Rush Enterprises Inc \Tx\ Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing-by and welcome to Rush Enterprises Incorporated Results Fourth Quarter’s Earnings Call. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, the CEO of Rush Enterprises, Mr. Rusty Rush. Go ahead, sir, and have a wonderful conference.

Thank you. Good morning and welcome to our fourth quarter and year end 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 our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved annual revenues of $4.7 billion and net income of $114.9 million or $2.04 per diluted share. In the fourth quarter, net income was $41 million or $0.72 per diluted share and revenues of $1.3 billion. We also declared a cash dividend of $0.18 per common share, an increase of 29% over the last quarter. We are proud of the team for their hard work this year given the tremendous challenges they faced. Even though demand was negatively impacted by the expected downturn in the industry, as well as the effects of the COVID-19 pandemic, our disciplined approach to expense management, previous investments and strategic initiatives, and gradual economic recovery in the second half of the year enabled us to achieve strong financial results. Rush truck centers have been fully operational across the country throughout the pandemic. While we will continue to monitor the impact of the pandemic on our industry, including supply chain issues that may affect trucks and parts availability, we will continue to carefully manage expenses and take a disciplined approach to continued investments in our long-term growth strategy. As we look ahead, we expect the economy to continue to improve demand throughout the market segments we support, and we believe our financial results will significantly improve in 2021. In the aftermarket, our annual parts and service and body shop revenues were $1.6 billion, and our annual absorption rate was 118.7%. Our annual aftermarket revenues decreased by 9.2% compared to 2019. This decline was driven primarily by weak demand from the energy sector and COVID-19 pandemic related issues, including production shutdowns and supply chain interruption. Our previous strategic investments in technologies including RushCare, Service Connect and Parts Connect enable us to continue to serve customers safely throughout the year. Looking ahead, we believe the nationwide economic recovery will drive healthy activity for a wide variety of customer segments. We expect parts and service revenues to grow gradually throughout the year and approach our 2019 levels. Turning to truck sales, in 2020, we sold 10,670 new Class 8 trucks, down 28.8% over the previous year, accounting for 5.5% of the total U.S. Class 8 market. Our truck sales aligned with the market which was impacted not only by the expected industry downturn but also pandemic-related production constraints and supply chain issues. In the fourth quarter, new truck demand increased due to healthy customer spending, strong construction activity, and strong freight rates throughout the country. ACT Research currently forecasts U.S. Class 8 retail sales at 243,000 units in 2021. While the overall economy continues to grow, particularly in housing, automotive, and consumer spending, we are cautiously monitoring component manufacturers' supply chain issues, which may limit current manufacturers’ ability to meet demand through the year. We believe our Class 8 new truck sales in 2021 will be consistent with the industry. Our Class 4-7 new truck sales reached 11,311 units in 2020, down 21.8% from 2019, accounting for 4.9% of the U.S. market. Our decline can largely be attributed to the impact of COVID-19, particularly on leasing and rental and commercial foodservice customers, as well as production shutdowns from some of the manufacturers we represent. Our fourth quarter results were further negatively impacted by the timing of fleet deliveries. ACT Research forecasts U.S. Class 4-7 retail sales reached 249,500 in 2021, up 7.5% from 2020. Looking ahead, while positively impacted by the overall economy, some challenges will remain for medium-duty truck sales particularly production lead times. However, with our nationwide inventory of ready-to-roll trucks supporting a wide variety of customers, we believe our Class 4-7 new truck sales will achieve healthy growth in 2021 consistent with the industry. Our U.S. truck sales reached 7,400 units in 2020, down 4.4% from 2019. Due to the high demand for used trucks in the second half of 2020, used truck values strengthened approximately 15% higher than their lowest point earlier in the year. In 2021, we expect demand and values of used trucks to remain strong. It should be noted that due to normal seasonal increases in employment benefits and payroll taxes, we expect general administrative expenses to be sequentially higher in the fourth quarter of 2021. Our employees faced some tremendous obstacles this year, and I'm truly grateful to them for their unending dedication to our company while protecting the health and safety of our customers, co-workers, and communities. With that, I'll take your questions.

We will pause for a moment to compile the Q&A roster. Our first question comes from the line of Justin Long. Go ahead, sir. Your line is open.

Thanks. Good morning and congrats on the quarter.

Hi, Justin, appreciate it.

So maybe to start with parts and service, Rusty can you share what you're seeing in January from a revenue perspective and then just thinking about the quarterly growth of parts and services here, it's probably going to be all over the place given the comps, so can you give us a little bit more color about what you're expecting throughout 2021?

Right. Sure, you bet. I'll be happy to speak about it January. Well, the acceleration and growth in parts and service has continued as it was in the back half of the year in January. That said, it's still less than January of 2020. When you look back over it, it's been a little lumpy to say the least. I would expect the first quarter to be maybe not quite back to last year's first quarter, a little bit shy of it. We started out a little late in January, but we're continuing to see acceleration in our business across the board. We expect to continue to see nice gradual acceleration, which is the way I want it to go. I want nice, consistent growth throughout the year. So, hopefully, as we get towards the end of the year, we'll look for something close to a 10% blended growth rate.

