Rush Enterprises Inc \Tx\ Q4 FY2022 Earnings Call

Good day, and thank you for standing by. Welcome to the Rush Enterprises Reports Fourth Quarter and Year-end 2022 Earnings Results. 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. Please go ahead.

Good morning, and welcome to our fourth quarter and year-end 2022 earnings release conference call. On the call are Mike McRoberts, Chief Operating Officer; Steve Keller, Chief Financial Officer; 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, 2021, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved annual revenues of $7.1 billion and net income of $391 million or $6.85 per diluted share, an increase of 64% compared to 2021. Included in the $6.85 per diluted share was $0.34 per share of earnings related to the sale of Momentum Fuel Technologies and the acquisition of Rush Truck Centers Canada. Excluding these transactions, earnings per share in 2022 would have been $6.51 per diluted share. In the fourth quarter, we achieved revenues of $1.9 billion and net income of $98 million or $1.74 per diluted share. We are also proud to declare a cash dividend of $0.21 per common share in the fourth quarter. In 2022, demand for new vehicles and aftermarket parts and services was strong, primarily due to supply constraints experienced over the last few years and an overall healthy economy. We continue to invest in our strategic initiatives that are focused on maximizing vehicle uptime for all of our customers, increased our large national account business, expanded our technician workforce and diligently manage expenses to enhance profitability. We are especially pleased with the overall operational execution and financial performance considering the industry backdrop of truck and parts supply constraints as well as the extensive work required by our employees to integrate the Summit and Cummins acquisitions. In terms of network growth in 2022, we added new locations in Florida and Missouri. And we further expanded by adding an international truck franchise in Kansas. We also acquired an additional 30% for a total of 80% interest in Rush Truck Centers Canada Limited and the operating results of RCC Canada are now consolidated into our financial statements. In January 2022, we closed our agreement with Cummins, who has acquired a 50% interest in Momentum Fuel Technologies now branded Cummins Clean Fuel Technologies. All of these changes strengthen our network and enhance the offerings we provide to our customers. In the aftermarket, our annual parts, service and body shop revenues were $2.4 billion, up 32.3%. Our annual absorption rate was 136.6%. We added 190 service technicians into our network and expanded our team of aftermarket sales representatives, allowing us to focus on strategic initiatives including Xpress services, mobile service and contract maintenance while continuing to support large fleets and national accounts. With normal seasonal softness, parts growth began to plateau in the fourth quarter, but service revenues remained strong due to the additional technicians in our workforce. Parts availability remains somewhat choppy, but has improved significantly, and we believe demand for aftermarket parts and service in the first half of '23 will align in the second half of 2022. As we continue to add technicians as well as aftermarket sales representatives, we believe our results for our aftermarket parts and service operations will remain strong in 2023. Turning to truck sales. In 2022, we sold 16,778 new Class 8 trucks, accounting for 6.3% of the total U.S. Class 8 market. Limited new truck production continue to impact the industry, but we experienced healthy widespread demand for new Class 8 trucks. Our results were further supported by our focus on national accounts and the timing of some large fleet transactions early in the year, which helped us gain significant market share. We ended the year strong with continued healthy demand from over-the-road and vocational customers in the fourth quarter. ACT Research forecast U.S. Class 8 retail sales to be 225,000 units in 2023, down slightly from 2022. While we expect we will continue to feel the effects of truck allocation, production has begun to normalize. Our backlog remains strong, and we believe that our Class 8 truck sales will remain strong through at least the first half of 2023. Our Class 4-7 new truck sales reached 11,025 units in 2022 or 4.6% of the U.S. market. Though production remained limited throughout the year, we experienced healthy demand from most market segments we support, and we're able to outpace the industry in 2023. In the fourth quarter, medium-duty truck sales declined from their peak in the third quarter, largely due to the timing of new truck availability for manufacturers. ACT Research forecasts Class 4-7 retail sales to be 253,600 units in 2023, up 8.5% from 2022. As we look ahead, we believe there will be continued pent-up demand for medium-duty trucks, especially from construction and leasing customers, but production constraints on medium-duty trucks will likely continue. We expect our Class 4-7 results to keep pace with the industry in the first half of 2023. Our used truck sales reached 7,019 units in 2022, down 6.7% year-over-year. As 2022 began, there was strong demand for supply with limited supply of Class 8 trucks in the market. However, in the second and third quarters, demand and values declined significantly as more new trucks became available. In the third quarter, we took swift action to minimize our used truck inventory to historically low levels. In the fourth quarter, low freight rates continued to cause weak demand and used truck values declined further. Looking ahead, we expect used truck values to continue to decline, and we plan to maintain our low inventory levels until conditions begin to normalize. Due to seasonal increases in employee benefits and payroll taxes, we expect our general and administrative expenses to be sequentially higher in the first quarter of 2023 compared to the fourth quarter of 2022. Before I turn the call over for questions, I would like to take a special minute to thank all of our employees of Rush Enterprises, not just for their outstanding work and unending dedication to our customers that led to our record-setting financial results this year, but for their efforts and execution of our strategic goals over the last 5 years. You see 2022 was somewhat of a milestone year for our company. In 2017, we developed a strategic plan that was heavily focused on expanding our market share and improving our quality of earnings and including aggressive financial goals of growing revenue to $7 billion and achieving a pretax return on sales of 5% by 2022. Thanks to their outstanding work. Not only did we achieve our revenue goal and exceed our profitability goal, we also enhanced our shareholder return programs through opportunistic share repurchases and by introducing a quarterly dividend that we have been able to consistently increase on an annual basis. Our people have demonstrated their ability to execute on the company's strategic initiatives, and that is why I'm extremely confident we will be successful in achieving our strategic goals of $10 billion in revenue with a 6% pretax return on sales by 2027. Again, to all of our employees, thank you. With that, I'll take your questions.

