Good day, and thank you for standing by. Welcome to the Rush Enterprises, Incorporated third quarter 2023 earnings results conference call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Rusty Rush, Chairman, President, and Chief Executive Officer. Please go ahead, sir.

Good morning, and welcome to our third quarter 2023 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, Senior 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, 2022, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved third quarter revenues of $2 billion and net income of $80.3 million or $0.96 per diluted share. We are proud to declare a cash dividend of $0.17 per common share. In the third quarter, we achieved strong financial results due to revenue growth from our expanded service technician workforce, our support of large national accounts, and ongoing pent-up demand for new Class 8 and Class 4-7 trucks, following a limited new truck production in the past few years. Though our largest customer segment, the over-the-road customers, are being negatively affected by high interest rates, low freight rates, and other economic factors, ongoing focus on our strategic initiatives helped us partially offset these challenges and achieve strong financial results in the third quarter. In the aftermarket, our parts, service, and body shop revenues were $643.6 million, up 3.5% for our absorption rate was 132.8. Though our aftermarket revenue growth has slowed compared to previous quarters, the diversity of our customer base, our technician workforce, and focus on large national accounts fueled our strong aftermarket results this quarter. Looking ahead, we believe aftermarket growth will continue to moderate through the rest of this year, and we are closely monitoring consumer spending and other economic conditions, which could impact parts and service demand. In the fourth quarter, we believe customer demand for aftermarket services will remain steady and that our aftermarket results will be similar to the third quarter, with slight adjustments caused by normal seasonal softness and fewer working days in the quarter. Turning to truck sales, we sold 4,326 new Class 8 trucks in the quarter, guiding for 6.1% of the US market and 2.1% in the Canadian market. Low freight rates continue to affect smaller operators, but strong pent-up demand continues due to limited new truck production over the past few years. While there are still new truck supply issues causing us to still be on allocation from our OEMs, new truck production continued to improve in the third quarter, resulting in significantly shorter lead times for new trucks. ACT Research forecasts US Class 8 truck sales to be 278,000 in 2023, up 7.2% compared to 2022. We believe pent-up demand for Class 8 trucks will last through the fourth quarter, and our fourth quarter Class 8 truck performance will align with our third quarter results. Our Class 4-7 new truck sales reached 3,244 units in the third quarter, accounting for 4.8% of the US market and 2.3% of the Canadian market. We experienced solid demand from a variety of market segments. And those truck manufacturers are loading more resources to medium-duty trucks. Production remains limited and unmet demand in the market remains. ACT Research forecasts US Class 4-7 retail sales to be 253,000 units in 2023, up 8.5% from 2022. We are closely watching consumer spending and other economic factors, which could impact our new Class 4-7 units, but continued pent-up demand suggests that we expect our fourth quarter results will align with our third quarter results. Our used truck sales reached 1,797 units in the third quarter, up 1.9% year-over-year. New truck production, soft freight rates, and tight credit conditions led to continued weak demand in our industry in the third quarter. Used truck values continue to decline at an accelerated rate, though the rate of decline is slowing and values appear to be normalizing. With new truck production continuing to increase and with freight rates not expected to improve significantly in the fourth quarter, we expect used truck demand will remain low until the end of this year. We plan to maintain our inventory at lower than normal levels and believe we are well positioned to navigate these challenging market conditions. We expect that our fourth quarter used truck results will be consistent again with our third quarter. As we look ahead, we believe pent-up demand for Class 8 trucks will substantially be satisfied by the end of the fourth quarter, and that new truck production has continued to improve. We will continue to monitor economic factors that are impacting our customers, especially over-the-road carriers. While we expect typical seasonal softness in the fourth quarter, we believe our financial results will align with the third quarter results, and we will close the year strong. As always, it is important for me to thank our employees for their great work every day and for staying focused on our company's long-term strategic initiatives while providing superior service to our customers. With that, I'll take your questions.

Thank you. Our first question comes from the line of Andrew Obin with Bank of America. Your line is now open.

Hey Rusty, how are you? Rusty and Steve, how are you?

Very good. Thank you, Andrew.

So first question is, I think Traton was saying today that they think they're starting to sell the new S13 engine and expect to ship on quarter Navistar units in '24. So does this have any impact on your profitability in the Navistar franchise going forward? And can you also remind us how you're positioned on the Cummins engines outside of your vertically integrated model on PACCAR? Thank you.