That's helpful. And thinking about parts and service gross margins, do you feel like 36% to 37% is the right range to be thinking about for 2021 as well?

I'd like to say 36%. Now, you have to remember that we had a couple tougher quarters in the 35% range before. But yes, if you want to take it blended and average it, a lot of that has to do with timing and rebates and other issues. Overall, I think we can maintain a 36% blended throughout the year, and hopefully, we might even do a little better as we go.

Great. And last quick one for me. You mentioned in the first quarter and I know seasonally we always see some sequential pressure in the first quarter. But is there any more color around the step up in G&A that we should be expecting in 1Q?

I would say the inline was historical that we don't want to get into the exact numbers of service, but you can look back historically, we have a lot of employee benefits, equity comp costs that are high in Q1 and all the taxes come back and all the payroll taxes come into effect. Historical patterns show that there will be a step up, but I think you'll see flattening out and maybe even going down in subsequent quarters. But our revenue will be far out exceeding our expense growth as we go through Q1.

Great, I'll leave it at that. I appreciate the time.

You bet.

Our next question comes from the line of Jamie Cook. Go ahead, your line is open.

Hi, good morning, a nice quarter. I guess a couple of questions. Rusty first, in your prepared comments in the press release, you noted supply chain risk, a couple of times, I'm just wondering if you could elaborate, where you see that sort of concentrated, to what degree it limits production in 2021 or the forecasts out there?

Yes, I'll take them in reverse order. What we love -- are we counting on energy? No, we're not counting like we've changed the companies over the last four years. We used to be quite dependent upon it. We have evolved, but at the same time, we've seen better demand obviously with the price of oil having stabilized and risen a little bit. However, if I was to sit here and tell you we were relying on it, that wouldn’t be true. We're seeing slight activity out there, but I wouldn't rely on that for our projections. As far as our suppliers go, I’ve learned a lot about impact from chip shortages and how other manufacturers will face challenges. Concerns with the Tier 3 suppliers may be affecting Tier 2 suppliers to the OEMs in different ways.

Okay.

I think we need to be cognizant that there may be some constraints, because I know all manufacturers are facing challenges in raising build rates. And as they raise these, this adds stress to the overall market.

Is the supply chain issues? Is it just concentrated in chips or do you see risks, are you seeing I guess any other parts?

No, I think there's other risks without a question. I've heard things regarding rubber for tires and some other components. So it is a bigger issue than just chips. I believe we'll catch up in supply, but I think we might be looking at some stretching out of what the demand the order intake demands. I don't know if we can meet them, but I guess that's what we need to see as we look forward — it's just going to take some time to balance supply and demand.

Yes, no. That's helpful. Just one more question. The strengths in the margin, the new news truck margins in a quarter of 8.7%, with that gains on new truck sales, I'm just trying to understand what drove the margin that’s what it was?

Yes, solid new truck margins, but at the same time, record used truck margins. With the used truck margins being the best quarter we've ever had. We see a solid demand, but that will probably be limited as supply is also coming down. For now, I expect used truck margins to remain healthy for the foreseeable future.

Okay.

We had extremely strong demand for trucks, with people scrambling for product and therefore gaining better margins.

All right, thank you. I'll let someone else get a question in.

Yes, ma'am.

Thank you. Our next question comes from the line of Andrew Obin. Go ahead, sir.

Hi, yes. Good morning, Rusty.

Well, good morning, Mr. Obin. You there?

Yes, can you hear me?

Now I can, I lost you there for a minute.

Yes, sorry about that. A lot of stuff in the news about sort of new technologies for trucks, batteries, hydrogen, maybe can you talk about what you're seeing? How this will impact the industry in the next three to five years maybe and maybe give us some thoughts about longer-term projections? Thank you.

You bet. Well, this could -- you think I ramble? You get ready, you're going to get a ramble here. I'm going to -- I've been trying to get my head around this myself. Obviously, this next decade is going to be the biggest disrupter decade I've seen in my career, okay. With everything going on, from a political perspective, from a climate perspective, from a -- from every hitting -- hit from every angle. The political driver is going to be huge from the requirements of government regulations, right? We all know, we're hearing about EVs every day, right? Everybody is hearing EV and hear about hydrogen. Well, this is not an add water and stir issue. Technology has not arrived at what people believe and want demand to be. That being said, as we go forward, I guess the best way I can describe it is, I don’t see electric vehicles taking over the market for long-haul yet because the technology isn’t suited for it. The existing technology will likely remain dominant in the Class 8 segment for many years, but hybrid technologies may be well suited for other applications.

Thank you.

I think natural gas, especially RNG renewable natural gas, is going to see an uptick as we get into mid-decade. I think there's going to be opportunities for RNG as we get further along. That's just my take, although hydrogen is a little further out.

Any thoughts on autonomous?