Our first question will come from Justin Long from Stephens.

Congrats on the quarter.

Thank you, Justin.

Rusty, I wanted to follow up on what you said about the first quarter just because I know there can be some seasonality with G&A. Could you help us by quantifying the step-up you're expecting in 1Q and anything else in terms of seasonality? It sounds like from a truck sale and parts and service perspective, you're expecting things to be pretty flattish sequentially moving into the first half of the year. But would love to just get your thoughts on first quarter.

In the first quarter, expenses tend to be higher compared to the fourth quarter due to increased employee benefits and equity expenses, as well as the restart of taxes. This pattern is consistent year after year. Historical data shows a notable rise in expenses during Q1 relative to Q4. Looking at truck sales, I anticipate a slight decline compared to Q4, but we should see a year-over-year increase from Q1 last year, as sales generally improve throughout the year. However, this does not guarantee that the same level will be maintained in Q2, as it largely depends on timing. Regarding parts and service, we are currently 46 to 47 days into the first quarter, and our performance has remained stable. February appears to be strengthening compared to December and January, aligning with our usual expectations as we approach March. We project a high single-digit growth in parts and service on a same-store basis, which gives us confidence in this area. There are no current signs of weakness. Last year, we faced tighter allocations, which is still the case, but we are managing additional challenges regarding parts availability affecting both us and our dealers. Moving forward, build rates seem to be increasing, as evidenced by December deliveries, which were likely the strongest on record. While we are not sold out like we were at this time last year, our backlog remains strong and deep, while we continue to sell trucks into the latter half of the year. We have a positive outlook for the first half, and as we progress, we’ll be able to provide better insights for the second half of the year.

And I guess building on that, at some point, I think it's reasonable to expect truck sales to come down, whether that's the back half of this year, 2024. Can you talk about your ability at Rush to outperform the market whenever we do see that pull back, let's say, in 2024, the market's down, Class 8 truck sales for the industry are down 15%. What do Rush's truck sales look like in that environment given the market share opportunities you have?

