Good day, and thank you for standing by. Welcome to the Rush Enterprises First Quarter 2024 Earnings Results Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Rusty Rush, Chairman, CEO, and President. Please go ahead.

Good morning, and welcome to our first quarter 2024 earnings release 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, 2023, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved first quarter revenues of $1.9 billion and net income of $71.6 million or $0.88 per diluted share. We are proud to declare a cash dividend of $0.17 per common share. Class 8 new truck production has caught up with market demand. And that, along with other economic factors, led to a decline in our Class 8 new truck sales in the first quarter. The freight recession and elevated interest rates are negatively impacting over-the-road customers, both small carriers and large fleets. We are pleased to significantly outpace the industry in Class 4-7 truck sales, and we achieved year-over-year growth in used truck sales, which were the bright spots in a challenging quarter. In the aftermarket, our parts, service, and body shop revenues were $649.2 million, flat compared to the first quarter of 2023 and our absorption ratio was 130.1%. Our results were consistent with the industry, which is experiencing slowing aftermarket demand driven by a depressed freight market. We did, however, see some healthy aftermarket demand from the public sector, refuse, and medium-duty leasing customers that, along with our commitment to support large national fleet leases and diversifying our customer base, helped us to somewhat offset the challenging industry conditions we faced in the first quarter. As we look forward, we believe aftermarket demand in the second quarter will be fairly consistent with the first quarter, though we expect some seasonal uptick as we enter the summer months. We anticipate the current freight recession will continue to impact aftermarket demand, but we remain committed to executing on our strategic aftermarket initiatives. We believe that our second quarter aftermarket performance will align with our first quarter results. Turning to new truck sales. We sold 3,494 Class 8 trucks, accounting for 6% of the total U.S. Class 8 market and 1.4% of the Canadian market. As expected, economic pressures, such as high interest rates and low freight volumes, along with production levels of new Class 8 trucks catching up with pent-up demand, led to a 13% decline in U.S. retail sales in the first quarter. While most of the decline in Class 8 truck sales was attributable to the over-the-road carriers, it is worth noting that we experienced healthy demand from vocational customers, and we expect this to be a good year for vocational truck sales. ACT Research forecasts U.S. Class 8 retail sales to be 228,000 units in 2024, down 16% compared to 2023. Due to the timing of deliveries to certain of our large customers and due to our diverse customer base that includes strong support in vocational markets, we believe our second quarter truck sales will improve compared to the first quarter. However, we expect the current freight recession to continue, causing Class 8 truck sales to decrease in the second half of 2024 compared to the first half of 2024. That said, there is plenty of time for us to sell trucks into the second half of the year and our sales teams are well-positioned to take advantage of every opportunity possible to help us navigate through these difficult market conditions. Our Class 4-7 new truck sales reached 3,331 units in the first quarter or 5.4% of the U.S. market and 2.7% of the Canadian market. New and medium-duty truck supply is less constrained than it has been recently and lead times have decreased, though deliveries continue to be somewhat delayed by issues with body manufacturers with steady widespread demand from our customer base and our focus on supporting large national accounts. We are proud of our strong Class 4-7 results this quarter. ACT Research forecasts U.S. Class 4-7 retail sales to be 262,000 units in 2024, up 3.7% from 2023. As we look ahead, we will continue to monitor concerns regarding consumer spending and high interest rates and their potential impact on Class 4-7 demand. Currently, we believe Class 4-7 commercial vehicle sales will improve in the second quarter compared to the first quarter and remain strong for the remainder of the year. Our used truck sales reached 1,818 units in the first quarter, up 8% compared to 2023. We continue to experience weak demand and depressed values for used trucks, largely due to low freight volumes and high interest rates. Even with those difficult conditions, great execution on our used truck inventory and sales strategy allowed us to achieve strong results in the first quarter. As we look forward, the rate of decline in used truck values is slowing, but we believe it may continue to decline somewhat. But with our strategically diverse product mix, we expect our second quarter used truck sales to be similar to our first quarter results. Looking ahead, we are closely monitoring economic issues and the current freight recession impacting over-the-road carriers, which we expect will continue for at least the next several months. We believe that the second half of the year will be tough with respect to new Class 8 truck sales, but we also believe that demand should remain solid for new Class 4-7 commercial vehicles. When it comes to the aftermarket, challenging operating conditions will likely continue, but we should experience some seasonal lift in the warmer months. To help offset the challenges facing our industry, we are taking action to reduce expenses throughout our organization. With these expense management measures, along with our diverse customer mix and our focus on supporting large national fleets, we are confident that we can successfully navigate this difficult market cycle through the second quarter and the remainder of 2024. It is very important that I express my gratitude to our employees for their hard work and for continuing to provide superior service to our customers while staying focused on our long-term goals. With that, I'll take the questions.

