Earnings Call Transcript - RUSHA Q3 2024

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Rush Enterprises Inc. Reports Third Quarter 2024 Earnings Results. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would like now to turn the conference over to your speaker today, Rusty Rush, Chairman of the Board, Chief Executive Officer, and President. Sir, please go ahead.

Rusty Rush, Chairman & CEO

Well, good morning, and welcome to our third quarter 2024 earnings release call. With me on the call are Jason Wilder, incoming Chief Operating Officer; Steve Keller, Chief Financial Officer; Jay Haselwood, 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.

Steve Keller, CFO

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.

Rusty Rush, Chairman & CEO

Thanks for joining us this morning. I'm pleased to report that we had a solid third quarter. We announced revenues of $1.9 billion and net income of $79.1 million, which comes out to $0.97 per diluted share. In the third quarter of 2024, we incurred a one-time pretax charge of $3.3 million due to Hurricane Helene-related property damage. Excluding this charge, EPS would have been $1 per share. And once again, we are happy to declare a cash dividend of $0.18 per share for both Class A and Class B common stock. As we have experienced over recent quarters, the industry is still dealing with low freight rates and high interest rates, and these difficult operating conditions are keeping demand for Class 8 trucks on the low side. Given these headwinds, we are proud of our performance this quarter. While the over-the-road carrier segment faced some challenges, we saw good activity from Class 8 vocational and public sector customers. Medium-duty demand also held up well, helping us outperform in Class 4 through 7 sales. And despite a tough used truck market, our strategy is paying off and contributing positively to our earnings. In the aftermarket space, we saw a slight revenue improvement over the second quarter, particularly in service sales, which outpaced the market. Diving deeper into our aftermarket results, our parts service and body shop revenues reached $633 million, down slightly 1.6% from the third quarter of 2023, but up from the previous quarter. Despite the ongoing freight recession, we are finally seeing slight sequential growth in aftermarket sales through over-the-road customers, the first growth we have seen since early 2023. The refuse and public sectors continue to be strong for Class 8 aftermarket sales, and our Class 4 through 7 aftermarket sales were healthy across the board. Though we expect some seasonality to adversely affect the fourth quarter, we anticipate beginning a gradual return to more normal market conditions in early 2025. Looking at truck sales, we sold 3,604 new Class 8 trucks in the third quarter, accounting for 5.3% of the total US Class 8 market and 1.6% in Canada. ACT Research forecasts 264,000 new Class 8 sales in the US and Canada in 2024, down 12.5% from last year. Continued low freight rates and high interest rates contributed to a 3.5% decline in Class 8 retail sales from last year's third quarter, and economic uncertainty continues to weigh on Class 8 carriers. Despite these challenges, we are pleased with our third quarter results. Specialty markets like vocational and public sector remain bright spots for us, and we expect this trend to continue into the fourth quarter. We saw a slight uptick in orders at the end of the third quarter, so we expect that our fourth quarter Class 8 truck sales will increase slightly compared to our third quarter results. However, with high inventory levels across the industry, we anticipate that pricing will remain competitive, making sales challenging through the first half of 2025. Our Class 4 through 7 new truck sales reached 3,379 units in the third quarter, accounting for 5% of the US market and 2.9% in Canada. ACT Research projects US and Canadian Class four through seven truck sales to be 273,000 units in 2024, up slightly, roughly about 2.5% from last year. Demand remains strong in this medium-duty space across all segments, and our efforts to diversify our customer base are paying off. On the used truck side, we sold 1,829 units in the third quarter, up 1.8% year-over-year. Although used truck demand is still weak, we continue to successfully execute our strategy, which led to positive results in the third quarter. Depreciation rates for used trucks have stabilized, and we continue to manage our inventory levels effectively to meet market demand. Lease and rental revenue was almost flat year-over-year, down just 0.4%. However, we are optimistic that rental utilization rates will increase in the fourth quarter, and we expect to see moderate growth in our leasing and rental revenues as we move into 2025. So far, it's been a challenging year for the commercial vehicle industry, but I am incredibly proud of our team's hard work. Their dedication has helped us manage our expenses and stay on track with our sales initiatives, allowing us to keep delivering value to our shareholders despite these challenging times. And I'm confident that we will finish the year in a solid financial position. I would like to extend my sincere gratitude to all our employees for their hard work this quarter. They stayed focused on our long-term goals while continuing to provide top-notch service to our customers. Before we wrap up, I personally want to thank Mike McRoberts, who as we announced will step down as COO on October 31. Mike has been invaluable to us, and we are glad he is staying on as a special adviser and Board member. I would also like to congratulate Jason Wilder, who will step in as our new COO on December 1. I have full confidence in Jason and expect a smooth transition. With that, I'm happy to take your questions.

