when you said when you talk about <unk> I'm talking about national accounts, Okay, Let's just call. It national accounts are continuing.

Drive of National accounts, while leveraging off the largest map of any dealer group in the country.

And going to market as one is going to carry us through whatever happens.

We can't make a market with <unk> for sure manage better than we ever have historically.

Exxon just maybe a follow up question that I, usually ask you talked about.

Over the road.

But can you just talk about you always have fantastic reads in the economy.

Maybe what are you seeing.

<unk> off road vocational what.

Are you seeing construction, California, Texas, Florida Midwest, what are you seeing on waste what are you seeing from guys like Fedex <unk>, just would love to get your take on what's happening in the underlying economy.

Sure.

Well brace down.

Really but I don't.

I don't.

The recession, we've seen in freight.

I don't think its fully indicative as really good group of what's gone on that I see across the board.

I think.

Still.

Pretty strong in a lot of areas. We are it's just the over the road got really crushed because inventory levels got too high.

We couldnt get inventory than everybody just took too much inventory in 'twenty two on the retail from retail right and so.

And then the supply and demand around trucks and so while the rates have come down for all the carriers as you can read and they've had to slug it out through there.

Don't think it's terrible to them the small guy has been terrible too, but the larger guys. You know with a stronger balance sheets have been able to manage through the interest rates.

Contract rate interest rates up contract rigs down et cetera et cetera.

But the overall local economy, so I think.

As you.

He is hanging in there at least that's what we see okay, we see that assisted.

Inventory levels I think are coming down.

Like to think that the over the road business as bottling, along the bottom and then I still as I mentioned.

Believe the.

Vocational markets will remain strong with the infrastructure. They haven't spent that money yet okay that money is still to be ported to the economy.

And so with all that going on in front of Us I've got to believe that the overall underlying.

Pes will.

Overall underlying economy will be okay, you'll have issues like they had with too much inventory breaks out and go back, but I would make there Bob with long.

<unk>.

Fairly well, it's just as I said, it's been really integral for the over the road guys.

Normally it follows an economic recession.

You see the freight recession tagging with an economic recession, but we really haven't had that.

As everyone knows we've been predicting it for a year.

But really didn't have equipped <unk> had it in the right market, but I do think roundabout, so but I can't tell you we're coming out next month next quarter or whatever but I've got to believe.

I am 65 years old.

Smarter, but I've lived through enough of that.

<unk>.

We're going to get into.

It's got to start picking back up somewhat in the next year and then as I said when you get into all that.

Have to deal with.

As an industry with all consistent.

<unk> and stuff.

Unlike automobiles trucks are not as far along on the technology path I hate to tell you, but we're going to be driven to do stuff, but I think we're a little ahead of schedule.

Which is going to create opportunities.

Opportunities in my mind for us.

As we go forward, but like I said.

It's a long winded answer.

Yes.

I guess I'll just squeeze one more.

You guys have been one of the early adopters of <unk>.

I guess, what 20 years ago, I think yellow software very very extensively.

In your parts and service operation right I mean, I think digital is one of your sort of strength.

Antibodies pitching AI solutions to have you looked at anything that's sort of applicable in real world that it's way too early.

Well, we're getting pitched it breaks that I could ask my CIO to talk more about it than I do and how it fits with us and we are looking into it I don't have anything definitive to obviously you talked to you about right now, but obviously, it's not like it's one sector or it will affect every.

Okay.

And I am sure.

I can talk more offline or they can literally they are better than I am at it I've got 125 people in my Department down there.

We are carrying out everything we do but.

We have used it in other way we are ready to use it in some ways.

Im going to tell you that's proprietary im not going to get into it that's not sort of dance okay.

So you just have to trust newness and so all I can tell you we're usually.

I've said all my life.

I don't want I want to be on the leading edge not the bleeding edge and I think we do a pretty good job of that route here.

With our look I put my system up against anybody can look at our business system and all the stuff that we've got it at least from an industry perspective.

Yes, that's exactly why I'm asking that question, that's right, yes, well I understand but theres things I don't want to talk about okay I got it.

But yes, you better believe it okay.

Sami dancing around here not a good dancer.

So.

There are certain things, we're working on and doing that are proprietary to us and so I'm just going to keep leave it like that Andrew.

Thanks, so much.

You bet.

Thank you again as a reminder to ask a question you need to press Star one one on your telephone.

One moment, while we pull in the next speaker.

Our next question comes from Justin long from Stephens.

Thanks, and good morning.

Good morning, Jason.

So I wanted to start with the question on parts and service I think you mentioned that your performance significantly outpaced the market I was curious if you could give a little bit more context around that comment and how you think the market performed relative to the 9% growth you sign.

In parts and service.