If you think I'm a scientist here as well, you’re tracking? All right, let’s start to talk. All right, automation, there are five stages of it. Remember, everybody thinks autonomous means there's a truck that drives itself with no one in it, right? Well, I don't think it works quite like that. I won't go into all details but you will see legislation passed first before we get to full autonomy. And while some areas are being run right now in testing, there's going to be legislation passed to allow full autonomous trucks. It might get there in 15, 20 years, but certainly, we're already seeing more testing happening for lower-level autonomy than ever before.

Thank you for a thoughtful answer on both counts. Thank you, and great quarter.

Thank you, Andrew. I appreciate that.

Thank you. Our next question comes from the line of Joel Tiss. Go ahead, please.

Hey, guys, I hope you didn't put your $500 bonus in GameStop.

Well, send someone I will put it in; I pulled it out how well I did -- done it.

So I wonder if we could go in a little bit of a different direction, and just talk about some of the lessons you guys are learning around, like flexibility on the cost structure, because that's pretty amazing, a $1 billion decline in revenues and your net income was down, $25 million. And so I just wonder how you guys were thinking about holding on to some of that, and what are some of the things that you learned in 2020? Thank you.

Well, I learned more than I -- my stubborn self thought I ever could. It was an interesting year, a painful year for everyone, yes, but lessons are supposed to be learned in these types of environments. The revenue numbers can fluctuate and are sometimes misleading. I feel good about the resilience demonstrated this past year and believe we can do a better job managing costs than we have historically. The results should show that as we go forward because I truly believe we're a leading organization that is set up for continued investment and growth.

Can you give us a little bit of a sense of your best guess kind of a free cash flow in 2021? And just thinking around your $100 million share repurchase, you're going to do that all more front-end loaded or is that more of a longer term multiyear rollout?

We've been approved that; I feel good about what our company is going to do, but I can't control markets and market corrections. We want to make sure that we're set up if there's an overall market correction. We’re nibbling at it in mind; we're probably going to accelerate that some, but on a consistent basis, throughout the year. At the same time, we have plenty of dry powder to provide security against any potential market corrections.

Free cash flow, and I know it gets lost in the cash flow statement. If you just look at the number we printed at the end of the year, even in a year like 2020, we grew our cash considerably entering the year with $312 million. Free cash flow will be roughly in the range of $175 million to $200 million next year. Our guideline is to try to return about 40% of that to our shareholders. That's our capital allocation guideline.

The balance sheet still holds a lot of cash. We are well-positioned to continue investing as well as achieving growth in the future. Other than a couple of small items, the only debt we've got is leased trucks. We're well aware of how to manage our financial obligations.

Having a lot of cash is a beautiful thing, thanks. Thank you very much.

You bet. If you look at the overall picture; it seems like we’re pretty comfortable moving forward.

Thank you, sir. The next question comes from the line of Brian Schwartz, Oppenheimer. Go ahead, please.

Hi, good morning.

Good morning, Brian. How are you, buddy?

I'm terrific. Month 12 in the basement but that's okay.

How is your boss doing up there?

He's wonderful, I'll send your regards.

Tell him, Brian, I said hello.

Certainly well. Question for you, a couple of questions. Lease and rental customers; now you would call the tariffs an area that had been weak. What do you see in there?

We're seeing strong lease and rental again, Brian. We started off the year strong. Typically you're separated from lease into rentals. Our lease and rental purchases for next year have accelerated significantly. Our lease and rental business was quite resilient last year.

That's great. Now going back to the cash question. You're sitting on quite a bit of it. What's the M&A environment touch up really grow, obviously and it can grow the pack up for your business. But other brands?

It's tough when the market gets hot. I was itching for a chance when the market corrections were happening. But opportunities quickly dried up. So, we remain vigilant about M&A, but the landscape has made it challenging to find suitable targets that can provide synergistic value. Overall, we keep looking but with the market acceleration where we see opportunities coming down.

Any change in behavior with some customers now that trade-in will be wrapping up Navistar likely in the next few months?

I think we’ll see better sentiment overall across our customer base. The one thing you don’t hear that we used to hear years ago is that there's a feeling of long-term viability as a company, which is very encouraging.

Excellent, well good talking to you and best of luck this year.

Good luck Brian, the stairs out of that basement.

Thank you, sir. And we do have one more question left from Joel Tiss.

With that. But I just wondered if you can give us a little bit of a sense of what's behind your next three years are going to be strong in the industry? Is that sort of a more of a gradual pre-buy ahead of all these new zero-emission standards or anything else in there?

I think you’ll see some gradual pre-buys in 2023. Most of the strength in the forecast is driven by the economic recovery and the demand we are seeing in the market for trucks. Given the pace of the economy, we are pretty confident about the next couple of years.

Okay, great.

There’s nothing I see out there which suggests it's going to be bad over the next couple to three years.

There are no further questions, sir. You may proceed.

Well, great. It’s been a while since we talked, so we will talk to you again in April. Thank you very much for your participation this morning. We appreciate it.

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