Earnings Call Transcript - RUSHA Q1 2023

Marvin Rush, CEO

And welcome to our first 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.

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, 2022 and in our other filings with the Securities and Exchange Commission.

Marvin Rush, CEO

As indicated in our news release, we achieved first quarter revenues of $1.9 billion and net income of $90.5 million or $1.60 per diluted share. We are proud to declare a cash dividend of $0.21 per common share. In the first quarter, we experienced strong demand for new Class eight and Class four to seven trucks, largely due to limited new truck production over the past few years. There was a healthy widespread demand for aftermarket parts and services as well and we maintained our focus on strategic initiatives, support to large national fleets and operational excellence. We significantly outpaced the industry in medium-duty truck sales, as well as aftermarket sales and we are proud of our results in the first quarter. In the aftermarket, our parts service and body shop revenues were $648 million, up 19.3% and our absorption ratio was 136.5%. In the first quarter, we experienced strong demand for parts and service for most of the customer segments we support. We continue to add service technicians to our workforce, notably mobile technicians, which supports our long-term strategy to expand our mobile presence across the country. Looking ahead, we anticipate the rate of inflation to continue to slow and the parts revenue growth will moderate throughout the year when compared to our first quarter results. However, with our continued focus on long-term initiatives, including strategically expanding our workforce to support mobile service efforts and national accounts, we believe our aftermarket revenues will remain strong this year. Turning to truck sales. We sold 4,365 new Class eight trucks, accounting for 6.4% of the total US market and 2.2% in the Canada market. While there's still pent-up demand for new Class eight trucks, we experienced healthy demand for most market segments, particularly over-the-road vocational, call hours, energy customers and large national fleets. ACT Research forecasts US class retail sales to be 259,000 units in 2023, essentially flat compared to 2022. While continued truck allocation may limit our growth potential, our backlog remains strong and we believe our second quarter Class eight truck sales will align with our first quarter results. Overall, we expect our results to be consistent with the industry this year. Our Class 4-7 new truck sales reached 3,038 units in the first quarter, accounting for 5.3% of the US market and 3.2% in the Canadian market. We experienced healthy demand from a variety of market segments. Further, while supply does not catch up with the needs of the market, we began to see truck manufacturers shift more resources back to producing medium-duty trucks. ACT Research forecasts US Class 4-7 retail sales to be 253,600 units in 2023, up 8.6% from 2022. As production continues to improve and as customers prepare for upcoming emission regulations, we believe there will continue to be strong demand for medium-duty commercial vehicles for the remainder of 2023. Our used truck sales reached 1,684 units in the first quarter, down 29.7% year-over-year. Demand for used trucks remained low, largely due to the continuing increase in new truck production. As new truck production continues to improve, we expect further deterioration in used truck pricing and we plan to carefully manage our used truck inventory levels until demand begins to increase and value stabilizes. Our lease and rental revenue was up 21.5% compared to the first quarter of '22. We continue to experience strong demand for leased vehicles and our rental utilization rates were solid in the first quarter. We expect our lease and rental operations to continue to make significant contributions to our overall profitability for the remainder of 2023. Looking ahead, we will continue to monitor economic factors, which may impact our industry but we believe our overall financial results will remain strong through the rest of 2023. Before closing, I would like to thank our employees for their great work and for their dedication to our company's goals, as well as providing superior service to our customers. With that, I will take any questions.

Operator, Operator

Thank you. Our first question is from Justin Long with Stephens. Your line is open.

Justin Long, Analyst

Thanks. Good morning, and congrats on the quarter.

Marvin Rush, CEO

Thanks, Justin.

Justin Long, Analyst

I'll start with parts and service. Rusty would love to get your thoughts on parts and service growth over the remainder of the year. And, obviously, we're going to see some moderation just given what's happening with inflation. But is there anything else that's driving that moderation, or would you say your parts and service growth going forward, excluding inflation, is remaining pretty consistent?