Andrew Obin, Analyst

Hey, Rusty, good morning.

Rusty Rush, Chairman & CEO

Good morning, Mr. Obin. How are you today?

Andrew Obin, Analyst

Just a question. You had constructive order commentary particularly into the quarter-end. At the same time, I would say I think ACT forecasts no retail to recover until the second half of 2025. How do you balance sort of the commentary that you've made in the press release? It seems there are multiple references to things bottoming out with the uncertainty that we're still facing in the first half of 2025.

Rusty Rush, Chairman & CEO

I think I was referring to our customers' business finding a bottom. For the truckload carriers, it seems freight has been stabilizing at lower levels. The decline in rates appears to be nearing an end. Recent reports indicate that many carriers feel they have been consistent at the bottom. There seems to be some confusion between the customer base and what I perceive for our business. When I mention our business and the recent uptick in order intake, it’s important to note that people sometimes forget we had two years of allocation. This year, we have returned to a more typical situation. I couldn’t have predicted back in Q1 that we would see such a strong Q3; it's just shorter timelines we are working with. The solid order intake I referenced in the last six weeks largely pertains to Q4 builds, rather than being for 2025. Most of it is intended for production in the fourth quarter, leading to shorter lead times. I’m pleased that our sales organization is adjusting to these conditions, which have historically involved 90-day lead times, rather than nine months. It was encouraging to see the order intake rise, and while we’re still figuring out our 2025 plans, some of the Q4 production will carry into Q1. I can’t say that Q1 is sold out, but I’m confident in our capabilities, as demonstrated in the past two quarters. There was a period where some were less active post-allocation, but we're regaining momentum and performing strongly, continuing the legacy we've built. Our customer base is stabilizing at a low point, but we’re taking advantage of shorter lead times. While this situation is a bit more stressful, we’re adjusting back to the typical 60 to 90-day lead times from the previous lengthy ones. I believe there will still be business opportunities. There may not be a significant order increase until the second half of next year, particularly from our over-the-road customers, while we're currently doing well in vocational segments. The truckload market remains substantial, but small carriers are still catching up, and larger carriers are conservatively managing as they stabilize their operations. However, recovery will take place. I anticipate we’ll maintain our current performance, but expect a notable increase in the latter half of next year as customers begin planning for 2027, considering the new technology and costs associated with it, along with adapting to new EPA regulations. In summary, over-the-road customers are not thriving but are stable, and I hope to see sales growth in the second half of next year into 2026. Overall, I feel confident in maintaining our performance.

Andrew Obin, Analyst

Thank you for your insight. It's encouraging to see you becoming less negative, even showing more positivity in your press release. I'm interested in your perspective on the economy since you engage with various sectors. Specifically, what trends are you noticing in construction and oil and gas, aside from the truckload industry? How does the economy appear to you as we approach 2025?