Our first question comes from Justin Long of Stephens.

Maybe I'll start with one on the expense side of the equation because, Rusty, I know you mentioned some cost initiatives that are going to be kicking in. Any sense you can give us for the timing and magnitude of those expense reductions and how we should think about those flowing through SG&A in the next 2, 3 quarters?

Well, the timing of these changes will occur and will come into play during the second quarter. I expect them to take full effect by the time we reach Q3 and Q4. We feel optimistic about our performance as we enter Q2, anticipating improved truck sales overall, although we do foresee a decline in truck sales in the second half of the year. One clear indicator of our situation is our absorption rate, which reflects our current standing. In Q1, our absorption was down about 6 points compared to last year, even with flat gross profit. This suggests some rising expenses have affected our performance, especially since gross profits from parts and service have remained steady, which is unusual for us. However, we've been working hard to manage this. We have two primary factors to control: gross profit in absorption and expenses. We intend to manage expenses in line with our current status and our expectations for gross profit, which has plateaued. Our goal is to recover part of that absorption decline, aiming to regain around half of those 6 points, possibly more, depending on how things turn out. This is all part of managing a cyclical business, which our company has experience with. The good news is that we have significantly increased our business from parts and service compared to the past. We feel confident in our ability to manage through this situation effectively. Over the last decade, we have shifted our earnings reliance from mainly truck sales to a stronger focus on parts and service, which allows for better expense management. There are challenges, such as inflation and providing necessary services, but this gives us a lever to work with. We've demonstrated in the past that we know how to navigate these circumstances, and we'll do it wisely in response to market conditions.

Got it. That all makes sense. And maybe to follow up on parts and service. So you talked about your expectations for the second quarter. But any updated thoughts on the back half of this year? Do you think it's possible for parts and service to start seeing a little bit of growth on a year-over-year basis? Or given the environment for truck sales, could that be a challenge?

The market for truck sales is influenced by our customer base. Starting with used trucks, we have significantly reduced our inventory by 40% compared to last year, dropping from about 2,500 units to around 1,500 units. This was necessary due to the sharp decline in used truck values over the last two years, which required us to sell more quickly. As a result, we've been able to minimize potential losses in our used truck inventory through faster turnover. This strategy has also enabled us to seize new opportunities since we maintain a lean inventory and turn them over quickly. We have seen exceptionally strong performance in used trucks, which is quite unusual, but the rapid turnover has helped sustain our margins without being affected by declining valuations. Regarding medium-duty trucks, our order board looks positive, and while we are not completely sold out, we are closer to that point than in the heavy-duty segment. Due to high demand in 2022, many manufacturers shifted their focus to heavy-duty trucks, creating a backlog in medium-duty inventory which still has pent-up demand. With consumer spending remaining robust, we are optimistic about medium-duty sales for the year. We expect the second quarter to be stronger than the first, and while there are fluctuations by quarter, our outlook for the second half remains strong based on our backlog. For heavy-duty trucks, timing can impact sales significantly, especially in the first half of the year. We currently have a large inventory, most of which is already sold, and we are preparing for increased deliveries of Class 8 trucks in Q2. Looking ahead to the second half of the year, there are concerns about backlog levels, but we are no longer constrained by allocation. We can produce trucks with a lead time of about eight weeks, allowing us to meet demand in Q3 and Q4. While we expect lower Class 8 deliveries in the second half compared to the first, we have a strong presence in various markets, particularly refuse and construction, which will help offset challenges in the over-the-road segment. The general market for trucks will be tough, but our sales team is active, and we anticipate some opportunities despite the ongoing freight recession. It’s important to recognize that over half the market is centered around over-the-road trucking, and while the LTL sector is stable, most orders have been placed. The second half will likely be more challenging, but we believe we will be in a better position compared to the broader market. Looking into 2024, I expect that we will perform better given our market diversification. Although the first half might see some setbacks, we still have time to enhance our performance. Overall, I’m optimistic about our future, especially as new environmental regulations come into play in 2027, which will push large carriers to invest in their fleets and technology. I anticipate strong years ahead in 2025 and 2026, even with the challenges we face in 2024.

