Rush Enterprises Inc \Tx\ Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Rush Enterprises, Inc. second quarter earnings release conference call. Please be advised that today's call is being recorded. I'd now like to hand the call over to Mr. Rusty Rush, Chairman, CEO, and President. Please go ahead.

Good morning, and welcome to our second quarter 2020 earnings release conference call. On the call today are Mike McRoberts, Chief Operating Officer; Steve Keller, Chief Financial Officer; Derrek Weaver, Executive Vice President; Jay Hazelwood, Vice President and Controller; and Michael Goldstone, Vice President, General Counsel, and Corporate Secretary. Now Steve will say 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, 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, 2019, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved quarterly revenues of $1 billion and net income was $16.8 million or $0.46 per diluted share. We also declared a cash dividend of $0.14 per common share, an increase of 7.7% over last quarter. Since the COVID-19 pandemic began, Rush Truck Centers have remained fully operational across our dealership network. We are complying with all CDC guidelines, federal, state, and local orders, and our own internal policies to keep the health and safety of our employees, customers, and communities our top priority. As expected, the COVID-19 pandemic and resulting economic shutdown, combined with the industry shutdown and continued severe decline in the energy sector, had a significant negative impact on our financial results in the second quarter. To address this challenge and help ensure our long-term financial strength, we implemented immediate steps to reduce and manage expenses during the quarter. We are continuously monitoring COVID-19 and its effect on the economy and our industry. And we are cautiously optimistic we will not see any further declines in our revenues and believe we are right-sized to meet the needs of the market. Turning now to our operations. In the aftermarket, our annual parts, service, and body shop revenues were $378 million or down 15.8% compared to the second quarter of 2019. Our absorption ratio was 110.2%. This was the result of declines in virtually all market segments and consistent with what the overall industry experienced this quarter. However, the energy sector remains hardest hit due to global pricing wars and reduced rig counts, and we don't expect it to improve substantially in the near term. The investments we've made in our strategic initiatives, including our online parts ordering and web-based communication system, enabled us to capture sales in this tough environment. However, there is still great uncertainty in the market and we anticipate that any recovery will be gradual. We believe the COVID-19 pandemic will continue to negatively impact our aftermarket results in the third quarter. Regarding truck sales, we sold 1,866 new Class 8 trucks, down 50.5% from the second quarter of 2019. Our truck sales accounted for 5.2% of the total U.S. Class 8 market. Our results were down significantly, as we expected, due to the COVID-19 pandemic and an industry-wide shutdown in Class 8 truck sales. Several of the manufacturers we represent also experienced production closures in the early part of the quarter, which further impacted our Class 8 truck sales. On a positive note, ACT Research recently adjusted its U.S. Class 8 retail sales forecast to 159,000 units in 2020, which is up significantly from ACT's previous estimate. We're seeing increased quoting activity, but our customers still remain somewhat hesitant due to uncertainty in both the COVID-19 pandemic and the upcoming elections. Our used truck sales decreased 15.8% year-over-year. We aggressively reduced our used truck prices and inventory levels in anticipation of the pandemic's impact on used truck sales. We experienced a significant decline in used truck sales through the COVID-19 pandemic in April and May, but we saw truck sales and values begin to stabilize and rise in June. Further, new businesses are entering the market to take advantage of healthy spot rates, and those new businesses easily start by purchasing used trucks, which is an encouraging sign. In medium-duty, our Class 4-7 truck sales were 2,331 units, down 40% year-over-year and accounted for 4.6% of the U.S. market. These results were primarily due to an overall decline in activity throughout the markets we support. Our customers, many of whom are small business owners, are uncertain about the economy and delaying purchases accordingly. That said, cancellations of Class 4-7 new truck orders are not as significant as we had expected. ACT Research is forecasting U.S. retail sales to be 176,500 in 2020, a 33.9% decrease compared to 2019. We have maintained our commitment to returning value to our shareholders as well as doing the right thing for our employees. We have instituted the share repurchase program that was temporarily suspended in the first quarter and increased our quarterly dividend. We also lifted the wage freeze on our service technicians that was implemented earlier this year as an expense management measure. And earlier this month, we raised our company minimum wage to $15 per hour to encourage employees to build long-lasting careers with us. While challenges remain ahead, our employees and I take pride in being an essential business, supporting our customers and helping our economy recover from this unprecedented time. I am incredibly thankful to them for their dedication to our company and to protecting the health and safety of those around them. With that, I'll take your questions.