Yes, I would tell you that the overall market most probably look the information that we get on this to be not as good as truck information, where you can license vehicles et cetera, but we are extremely confident.

That.

We probably doubled the growth rate or better.

Pretty flat when you think about what I talked about customers right you thinking about folks that are tied to certain regions that are just side over the road business.

The reason, we're able to we're confident in that statement is the fact that the diversity of our customer base.

Go back six years ago, but we were not.

Oil company right, that's no longer the case, we still do a lot of business. We've got a lot of business in the mixer and construction business, we do a lot of business.

And the revenue side, we do we still do a lot of over the road business I would tell you that our small carrier business.

Currently when you look at say what was it eight 9% growth.

We realized the small carrier business, which is 30, hence for example, I think a third of our business. It was off 6%, 7%. So I got to get to that six or seven back on that third before abstract trying to go with $8 nine on the hall so to me that just.

Tells you exactly.

Some of the real hard work that's gone on with the field over the years to make sure that we are not tied to one thing we do all of those things and more right.

So.

With the information we have we're pretty confident.

Low singles.

Body else did to flat to be honest with you.

So as I said that's it.

It ties back to how we go to market.

I think everyone will be somewhat flattening remember this inflations out of everything right Inflations way off from where it was a year ago too so.

Inflation was a part of some of those huge growth rates. There are a lot of companies. So.

<unk> really taking share here is what we're talking about.

And Thats, how we do it so we can take share.

So when you gross up that you're going to grow with them naturally quite economy, but the way you do the way you perform outperform everyone else is to take share and that's the goal of 8400 people every day, we get up.

And when you look at parts and service revenue in the second quarter. It was pretty stable with what you saw in the first quarter are you assuming that on a sequential basis third quarter look similar to the second as well and maybe any update you can provide.

On quarter to date transpire.

Sure.

That's what we're hoping for.

There could be slight deterioration because these big.

Guys.

We're supplementing it with all the diversification in our portfolio of what we do.

Look for sequential big growth rates for sure <unk> had tempered inflation, but remember as Andrew talked about a minute ago. We have a couple of ways. There is golf management of G&A at the same time right.

That's what that's the part that's worth.

So that's where the difference makers.

So how you go to market, how you take share and how you manage gross flows.

I think we've proven in the past and will continue to improve we're pretty decent at it.

But I don't see we're not going to see I don't see double figure growth rate sequentially by any stretch.

Mid singles if that.

Somewhere in those in that cycle I don't want to it's a little bit early in the quarter. This July is always an interesting month, because you put July 4th on a Tuesday, which I love to add a lot of money I'd love to have it on a Friday I don't like hit the middle of the week and kind of not just message.

But I think we have a strong close to spot.

But it made a rough start to July but I am confident that we will continue we have throughout the month to accelerate back more to normal that first week.

Or is that I think you guys got.

A lot of companies.

Good for them, having it on a Tuesday, so, but which still solid we still expect great results, just maybe not to the levels of all of those double figure mid to high 17% in the first quarter.

Finishing up with tag a little inflation in there et cetera, et cetera, but that's come out of the mix a lot. So along with but we are taking share thats, what we were able to at least maintain some growth at eight 9%.

We'll just have to see.

Year over year perspective, probably okay sequentially.

That and a little bit as I said, I said, it would moderate and Thats, what we expect going into the back half of the year, but still very strong results as I said, there's more than one level.

Got it that's helpful and I guess last question for me when you put together all of that puzzle pieces any thoughts on third quarter EPS relative to what you just put up in the second quarter. It sounds like a lot of the topline trends are pretty stable, maybe we see a bit of margin pressure, but what <unk> did.

Just get some high level thoughts.

Boy adjusted I.

We don't do that.

You were talking about dancing earlier, so I thought maybe I could.

This one Ed.

I don't I don't dance, well, but I can read music so.

I would tell you that.

No comments US then you can read the press release.

Our EPS guidance Agco jaws, when it gets to be a big trough what have you remember I said I'll keep it over four and if what they've got projected for 2026 plays out, but we're going to get it over eight and I'm going to keep looking to add to the Bible I don't have anything right now that the company as we go forward. So.

We will continue.

Track record speaks for itself, but we don't expect to do anything but to continue to operate with excellence and outside of the competition whatever the market holds.

Understood. Thanks for the time and congrats on the quarter.

Okay. Thank you know we were also.

We were happy to be able to raise the dividend 21% during the quarter as I said so.

Anyway, that's that.

Okay.

Yes.

It looks like on the board I think thank you at.

At this time, we concluded the question and answer session I would like to turn it back to Rusty rush for closing remarks.

Well I just thank everyone for joining us this morning.

Look forward to getting back with you in October do you have any other questions feel free to call, Steve or myself. Thank you guys.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

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