You bet. Well, the S13, we're excited about it. We know that Volkswagen is excited about it and Navistar is excited about it. We're going to start a little slower than what we anticipated with the engine getting it here. We were hoping to get a few more this year than what we've gotten. But we're excited, and we'll be showing up in 2024. That said, when it comes to profitability, remember, typically, the most important thing that you derive, we're excited with what we believe will be a great performance from it. It's the long-term parts profitability that goes with it because it makes parts more valuable to that brand. So we would expect that over time, it will definitely have a positive effect on the profitability of the overall Navistar franchises. I'm thinking about trying to understand your Cummins question. Obviously…

Just what's happening with Cummins and what's your position? What's your relationship with Cummins? Just remind us.

Sure. Well, our Cummins relationship is great. From an engine perspective, we're the largest distributor of Cummins engines, considering their two largest customers PACCAR and Navistar, we are the largest dealer. We're probably the largest retail dealer in the world, I would guess, when it comes to retail delivery. We also have a very strong relationship across the board. It's much deeper than just that. Remember, we've got our joint venture, which we call it CCFT, Cummins Clean Fuel Technologies, with them on the natural gas fuel system side because we both believe they bought a 50% share in that on January 1, 2022, and we have accelerated our investments in preparation for what we believe to be a big opportunity for that market share to increase from what it's always stayed around 2%. We think over the next two to three years that share can increase to 7%, 8%, 9% as the over-the-road long haul side has to wrestle with all the environmental pressures that we're dealing with. Right now fuel cell is still ways away, hydrogen is also a long way off, and I don't believe electric is ready to meet the needs of a 400 or 500-mile haul on a daily basis. None of those are set up for that right now. So we believe they're bringing over their new 15-liter engine, and we do believe that the other partnership is going to be doing really well for us, especially as we get into 2025, 2026, starting to accelerate in 2024, but by 2025, 2026 and getting to 2027, we believe we've got a lot of opportunities around that from a fuel system perspective. So, as I said, it's a very broad relationship with them, and we're excited to have that relationship and look forward to continuing to work with them like we always have.

Thank you. Just a follow-up question on your statement that Q4 is roughly going to be in line with Q3. I hate to ask a question about next year, but how sustainable is the quarterly pace? We know that you're sort of telegraphing that new unit sales are going to be down, but you have your own dynamic and then the aftermarket. How sustainable is the earnings power, I don't know, let's call it around $0.90 going forward? Thank you.

I'm going to refrain from giving a specific number, as usual. However, I can provide a broader perspective on what I see for the fourth quarter and our outlook for next year. In Q4, we expect our performance to be quite similar to Q3. There will be some factors at play, including seasonality that brings its own fluctuations. Overall, while the results won't be identical, we anticipate they will be around the same levels based on what we have seen heading into October. We recognize that October is running fairly flat, but sequentially it provides some guidance on truck sales. As for next year, it's important to note that the Class 8 market, according to ACT, is down 22%. We believe we can perform slightly better than that, although I'm not ready to share specific EPS figures. We do expect a decline in the market, but we hope it won't be as sharp as it has been. The order books were opened in September, and while the reported 37,000 units seemed significant, it's essential to consider that last year's number was around 54,000. Manufacturers typically opened their order books earlier in the year, but due to past inflation and surcharges, they delayed this process to become more comfortable with pricing and costs. This delay meant that some demand had built up, and while orders placed earlier may have been pending, they were not released right away. So, while the September number appeared more substantial than it actually was, we've essentially only been operating on that for about four weeks. It’s premature to make definitive predictions, but I believe that, overall, the market will relax a bit before regaining momentum. Looking towards 2025 or 2026, we expect those years to be strong. For 2024, we aim to navigate through, and given the variety of our customer base, I don't predict we'll regress significantly. Moreover, there's still significant infrastructure spending that will benefit the vocational market, which should help offset challenges in freight markets. We have indeed been experiencing a freight recession for about a year now, and while we hope for a turnaround perhaps around April next year, we cannot be certain. The long-haul truck supply has been somewhat excessive, but we expect that to correct itself over time. Regarding parts and service, growth rates may slow, but we need to delve deeper into those figures. Currently, around 30% of our business consists of unassigned accounts, often with smaller customers who don't have dedicated account management, which has suffered due to the recession. However, larger carriers remain stable and hold a strong cash position despite reduced profits. We've been actively pursuing dedicated account strategies and have seen significant improvements in that area. Although it's not as high-margin as servicing smaller accounts, it's crucial for our future stability. While it’s early to make long-term predictions, we remain confident in our business model, albeit aware that 2024 will be more challenging. Our track record over the last few years reassures us for the future, even if 2024 doesn't match the highs of 2023 or the strong prospects of 2025 and 2026. However, it won't be catastrophic either.