Rusty Rush, Chairman & CEO

I think when we break down the vocational businesses, oil and gas has been weak. No one is really purchasing new equipment for oil and gas; instead, they are mainly refurbishing old equipment. There's a perception that the future of oil and gas might have some challenges due to the rise of electric and hydro technologies. As a result, capital expenditures are low, with maintenance spending being more common, though that maintenance spending has decreased by about 20% in our parts and service perspective. While maintenance is a smaller portion of our overall business compared to a decade ago, it still accounts for a significant chunk. On the other hand, construction is seeing an increase in capital expenditures, driven by funding from the infrastructure bill. We have faced some supply shortages on the transmission side, which has limited some vocational product availability, but I expect that situation to improve later next year. Nevertheless, demand in the refuse sector remains strong, and the municipal sector is solid as well, although it can vary. I anticipate that truckload companies will become more active in the latter half of next year. Private carrier purchases were very strong earlier this year, and regarding our business model, we've made efforts to diversify our customer base and geographic presence. California is challenging due to new car laws, resulting in only 50% of previous order intake there; however, I believe it will improve, as it's just one state. Overall, our diverse customer base helps us navigate these challenges effectively. As for future orders, I expect a pre-buy to drive demand, although market projections indicate a decline of around 10% next year. Currently, they are predicting around 234,000 units from the U.S. this year and about 216,000 for next year. I don't foresee any negative trends and believe that the latter half of the year will be more favorable. Despite some tough conditions in the first half of the year, I feel optimistic about our performance going forward.

Andrew Obin, Analyst

This is great. Thanks so much.

Rusty Rush, Chairman & CEO

You bet.

Operator, Operator

And our next question comes from Daniel Imbro with Stephens. Your line is open.

Daniel Imbro, Analyst

Yes, hey, good morning guys. Thanks for taking my question.

Rusty Rush, Chairman & CEO

Thank you, Dan. Good morning to you, sir.

Daniel Imbro, Analyst

Rusty I want to start maybe on the new unit side. You mentioned obviously order uptick picking up a little bit, but inventory is still going to challenge pricing for the intermediate term. I guess how should we think about the impact of that on gross margin or gross profit per unit, however, you want to think about it kind of across both I guess new or used and then any difference between Class 8 and medium duty? Just curious how that's going to trend over the coming quarters given the inventory versus demand backdrop?

Rusty Rush, Chairman & CEO

Our inventory has improved significantly compared to six months or three months ago. Following the downturn late last year, we faced some small order fallout that contributed to our stock inventory. However, we have effectively managed it and ensured it’s adjusted to market value each quarter. As a result, we have begun to reduce inventory levels. I feel much more optimistic about our situation than I did in April. We have managed to decrease our inventory over the past 60 days. While there is still a large number of Class 8 units in total across the U.S., I believe our inventory is in better shape than others. We’re not perfect yet, but we are making progress. We have reduced our used inventory significantly from carrying 2,500 units to under 1,500, and we are seeing turnover. It's crucial to turn used trucks promptly, as they depreciate faster than new ones. Our used truck department has performed admirably this year compared to last, helping to offset some softness in our new truck business. I look forward to discussing our expense management when the opportunity arises.

Daniel Imbro, Analyst

That's like you're looking at my question list here Rusty. I was going to ask next on the cost side.

Rusty Rush, Chairman & CEO

Go ahead. I've got all day, Daniel.

Daniel Imbro, Analyst

You took out a lot of OpEx in the quarter. I guess first can you maybe just talk about where you guys are pulling costs out of the business? And secondly, I guess how do you think about the sustainability of these cost takeouts? Obviously, we're at a cyclical trough and how much can we keep out of the business as the business improves next year? Where do you see opportunities to further reduce it? How is that cost management shaping up?