Okay. That's good to hear. And I guess I'll just ask one more question. To your point about the freight down cycle lasting for 2 years now, I think it's lasted longer than everybody anticipated. Has that changed your view at all on the trough earnings and free cash flow potential of the business this year?

Reflecting on something I mentioned a couple of years ago about trough earnings, I can confidently say that is not going to happen. I feel more assured about this now than I ever have when I consider the current state of the organization and our market strategy. Although I shared that perspective a couple of years back, I am now even more confident in that assessment. Regarding the peak, if everything unfolds as expected in 2026, we anticipate significant earnings based on current projections, although we recognize that circumstances can change. The economy is unpredictable, but with the new EPA guidelines set to take effect in 2027 and the information at hand, we have strong confidence regarding the trough. As I've mentioned previously, 2024 will be a year of adjustment following the strong performance in 2022 and 2023, and I still project a decline of around 13% in truck sales overall, with 20% in March alone. The first quarter reflected a 13% drop, and while ACT is at 16%, I believe it may actually be a bit worse than that. However, I expect significant pre-buy activity in 2025 and 2026. It's challenging for many in the industry; reviewing public earnings reports from over-the-road truckload companies reveals that many are facing difficulties. In contrast, I'm quite proud of what we've achieved, and I'm more confident than ever that we will manage these challenges while maintaining strong free cash flow this year. Although it won't be as robust as last year, it will still be significantly strong compared to historical data.

Our next question comes from the line of Andrew Obin from Bank of America.

This CARB law thing is confusing, Rusty, sorry. So a question, can you talk about your confidence, given the weakness in over-the-road freight, what's your confidence of actually sort of being able to manage your inventory into the second quarter? You said that you sort of have confidence in your used truck, but maybe a little bit granularity of why you're so confident given the weakness in the market?