So, the last question for me, and I think you set it up for me, and I bet you know the question I'm going to ask. You keep delivering earnings well ahead of consensus, even as things are slowing. I think if you look at the fourth quarter, your message seems you coming out versus consensus, excellent SG&A control, you're doing everything you're supposed to do. You know that the next year is not going to be good; you also know what 2025 and 2026 is going to look like; you know what the company is going to deliver. What's the Board's thinking about sort of stepping up share buyback in this environment, particularly on a day like today when stock is down 8% on very solid numbers?

Good question, Andrew. I just wrapped up the Board meeting yesterday afternoon. We view our current efforts as a great value. We have increased our activities by 50% this year. We have a detailed plan for our next steps, and as we've previously stated, we aim to provide a 35% to 40% return to shareholders through a mix of dividends and stock buybacks. This year, however, we're looking to return 55%. I don't expect our return next year to exceed 55% of our free cash flow. I believe it's wise to maintain a cushion for future opportunities, especially in potential M&A activities. Although there are currently no significant M&A deals on the horizon, I expect that some may emerge during the downturn. We need to be prepared for any opportunity. We will spend the entire $150 million this year, and I foresee us making decisions about our approach. We have a Board call scheduled for November 28, where we will determine our next steps, and our annual buyback announcement will take place on December 1. So, please stay tuned for more details.

Well, you know what I feel about it. Great quarter, thanks a lot.

You bet. I know Andrew. There's a balancing act, as I said, possibly some M&A might show up and I want to make sure I'm prepared and I don't want to take on debt. But we believe it is the best investment we can make. I'm totally in agreement with you.

Thank you. Our next question comes from the line of Justin Long with Stephens. Your line is now open.

Thanks, and good morning.

Well, good morning, Justin.

Good morning, Rusty. I wanted to start with a question on customer mix, going back to some things you were saying earlier.

Sure.

Do you feel like the small customers that are unassigned, do you feel like the activity there has bottomed at down 10% this quarter? And then can you share on the other side of the coin how your national accounts are performing right now just so we understand the relative trends?

Sure. No, you bet I'll get you the numbers. Like I said, down 10%. I don't have that answer, but if the comps are going to get easier, I've got to tell you, if you're going to year-over-year comp, yes, they're probably right there, okay? Sequentially, I don't know if there might be another couple of three points left in there, buddy. I don't know that we – the market has not totally been cleansed yet, okay? There are still folks out there that are hauling freight for basically barely breaking even and can pay my fuel. I mean, I heard some numbers that people were all afraid for last week when I was up there. I met with a lot of customers at ATA, and I heard some of the slashing that was going on out there. So it's liable to continue for another six months here, okay? So that means you're going to keep flushing some out. But I would expect the year-over-year comps with that market to be around the same; I guess that would be what I would tell you, because it got worse as the year went along. When it comes to the national account business, we're really proud of the efforts because we put in a lot of dedicated people and spent some money on that. That's all inside our G&A and focused on it because our ability to grow that piece of our business is directly tied to the second most valuable piece of this company. My people are always first, first and foremost, but the second piece is my map. My map is bigger; our map is bigger than anybody else's map. When you can provide consistency of service, and I can take you to interview many people, many large companies that we can do that with, when you can provide that consistency, your opportunities to me are endless. I mean, they're not endless, but they sure feel like it for us. We've got plenty of conquests out there that we don't do business with, or large national accounts. So, this consolidation has continued around this industry for years and will continue. That ability to go out and capture some folks, and I'm not going to get into any names on an earnings call, but we know there's still plenty of opportunities. I sat in meetings with folks last week, almost begging us to come over and do business with them in some way. Regardless of whether their business is up or down, I can't change the environment. But what I can do is provide a different solution. Understanding your competition and differentiating yourself is what it's all about. We've got a lot of runway left in there. Whether the market goes up or the market goes down, we think we can grow it consistently on a year-over-year quarterly basis. We don't look for that to change either, okay, as we go forward.