Rusty Rush, Chairman & CEO

Sure. Back in the past, we noticed some flattening. In April, I mentioned to everyone that typically, the parts and service business sees seasonality, excluding truck sales which drive our S piece. We look at G&A separately. I did not anticipate the seasonal increase we usually experience in the summer, and indeed, we didn't have it. We've remained fairly flat. However, as I have explained, this demonstrates the flexibility of our business model, which has significantly improved over the years. We measure absorption with gross profit from parts and service over our expenses. If gross profit levels off, we need to adjust expenses accordingly. As you noticed, our revenue and margin took a slight dip. In April, we recognized the need for adjustments, and we implemented them. Looking at G&A, it's increased 4.5% sequentially from Q2 and 7.7% from last year's Q3. I am very proud of our team's ability to achieve more with less. Sustainability is key. If we see a ramp-up in business, we may need to bring some people back since service and parts sales require staff. Although we won't be borrowing money, we will be working on equipment. We'll strive to maintain a portion of that gross profit; historically, we’ve succeeded in this, which has contributed to our absorption rising by 50 points over 20 years. Even if gross profit doesn't pick up during summer, we face ongoing inflation and rising payrolls. Yet, we have managed to keep our absorption rate relatively stable by controlling expenses. If business begins to grow next year, we're planning for mid-level parts and service growth as we finalize our budgets. If gross profit increases by about six points, we aim to retain half of that for improved bottom-line results. I have no doubt about our ability to sustain this because we have been managing effectively where we currently stand. An uptick in gross profits and sales would require some additional spending, but our goal remains to retain part of it, albeit needing personnel for sales and service. Our model allows us to adapt to market conditions and seize opportunities. We remain committed to gaining market share and plan to enhance our outside sales team in parts and service. Despite facing challenges this year on the service side, we recently held our senior leadership conference, reinforcing our commitment to business growth in the upcoming year.

Daniel Imbro, Analyst

That makes sense. Maybe last one to follow-up on that. I guess how is tech availability out there? I feel like just across a lot of end markets it's difficult to find technicians, difficult to hire them. You mentioned you guys haven't done as well this year as you'd like to on the technician hiring. So just curious, has that backlog gotten better at all? Or has that available labor pool gotten better at all for you guys? Just any thoughts there?

Rusty Rush, Chairman & CEO

Good question. It's always challenging, particularly with entry-level technicians where we see higher turnover. Technicians range from Level 1 to Level 5, with Level 5 being the most experienced. At Levels 1 and 2, if you have any effective strategies to help us, I would greatly appreciate it. We are actively working on retention for those levels. A recent study indicated that 40% of Level 1 and 2 technicians leave the industry within two years. They may think they want to be technicians, but many don't stay. This is a tough situation, but we continue to address it. It remains a challenge. We collaborate with tech schools and high schools, and we have a dedicated team of recruiters. Our approach is comprehensive, and we recognize it's an ongoing battle. The role of a technician today is vastly different from what it was 25 years ago due to advancements in technology. It requires a different skill set, yet the difficulty persists. We aim to grow by adding 150 to 200 technicians annually. A few years back, we attempted to grow by about 500 but realized that wasn’t sustainable. We've focused on appropriately aligning jobs to better support Levels 1 and 2, ensuring they have suitable work. I am optimistic about our capacity to improve technician retention, particularly for Levels 1 and 2, and I expect meaningful progress in that area next year.

Daniel Imbro, Analyst

Appreciate all the color and best of luck, guys.

Rusty Rush, Chairman & CEO

Thank you.

Operator, Operator

And our next question comes from Ian Zaffino with Oppenheimer. Your line is open.

Ian Zaffino, Analyst

Hey, guys. Thanks for taking my question. Appreciate it.

Rusty Rush, Chairman & CEO

You bet.

Ian Zaffino, Analyst

Just kind of looking at the landscape here, I guess sort of with the environment is – how is the M&A environment I guess in this backdrop? Where do you see multiples? And kind of what's out there? And I know you're sitting on a great balance sheet. So any color you could kind of give there? And yes then I have a follow-up. Thanks.