You bet. Well, it goes back to first off, I must take them in inverted order here, Andrew. I'm going to go to used first. We reduced our used inventory by 40% over a year ago. We traditionally had closer to 2,500 units, and now we carry around 1,500 units. Given the accelerated decline in the used market over the last two years, we had to turn inventory quickly. This accelerated turnover has helped us mitigate potential losses in our used truck inventory. It has also allowed us to take advantage of other opportunities since we don’t have an inflated used truck inventory. We maintain a level of inventory and turn it fast. Our used truck quarters have been extremely strong, which is unusual. Rapid turnover has enabled us to maintain higher margins because we aren't stuck with used trucks that are losing value quicker than historical norms. When it comes to medium duty, I feel optimistic about the order board. It's solid. While I can't say we're completely sold out, we are much closer to that point compared to the heavy side. On the medium-duty front, we still have some allocation because, during the major market activity in 2022 and 2023, manufacturers shifted focus from medium to heavy duty due to better margins. This has left some pent-up demand in medium duty. Additionally, strong consumer spending over the past couple of years has significantly contributed to driving medium-duty sales. Overall, we are very pleased with the outlook for medium duty this year. As I mentioned, we had a solid first quarter. The second quarter is expected to be even stronger than Q2, and I believe that it's important to keep in mind that there are fluctuations from quarter to quarter. Sometimes people focus too much on these quarters. However, I anticipate that our second half will be at least as strong as our first half, based on our current backlog in medium duty. Regarding heavy duty, timing plays a significant role, especially in the first half of the year. Currently, I have a large inventory, which might seem surprising, but the majority of it is sold. We're in the process of delivering a lot of that inventory now in Q2. We are confident that we will deliver more Class 8 trucks in Q2; there is no doubt about it. The inventory is already on the ground, and we are nearly through April. I feel very confident about our Q2 performance. Now looking ahead to the third and fourth quarters, there are definitely concerns and the backlog is significant. However, we are no longer on allocation. If you need a truck, I can begin production in about eight weeks. This means I can still initiate truck production in the latter half of the second quarter for delivery in the third and fourth quarters. So we feel pretty good about it. I do believe we'll be softer. There's no question in my mind. I do mean the second half will be less Class 8 deliveries than the first half. Like I said, Q2 more than Q1, the second half less than the first half. But given the diversification of our market, look, all most all of your big carriers have already placed all their orders for this year. The little guys, we're still way oversupplied in trucks out there, just look at contract rates, look at spot rates and we'll tell you what's going on. So that market is going to be tough. But given our diversification into the vocations that we sell into, we're going to be extremely strong in refuse. That's booked out. We already know where I'm at. I'm going to have more construction. Now we do have some supply issues from one transportation manufacturer we're dealing with and some other things on the vocational side, but we still have the opportunity to sell into that. And there are still some private carriers out there that are looking at purchases, right? Not for hire, but private stuff we believe we can sell into. So the year is not done. I'll put our sales team out there and challenge anybody, and we're going to be out there, we're going to be looking for business. And there's going to be some. It's just not going to be what it has been until this freight recession clears itself up. Everybody needs to keep in mind that over half the market is still in the over-the-road segment. The LTL segment is doing well, but most orders have already been placed. There are only a few smaller opportunities we are pursuing. The second half of the year is expected to be more challenging. However, I believe we will finish the year in a better position compared to the U.S. retail market's decline in '24, thanks to our diversification. There are just some timing factors. However, I expect that as we approach the fourth quarter, we will see positive developments. Let's not lose sight of the bigger picture; I am confident about the company's prospects, as I mentioned previously. My conviction about our current position is strong. When we reach the last quarter, I believe you will notice an increase in order intake. I also anticipate that 2025 and 2026 will show progress, especially now that we have recently completed the last greenhouse gas law, which is quite stringent and will require attention from the industry. Currently, many businesses are concentrating on their own operations, but they will need to shift their attention to their fleets, their composition, and the adoption of new technologies, in addition to managing inflationary price increases to meet the demands that will arise on January 1, 2027. I anticipate that these markets will require investment, particularly from larger carriers, regardless of their current focus. I hope that the freight recession will start to ease in the latter half of this year. Look, I've been watching everybody kick the can for a year about when freight was going to pick back up. So I'm not going to be the economist here and tell you when. But I know it's got to carry around some time. The further we go and the closer we get to the end of it, you've got to believe. But then you tie that up with the '27 EPA laws, you're going to start to get, I do believe '25 and '26 will still be the kind of years that everybody's been predicting because look, engine prices are going to go up $20,000-plus just for diesel and more when we get into '27, you're going to have demand, so you have to do this much electric, you're going to do this much of that. So people are going to be a little nervous and fearful of that. So I do believe that will guide '25 and '26 to be super solid. We'll just deal with '24, as I said, given the diversification, I'm comfortable. Will it be backwards in the first half? Yes. But we still got time to try to make it a little more decent. So there you go. I don't want to ramble on for a while, but I'm trying to give you a larger look at what we see coming in front of us for the next 2.5 years.

Sure. And just looking at the ACT forecast, which you referenced, what are you seeing the puts and takes for the ACT forecast? What do you think is potential upside to the numbers? And what do you think is potential source of the downside to the numbers?

I don't see much potential for growth this year. If you take the first quarter retail numbers for the U.S. and project them for the whole year, you'll arrive at the 228 figure that was mentioned. I expect there might actually be some downside this year. However, I do anticipate growth in 2025 and 2026, particularly as more people understand the implications of recent changes. The implementation of CARB in California began on January 1 this year, but we haven't yet observed its full impact because we're still fulfilling orders made in late 2023. Much of that was driven by accelerated purchasing. I believe the true effects will start to manifest later this year, and as consumers become aware of these changes, there may be increasing concern nationwide about the implications of new EPA regulations on costs. I have reservations, without disrespecting anyone, regarding performance and after-treatment technologies. I've observed challenges with after-treatment systems for years, and every time we introduce something new, we encounter issues. I think there will be significant concerns about performance in that area. I believe that our diversification will lead us to finish the year in a stronger position than the overall Class 8 sales. I am optimistic that 2025 and 2026 will be excellent years as people begin to understand the true costs involved. Looking ahead to 2027, I anticipate that we will return to allocation status sometime in late 2025.

Well, I guess I'll be the operator too today. Do we have any more questions? I see no more questions on the board. So I get a second job for the day. With that, I look forward to speaking to everybody sometime in the mid-late July with our second quarter results. Everyone, have a great day. Thank you.