[Operator Instructions] Our first question comes from Jamie Cook of Crédit Suisse.

Nice quarter. I guess, a couple of questions. One, some of the OEs that have reported so far talked about when they thought about service or even order trends or sales, it was like April was the worst quarter, and things improved into June, and it sounds like July. Just wondering what you're seeing from the truck sales part as well as the service part, whether service ended stronger relative to April. And then, I guess, my second question, the G&A was impressive in the quarter. How much you were able to sort of take out -- take costs out to help your EPS? So wondering how we should think about going forward? And then as we sort of go through COVID, is there an opportunity to sort of structurally reduce your cost base?

Good questions, Jamie. Well, as far as looking forward from a truck sales perspective, let's start there. As I mentioned in my comments earlier, no question quoting has increased. We are seeing some of that come to fruition, but we're continuing to hope the quoting activity continues to get better. As you saw, the net order intake for the month of June was more than was anticipated, obviously. And we are still -- well, I don't want to say I'm super bullish on it. We're not talking about getting back to levels we were at beforehand. It has definitely increased, and I expect it to stay that way, barring any second wave as they talk about, but that type of stuff is out of my control. From a business perspective, given where the freight business is right now, we have seen all the reports from many of our larger customers, and they have reported solid results, and spot rates are probably back to being as good as they've been in a couple of years. So that usually bodes well for rate increases down the road for our over-the-road customer base because we know it's about 70% of all the trucks sold. So looking at those indicators, you have to feel there's some strength there as we look forward. That would be my opinion on that. From a parts and service perspective, it was interesting. As I mentioned in the release, we took a little more hit in service. While we did see some shifts, I would say we were [indiscernible] bottling on the bottom. Now, if I look at the parts from a parts perspective, we did increase for sure, as we move through April, which was the worst month, May about the same. But it did increase somewhat in June. The service side did take a tougher hit in the quarter, and that is largely due to the oil and gas business, even though it is a much smaller percentage than what we used to be. I mean, it's not even what we were 4 or 5 years ago. I told you in the first quarter, I think it was 3% to 4% of our parts and service; well now, it's less than 2%. And that is more heavily service weighted. So service took a little tougher hit in the quarter, but we do believe it's going to come back. We are seeing backlogs in our shop and the number of tickets we are writing up has increased. Not dramatic increases, but we’re looking at a gradual pick up, and I think we have bottomed. I haven't seen all I want to see, but obviously, there are good indicators that we will continue. It's not going to be any V-shaped recovery, but that's fine. We just want to keep moving in the right direction. I think we will as I look at the backlogs, what we call work in process, and the number of tickets we're writing up on a daily basis. The problem we took for a while is some of the dollar values on the tickets. The tickets have been coming back, but the dollar values were less. But I think they're starting to creep back, too. So it's something we've got our eye on, not just month-to-month or quarter-to-quarter, but week-to-week, day-to-day, hour-to-hour right now. But I do feel that we will gradually come back on that side of the house. And for sure, the parts business has bottomed and is gradually coming back also. Now regarding expenses, I've got to do one thing, first. I've got to complement our team, and that goes for each and every one of the employees out there in the company, for an outstanding job under very stressful conditions. When you're dealing with the pandemic, you're dealing with a lot of people affected by it being an essential business, don't think we weren't affected as an organization. And we had people, whether it was in quarantine or dealing with COVID. And on top of that, you're having reductions in workforce, and you've got all this going on. The job they did was just outstanding. I can't say it enough; I'm incredibly proud of the organization for producing results under significant stress and with a multitude of challenges coming at them. Our big question, which I knew would be asked, is regarding our expense base. Well, I have historically always told you, you know what? Every gross profit dollar that we create, we're going to take probably 50% to 60% to cover it. I don't loan money, I don't do things like that. I work on parts of trucks, and I do pick parts up, but I do deliver, and it takes personnel. So because of what we've learned and the investments we've made over the last few years, and some of the lessons we're learning in this current environment, we've set a goal that is not a 50% goal. We want to achieve 30% to 35% in terms of adding back our gross profit. Our goal is to keep two-thirds or better, somewhere in that range, and not just 50% when the markets return. I have been through enough cycles to know it is going to come back. I may not have the timeline exactly, but sometimes the steeper the valley, the bigger the rise back. So always remember that. So as an organization, our goal is to -- yes, we're going to have to spend a little money, but we are not going to spend as much as we did in the past. That's our goal. I guess, we have to prove it, right? We'll see if the proof of the pudding is in the eating. I look forward to that challenge, and I think the whole team, from top to bottom, looks forward to that challenge to try to maintain at least two-thirds of our gross profit as the market comes back. When you look at it compared to last year, I mean, I go back to July or June last year; we were talking about taking $12 million of better gross profit a month, and they have done a great job managing on the expense side. It's taught us some things, and the investments combined have allowed us to set a new internal goal. And I can give you some high-level view on how we're going to do it, but I do believe that with the use of technology, and being forced to use more of it in the last 90 to 120 days, along with the investments we've made, we will achieve the goal I gave you.