Rusty Rush, Chairman & CEO

Well, obviously, I never talk about M&A until I do it. There's a little out there. I'm always working a little bit. We have – we actually had a little M&A in the quarter. We added a new – small stuff, right? We had a small deal up in Nebraska. But we're – I don't have any large M&A I'm working on right now. There's a couple of other small things. There may – I don't have anything big to announce that I can tell you. I wouldn't tell you anyway until I did it. So I don't see that there's this huge rush of people trying to get out of the industry at the moment even though it wouldn't surprise me as we get further into the next two years with looming 2027 EPA regulations coming on that some people don't try to get out prior to that. I'm not seeing it right now, not for those reasons. But there's not a lot of big M&A going on right now that I that we have going around. We're constantly looking. So if anybody out there wants to bring me a deal that I need in an area, I'm not, I'll be happy to look at it. So – but I mean I know it's just a roundabout question but I'm never going to tell you what I'm doing anyway when it comes to M&A until I do it. So – but it's not – there's not a lot of big activity at the moment. But I wouldn't be surprised as we get further along down the road towards 2027 January 1 EPA that M&A activity picks up prior to that.

Ian Zaffino, Analyst

Okay. Thanks. And I guess I know you did that Navistar deal and that went quite well. So I kind of like to see...

Rusty Rush, Chairman & CEO

We completed a significant deal with Navistar around two and a half years ago, which was a major acquisition as we brought on the second largest international dealer at that time. We remain open to exploring additional mergers and acquisitions when the opportunity arises.

Ian Zaffino, Analyst

Okay. Thanks. And then just maybe as a follow-up, can you just maybe talk to the outlook you're seeing now on the vocational truck side? I mean, Allison came out yesterday with quite good numbers on the vocational side. So you kind of wonder what you're seeing there looking forward?

Rusty Rush, Chairman & CEO

Yeah. I may have touched on it a little bit ago. Yeah, I bet they had good numbers. They were sold out of 3,000 to 4,000 series transmissions back in May for the whole year. So anyway, but they're managing their sales, they have their inventory. So yes, vocational continues to be strong, as I mentioned. It actually probably cost us some sales because we couldn't get enough transmissions this year in 2024. So that's probably pushed some of those sales into 2025. So that's a good thing. We expect that to continue. As I mentioned earlier, I expect most all my vocational, I expect to continue to be strong through 2025. I'm not going to look out into 2026 on it, but we do expect to continue strong vocational sales across the board regardless of which location it's in, driven by the government spend on those bills on the infrastructure bills. And just that's what we expect. We're still seeing it, and that's a solid piece for us. We're in the refuse business strong also. So that's solid for us also. And our medium-duty vocational continues to be strong, too.

Ian Zaffino, Analyst

All right. Thank you very much.

Rusty Rush, Chairman & CEO

You bet.

Operator, Operator

And the next question comes from Avi Jaroslawicz with UBS. Your line is open.

Avi Jaroslawicz, Analyst

Hey. Good morning. Thanks for taking the question.

Rusty Rush, Chairman & CEO

Good morning, sir.

Avi Jaroslawicz, Analyst

Good morning. You mentioned in the press release that you believe aftermarket sales are nearing their low point. I'm curious about what indicators you have to feel confident in stating this as the bottom. Additionally, how do you anticipate the recovery in aftermarket sales will unfold? Should we expect a slower rebound than usual considering the challenges in the over-the-road market?

Rusty Rush, Chairman & CEO

We've seen that margins have been relatively flat, which is why we made some adjustments back in April. Sometimes, a flat margin can be a good thing when you cut expenses. Typically, we would expect to see a bit more of an increase in summer given our presence across 24 states, but this year has been different. As we approach Q4, there's some seasonality to consider; it's generally softer due to fewer working days around the holidays. During this time, our air conditioning business tends to decline, but other areas may rise to offset this. It’s customary for Q4 to be a couple of points lower than usual. Looking ahead, I believe that as the over-the-road market stabilizes and starts to recover next year, we should see improvement by summer. While I don't expect a significant increase early in the year, I am optimistic about the growth in our parts and service business during the seasonal uptick around May and June. Our typical summer patterns should return, including ramps in parts and service. I think the spot market will improve, especially as we've managed to diversify our customer base. Although smaller customers were down 8-9% year-over-year, we have still seen growth from our larger national customers. Looking back, small customers have faced significant declines over the past two years. Despite these challenges, we're producing solid numbers due to our diversified base, but I anticipate that comparisons will become easier as we see stabilization in the smaller customer segment and recovery among larger clients. I foresee a need for either buying or repairing trucks from these larger customers, which should help our performance around the middle of next year. I don't expect any significant downturns outside of normal seasonality, thanks to our diversification. Moving forward, we'll continue managing expenses effectively. We expect to deliver more Class 8 trucks in Q4 compared to Q3, and while I can't predict Q1 precisely, I believe we can still produce trucks in December. Although the visibility we once had isn't as clear, I have confidence in our team's ability to execute across different market conditions.