Got it. That's helpful and you mentioned earlier the ACT numbers for next year that have continued to trend lower and now they're expecting a 22% decline in Class A truck sales. If that plays out, if reality is pretty close to that, how should we think about your ability to grow parts and service? Do you feel like you can still grow it? And if so, any thoughts on the order of magnitude?

Sure. I believe our year-over-year comparisons will begin to improve in Q2 and Q3 as they have leveled off somewhat this year. Earlier, I mentioned the shift of smaller customers, who generally have higher margins, towards national accounts. This shift has made things a bit more challenging. You can see the impact in the service profit numbers. We anticipate that conditions will improve slightly next quarter. We hope Q3 was the lowest point. However, I want to emphasize that it will still have some impact. We think we can manage or at least maintain our current position. We're not expecting to replicate the 17% growth rate from the first quarter of this year next year. In Q3, we were at 3.5%, and we will likely hover around that in Q4. I expect this trend to continue into Q1, influenced by the same factors we're encountering now. Q3 will likely exhibit similar dynamics. While I hope to avoid overly pessimistic predictions, I don't foresee any significant market downturn based on current observations. We believe we can navigate the challenges posed by declining truck sales. It may reduce some internal work, but we have confidence in our growth strategy focused on our service sector and commitment to larger clients. Will there be an impact? Yes, we believe we can maintain our position by capitalizing on other opportunities available to us. While it presents some headwinds, I can't claim it's going to be a significant loss; we will be selling fewer trucks, and a lot of internal work goes into preparing those trucks. However, I think Q3 was indicative of the market outside of truck sales. On the parts and service side, we will continue to perform well despite fluctuations. Our diversification is not limited to the over-the-road segment. Remember, we are embedded in many other market segments, and if we were solely focused on over-the-road, we would be struggling like many of our customers. Our numbers demonstrate our broad diversification into various market segments.

Got it. And last question for me is on the used truck market. You talked about that a little bit earlier. But I was wondering if you could give a little bit more color in terms of what you're expecting for the trend in used truck pricing as we move into year-end and early 2024?

Certainly. We're likely to see a year-over-year decline in the value of four or five-year-old trucks, around 35%, in September and October. There might be an additional 10% drop, but I don't envision it falling much more because the gap between new and used trucks becomes too large. At that point, you could purchase three late model trucks for the cost of one new truck. This situation creates an attractive value proposition for used trucks when prices fall significantly. However, the issue lies with used truck buyers, who are typically smaller operators and are currently facing significant challenges. There needs to be demand in the market; even if prices drop, if there's no opportunity to lease trucks, it complicates matters. It will take time to resolve these issues. Presently, while depreciation is accelerating, it's level has not reached historical norms; it remains elevated month-over-month. The demand side is what we need to improve. I don't anticipate any significant change until we see a seasonal uptick, which historically occurs after winter. I'm hoping that in four to six months, we will return to a normal depreciation cycle. The rapid depreciation we experienced was due to inflated used truck prices from a year and a half ago when new trucks were scarce. We have had to adjust those inflated values, and demand for used trucks is down, leading to continued depressed values. It's a challenging situation, but I expect conditions to stabilize by the second quarter of next year, conservatively speaking. While our lower used truck inventory will limit our upside, it also mitigates risk. We're focused on maintaining good inventory turnover aligned with demand. We believe we have our used truck inventory under control and our margins have returned to typical levels in the last couple of quarters. We need to manage our inventory closely since trucks do not improve with age. Currently, my inventory stands at 1,300 to 1,500 units, which is down from previous levels due to insufficient demand to sustain a larger inventory. This approach allows us to maintain decent margins, and we will keep a close watch on market trends. As demand improves, we will consider increasing our used truck inventory, but it hinges on more than just pricing; it ultimately depends on demand.

Make sense. I’ll leave it there. Thanks for the time.

Thank you for your questions. I would now like to turn the conference back to Mr. Rush for closing remarks.

Folks, we appreciate it. Thank you very much. I'd like to wish everyone a very happy holidays, and we will speak to you early to mid-February with our Q4 results. So again thank you very much.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.