All right. Rusty, one last question, probably unfair, but it's a complement to you and your team. You look, we're in a COVID environment. Your sales were down, I don't know, 35%. You put up $0.46 this quarter in that type of environment, with the cost you took out, with the focus on the aftermarket parts business. Like why isn't the second quarter the trough of earnings? Or why shouldn't people think about sort of, if we take the $0.46 or $0.45, multiply it by 4, why isn't $1.80 the new trough for earnings for Rush? Steve can answer if you don't want to.

You know I'm not going to, Jamie. Okay. I'm not going to start... You have to get a new guy in here to get that started. So I'm not going to go there. I'm just going to say, I'm proud of where we're at and the job that was done. But it's not -- this is one for sure. There's still a lot of uncertainty out there, okay? In many different ways, not just COVID, but with the elections and everything else going on; there's a lot of uncertainty, not just in our organization, but in people's lives out there. So I'm not going to get out there right now with all of that.

Our next question comes from Justin Long of Stephens.

So I wanted to ask about the trend in parts and service revenue in the quarter, and if you could give any color on how you think that compares to the industry in 2Q. And then also, would love to get your thoughts around the competitive landscape in parts and service and how that could potentially change post COVID.

Sure. I don't think we did any worse. Parts and service information is not the best to gather overall, other than mine. We have a couple of things that we look at. From what I've seen, I think we did a couple of points better in parts and maybe a couple of points better in service, but it’s either flat or stayed flat with it. I'm confident we did a little bit better on the parts side than most. But I do expect, certainly, it has bottomed, as I said. It just crept up in June for sure. Service, I still think we were feeling a lot of the effects, but it has bottomed out. I'm looking at my technician count, and stuff has flattened out, too, but we had some declines for a bit. I'm looking at tickets written up. We had to get values on tickets back up because for a while there, people were just spending what they had to. Generally speaking, they weren't spending any extra. If you had a problem and I was going to break the truck, you fixed that. But you usually didn't miss a test, would you like to do this and this, and that and that. They simply did not do that. And then you had other people extending things, like oil intervals, as people were struggling. I know we had Rush on the stores; certain market segments were fine, but others were not. You were closing down all the department stores, and everything else was going online. That has changed a lot of customers' ways. I think that is straightening itself out somewhat. I think it's going to be interesting to see how it all shakes out when we're done with all this because there's a lot that was pushed online. But I do believe we've bottomed and are poised to go up, as I said. I'd like to start picking up a couple of points a month. I can't see that, I don’t have the future in front of me, but that's what I'd like to see. I think the confidence levels are improving given what we've seen from the freight companies, the large guys have been projecting on their spending. I can talk more and ramble on, but you have to focus on the small and medium guys. There are roughly 100,000 truck companies. Many got PPP money, which is about 20% of now, that’s 40% of people who got it. Now I hope that when you look at where the money went, I can't break it down. But point being, they got some help. There were extensions done. From what I can tell, I was worried about a bubble, but from what I've gathered, talking to industry players on financing, most people seem to be making their payments, which is a good sign. We looked at our lease portfolio, and we have seen utilization inside our rental comeback. I'm just giving you anecdotes for why this isn’t a V shape, but you feel you have passed the bottom and will gradually get back there. Now what was your second question?

The competitive landscape. I'm just wondering -- yes. Do you see some of these other companies in financial distress and maybe a little bit of a shakeout or consolidation opportunity on the other side of this?