Avi Jaroslawicz, Analyst

That makes a lot of sense. And then I guess also, yeah, thinking about the rebound that you're talking about for Class 8 in late 2025. It sounds like you're thinking of that being more from improvement in the over-the-road market. And to what degree would you say that the pre-buying ahead of the emissions regulations would also be a factor in that?

Rusty Rush, Chairman & CEO

There's no doubt that many expected pre-buying to begin earlier this year. However, that hasn't materialized. I can still produce your truck in December, which indicates that things haven't unfolded as anticipated. The over-the-road sector is facing significant challenges, as reflected in various earnings reports, particularly in the truckload segment. While the LTL (less-than-truckload) sector is improving, truckload is struggling. I'm confident that things will improve as capacity finally leaves the market. I haven't been able to remove capacity myself; financial institutions have been more lenient than ever, which makes it difficult to manage capacity removal effectively. However, we are witnessing this process through various bankruptcies, as companies continue to dispose of their equipment. Thus, the situation continues to improve. Companies will soon shift their focus to the regulations set to take effect in 2027. Originally, we expected this to prompt earlier action, but that isn't happening now. The current situation implies a compression of demand, potentially leading to a sharper increase when demand does rise, as companies are pushed to manage their operations instead of preparing for the 2027 EPA rule. As their operations improve, they will be compelled to address the upcoming regulations. They may not rush to buy everything in advance, but they are likely to purchase strategically to avoid facing higher costs associated with new technology, which could range from $15,000 to $20,000 for diesel, as well as transitioning to battery electric vehicles as new rules come into play. Driven by improved business conditions, they will likely look to pre-purchase a bit ahead of time. By mid-year, I expect their operations to stabilize, and they might start seeing some rate increases. This could prompt them to prepare for 2027 more actively. I can't predict exactly how the timing will unfold, but it's logical to anticipate this progression. As one aspect improves, others will begin to follow suit, and we'll be in a position to look forward. Right now, I'm focused on immediate challenges, but once we find our footing, we'll be able to look ahead more clearly.

Avi Jaroslawicz, Analyst

Yes. No, that does. Thanks for unpacking that. And then I guess just the last kind of question. Where are vocational volumes relative to longer-term kind of normal average? Just trying to understand, how much runway is left for that market?

Rusty Rush, Chairman & CEO

I believe 2025 looks promising for our vocational business, but I won't speculate about 2026 since it's still a bit far off. In terms of normal expectations for the truck industry, I can't define what that means exactly, but sales in this sector tend to fluctuate. Demand remains strong, and we're optimistic that vocational demand will keep up its momentum into 2025. While I'm not making projections for 2026 yet, we are actively discussing and booking business for 2025. Currently, we have booked more vocational business than over-the-road business, indicating that we expect this strength to persist in 2025. Looking ahead to 2026 is challenging at this point.

Avi Jaroslawicz, Analyst

All right. Got it. Appreciate the time. Thank you.

Rusty Rush, Chairman & CEO

You bet.

Operator, Operator

I show no further questions, at this time. I would now like to turn the call back over to Rusty Rush for closing remarks.

Rusty Rush, Chairman & CEO

Well, I'd like to thank everyone, for their participation this morning. We won't be talking to you until February with the fourth quarter release. So happy holidays to all to you and yours, and we'll talk to you again, in February. Thank you all very much.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.