I don't anticipate significant setbacks in 2024. It's important to consider our partnerships, not just with Rush, but also with our manufacturers and OEM partners. On the heavy-duty side, I believe Navistar has the best performance potential within the organization. Their market share, now under new ownership for the past 1.5 years, positions them well for growth as they continue to establish themselves and launch new products. I'm optimistic they will contribute significantly to our success going forward. Regarding PACCAR, I've been a PACCAR dealer for 55 years, and I've never been more confident in their ability to increase market share. Historically, they've maintained a share between 13.5% and 15%, but I believe Peterbilt has a chance to increase their share even further. Both of our heavy-duty OEMs have promising futures, and as their market share grows, we will benefit from that growth. This may help mitigate some of the expected cyclicality in 2024. Looking ahead to 2025 and 2026, I believe we could see tremendous years for the industry. We're focusing on enhancing our partnerships and aligning our efforts under the Rush brand, leveraging our extensive network not just for truck sales but as a broader service provider. We've been improving our capabilities, as evidenced by our successful conquest accounts. Our network allows us to service a wider range of customers than any other in the industry, and we've been diligently working on this. In the medium-duty segment, I'm optimistic as well. Hino is back in the market after not selling for over a year, which is a positive development, especially with their new Cummins engine. I have confidence in both our Ford and ISUZU product lines and our overall network. While I won't make guarantees, I am confident that we won't regress significantly as the market fluctuates.

Very helpful. And maybe one last one, and this one is probably for Steve, but anything you can share on free cash flow expectations for 2023?

This year, our free cash flow was about $375 million. We're estimating it to be between $300 million and $350 million for this year. This is our current outlook. The business continues to generate strong cash flow, and we anticipate that this will remain consistent.

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

This is Themistoklis on for Jamie. So I wanted to ask, medium duty has a better growth outlook versus heavy-duty this year. But what are you seeing from OEMs in terms of ramping medium-duty production? And then does it have any mix implications on your margins, if any?

Medium-duty production is increasing, and there's no doubt about it. As I mentioned earlier, Hino has re-entered the market after being sidelined for the past couple of years. They have integrated the Cummins engine into their products, which is a significant development. I've noticed that build rates for medium-duty vehicles are rising across nearly all brands we work with, which is very promising. I expect our medium-duty sales to increase substantially beyond the market's predicted growth of 8.5%. Given the trends I'm observing, we're seeing improvements in medium-duty production at all our OEMs. Regarding the supply situation for medium-duty, it was heavily impacted, especially for two suppliers. Peterbilt prioritized heavy-duty options when facing supply constraints, as they tend to be larger sales with better profit margins at the time. Fortunately, the supply shortages are easing and becoming more normal. While some challenges remain, they are not as severe as they once were. Medium-duty is going to receive more attention. Would you like to follow up on the second part of your question regarding mix or margins?

Yes. Yes, if there is any implication?

Yes, I would say that our margins are likely to face some compression, although I anticipate that our volumes will be solid. I believe inflation will ease as we progress through the year. However, it will still remain significantly above historical margins. There may be some pressure on margins as the year goes on, but I remain optimistic. Each day we move into the year, we gain more confidence, particularly for the latter half of the year. I'm quite confident in the first half and am becoming increasingly assured about the second half as the year unfolds.

Okay. Great. And so yes, you're obviously telling us that you feel better about the second half now versus before and you have really strong backlog and good visibility. I was just wondering in terms of supply chain, do you think it's maybe healing quicker than you would have thought a quarter ago? And when do you think that truck production can fully normalize? If you have any sense, that would be great.

I believe we are close to normalizing truck production, though there is still some room for adjustments. I'm not fully aware of every manufacturer's status, but those I work with seem to be managing their supply issues well, particularly concerning labor, which has presented some challenges. Overall, I feel optimistic about their current situation. According to ACT, Class 8 production is just slightly down compared to last year. As for PACCAR, I hear Jamie is participating in an Analyst Day, so it would be worth asking Preston for updates. I can confidently say we are about 85% to 90% recovered from the parts shortages we faced. While there are still occasional issues for manufacturers, I can say that I feel significantly better about the situation now compared to a year ago. The recovery in the latter half of the year has been faster than I anticipated, as evidenced by the delivery numbers we are seeing.

And I'm not showing any further questions in the queue. I would now like to turn the conference back to Rusty for any closing remarks.

Well, we thank everybody for their participation, and we will talk to you again in April, I'm sure with hopefully great results again as you. Thank you. Bye-bye.

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