If you could -- you didn't have to spell the letter P-P-P. I think I would be looking at some right now, okay? But I wasn't able to do that. Well, given our size, it wasn't the right thing for us. It wasn't meant for us, so we just managed our business. I do expect opportunities to come, but they may be a little further down. I didn't get the push I was looking for, I think because several companies received financial assistance, but I think that speaks to the quality of our organization. In terms of others, there are many dealers who took a lot of money, and rightfully so. There’s nothing wrong with that. But given our situation, we are watching the landscape and are positioned well to take advantage when the time arises.

Makes sense. And then following up on what you said about parts and service and some of the mix changes we saw in the second quarter, I wanted to ask about parts and service gross margins going forward. Do you think they can get better versus what we saw in 2Q? Has the service piece improved? Or how should we be thinking about that?

Yes. When service does come back, that will affect the mix when it starts coming back at a higher rate. So there's no question that we could see a pick-up. It was up from Q1. I mean, margins were up from 36.6% to 37.2%. Now they were not anything compared to Q2 last year, which was a record quarter for us. I'm not going to consider that a benchmark. However, I believe we will be somewhere in the high 36s moving forward into next quarter. I don’t want to commit exactly, but I think when service recovers, we will likely observe increased margins. I anticipate the service aspect will come back faster over the next few months, but I cannot give specifics on the timeline. I think we took a hit in O&G, affecting our service more than anything else, but we seem to be returning. The results show great potential, and I’m excited about where we can go when we start to return closer to normal. Yes, there's room for improvements in margins, but don't expect dramatic increases like 200 bps. I'm hopeful for a gradual pickup.

Okay. That helps. And last question, just real quick on the longer-term financial targets. I know you guys put those out there a while back. Obviously, the world's changed a lot. Any updated thoughts around one, those targets; and two, the timing of when they could be achieved?

Well, I guess timing got extended a bit, right? Targets haven't changed. If anything, we want to raise the targets. That's what you do when you start talking about trying to hold a higher percentage of profit margin. When you're at the bottom and looking to grow back, it's exciting. The targets are still out there. We still want to capture 6% of the parts market. I have to look to see what our position is in the COVID world; I know we haven’t declined from 38 to maybe 46 or 47 after COVID. We still have a target of wanting to capture 6% of the overall parts market, and I've stated that before. Only earlier this year, I was eager to prove 30% off in truck sales and show a solid year, but that didn't happen. Despite what we’ve gone through, I think we are on track to show a decent year considering the environment and how we have managed it. Right now, I can’t provide a concrete timeline; let’s navigate the uncertainties first. Hopefully, by late this year or early next year, we might remove some of the uncertainty and provide a timeline, but I don’t want to shoot from the hip when there is so much unpredictability. Nevertheless, we haven’t halted any of our strategic investments.

Okay. Great. I appreciate the time and congrats on the quarter.

Our next question comes from Joel Tiss of BMO.

It sounds like you were kind of softening up a little bit from what you're saying in earlier conversations about the potential for kind of smaller and medium-sized guys to see more bankruptcies than we've seen before, and a bunch of low mileage used trucks come back in the market. Is that fair?

Well, given what I'm seeing out there from a freight perspective and miles being driven and stuff like that and what I’m hearing, I’m feeling that many may weather the storm. I was concerned that if we threw a second shutdown, all bets would be off. However, with the spot market performing well over the last four weeks, and acceptance rates still being high, it just appears to be more freight than I anticipated. Now, that said, you might have some smaller companies that could face their challenges, but overall, many of them are making their payments and a vast number seem to be in decent shape, which is a good sign. I can't foresee how that will unfold, but I do sense a stabilizing freight market, which may help the smaller and midsized companies.

And then do you -- are you starting to feel like -- you've obviously been doing this longer than all of us, and are you starting to feel like we could squeeze the whole cyclical downturn into one year versus how we usually have whatever, four good years and two bad years and things like that? Do you think the shape of the cycle changes?

Yes. I think that it very much could change, Joel. There's no question in my mind. The deeper the valleys, the quicker you come out of that slow crawl down. Remember, we were always supposed to come down, projecting a U.S. retail of around 200,000. Well, now we’re predicting around 150,000 to 160,000. We’ve taken a bigger hit, and if this continues at similar paces into next year, yes, there’s no question you could squeeze this down tighter. It may not be a full 12 months, but it could be down to 18 months or so as we right-size back to previous levels as long as there aren’t any additional external pressures. The used market will be a big indicator for us moving forward.

And just more about it from a bigger picture standpoint. Why would you -- like seeing how great your company has reacted to this unbelievable time, why would you be reluctant to walk away from saying, I think trough earnings are $1.50 or something like that. I mean, no one ever knows what's going to happen. But you've seen sort of the resiliency and excellence of your company?

Well, I'm going to let you say that, okay? I'll let the comments be made. We all can read the signals. As we get through this year, then I can give you something to write about. So we'll finish the year out, and we can call this the trough, and you can take it from there. I'm not wanting to put earnings estimates on it at this point. I've been doing this for 24 years plus, and I am not starting today. Maybe someday I might be able to loosen up on that, but for now, I’m sticking to my approach. You can read the signals and the results are here.

[Operator Instructions] Our next question comes from Andrew Obin of Bank of America.

I appreciate how hard the entire Rush work to deliver these results. So very impressive.

Thank you. I'll relay that message to my team, but it’s really all them.

Just a question, could you just give us more of a rundown -- a lot of questions have been answered, but could you give us a rundown by key geographies: California, Texas, Florida, Midwest, what are the key trends you're seeing by industry? And is there a material difference between, let's just call these four regions?

Right, okay. Surprisingly, California has held in really nicely. Given what went on, everything shut down the ports early in the quarter; they have held on very nicely. Arizona has also maintained pretty well. The biggest hit has been our Texas region, which encompasses Texas and Oklahoma, as those areas rely more on the oil and gas sector. They are showing resiliency, considering their past performance. At the same time, they’re not up to their usual standards, but considering they were significantly impacted, I think we've posted decent results. The Midwest has also shown some strength; we have seen a positive trend in Illinois and Ohio. They appear to be gradually climbing back. The Southeast is still tough; areas like Georgia are struggling. Florida has shown resilience despite the tourism drop, showing good results.

I think in your press release, you've highlighted that the fact that parts and service business was down was a function of sort of headcount in terms of your team. And you also sort of talked about how, going forward, perhaps you could do more with less. Can you just talk about how will you ramp up staffing in the parts and service department going forward? Will it be in line with historical patterns? Or have you learned lessons that would allow you to be more efficient in that area of the business?

Thanks, Andrew. Historically, I have always told everybody that we grow gross profit and I will probably spend about 50 cents of every dollar. But excluding investments we've made in the past few years, and through lessons learned during the pandemic, we now have an internal goal to keep around one-third; I am aiming for something being 30% to 35% based on our gross profit. So how do you do it? Well, becoming more multichannel is key. This includes increased online presence, better connectivity among our phone systems and staff. When one area is busy, the support is rolled over to others. All of this allows us to do more with less staff but still grow. This is not just theoretical—this aligns with our recent successes.

Our next question comes from Shawn Kim of Gabelli Fund.

Rusty, and congrats again to you and the team on a great quarter. I wanted to switch gears here. Just given some of the attention that some startups in the industry have been getting, I wanted to get your thoughts on hydrogen fuel cell technology in commercial vehicles. Obviously, this is probably more of a long-term play, but I just wanted to get some commentary. Are you having any discussions with customers? Are you seeing any sort of customer demand? And any thoughts on the timeline for the rollout of these technologies?

Okay. On hydrogen fuel, I'm not engaged in any discussions, it’s early, and I would say that it will be several years before we see a significant rollout. That said, I’m not disputing its long-term viability or that we won’t adapt to the technology as it becomes more integrated into our daily operations. One factor that differentiates us is our extensive service network. Thus, we’re constantly looking for ways to leverage that network and add more services. While many start-ups can focus on advanced product development, they often lack a solid distribution network. We are committed to remaining involved in alternative fuel spaces, whether that is hydrogen or electric. PACCAR is developing their products in this area, as well as others in medium-duty segments, so we will certainly align ourselves with their efforts.

There are no further questions. I'd like to turn the call back over to Mr. Rusty Rush for the closing remarks.

Well, ladies and gentlemen, first off, I want to thank you for joining us on the call today. And most importantly, I wish you and yours and everyone, all the health and safety I can. These are still very, very uncertain times. So just do the right thing. I spend a lot of time talking with my staff, and if I can tell anybody anything, it’s just get off your horse and do the right thing, okay? There's such a thing. We do the right thing around Rush, okay? I can promise you that because the health and safety of our employees and our customers and just our communities in general are the most important things. So the rest of this really doesn't mean a lot. Thank you very much. I wish you all the best. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.