Marvin Rush, CEO

No, I don't see anything out there. We continue to execute on all the strategic initiatives that we have been implementing consistently over the last six or seven years to be honest. I would tell you, while it may moderate somewhat, especially given some pretty large comps coming forward, we still believe we are going to close the year in double digits, okay? I would expect the next few quarters to slightly moderate from the 19-plus percent, understanding that there were some acquisition aspects in there, particularly the Canadian acquisition, but we were still well over 17% from a same-store score perspective in Q1. So with that, we've got to start, we're talking high singles and low double digits later this year. We'll just have to see how it plays out. I can't predict it exactly, but we will still see overall growth well outside of inflation. I feel very good about it again. It's important. I hope folks know the absorption rate number. It's the calculation of parts service and body shop gross profit versus the G&A of a dealership, right? Well, we put out, it's 136.5%. Now I think it's important to note that if you take our new acquisitions from last year, that would be the Canadian acquisition along with our acquisition of Summit, they are well below that number. If you looked at prior stores that we had prior to those two acquisitions, that number would be into the almost mid-140s. I would have never thought we could achieve that. So what that really explains is the fact that there's plenty of upside in these other stores. Over last year we just brought them onto our business system really between March and August. Well, just getting on the system and bringing your regimented way of going to market to them is not an add water and stir thing. So those numbers for sure have room for growth in the coming years as they grow to catch up with the rest of our locations, right? So I feel very good about the overall parts and service outlook for us going forward regardless of where the market is. You've got to understand, we go to the market very diversified. We're not just hitting one segment. I always try to explain that to people. We're not just doing over-the-road business; we're varied in many different market segments on the location side. So the vocational business is quite good out there right now. So I mean I can go on and on Justin. The quality of what I see, the quality of earnings that are out there. But that's a bit of touching on it from a parts and services perspective there.

Justin Long, Analyst

Okay, got it. That's helpful. And my next one is probably for Steve, but is there anything you can share on the expected trend in SG&A as we move into the second quarter relative to what we saw in the first quarter? And then maybe thoughts on interest expense going forward as well given it's come up quite a bit the last couple of quarters?

Steve Keller, CFO

Well, as you see, G&A was sequentially up significantly from Q4, and that's pretty normal for us. In Q1 compared to Q4, we incur a lot of what we'll categorize as employee-type benefit costs. We issue our options payroll taxes which had fallen off as the year goes as people hit earnings amounts. Typically, in Q2 that will stabilize, you won't see another sequential jump. You'll see it pretty flat maybe even slightly down. On the interest front, I'd expect Q2 to be very similar to Q1. Inventory levels are elevated versus last year. I think it was up about $8 million to $10 million compared to Q1 last year. That's what you can believe it to be. It's a product of interest rates on our floor plan and the carrying amounts of inventory. You've got to remember that even though we're on allocation, we're turning them quickly. They sit in inventory for a while while we bought them up and do things like that. So I think for the remainder of the year, you're going to see the run rate similar to what it is depending on your outlook for interest rates; I think maybe there's another quarter-point bump. I'm not sure there is much more than that. So that probably going to be very similar to Q1 for the remainder of the year.

Justin Long, Analyst

Got it. That's helpful. And maybe I'll close with a high-level question for Rusty. When I think about the business going forward, it feels like we're going to see higher highs and higher lows and I look at valuation multiples today and they're still very compressed relative to what we've seen historically. What do you think the market is missing?

Marvin Rush, CEO

Well, I'm going to step out a little bit here, Justin. But a good question, right, especially when you're sitting in my chair. Based upon our current multiple and where it has been in the last couple of years, I do not believe the market fully understands how our strategic execution has improved our quality of earnings. The aftermarket growth and the expense management that resulted from executing our strategic initiatives have increased our absorption rate, as I mentioned earlier, to 136, but well above that in the older stores. Combined, we have the acquisitions in. I also believe the market does not realize that the normal replacement cycle for Class 8 in the US over the last 10-year average has increased to over 225,000 units per year. I think given the commercial market performance, how we and other industry experts such as ACT Research expected to, we believe that we’ve significantly improved both our trough and peak earnings since the last down cycle in 2020. So from an operative perspective, the ACT’s current forecast for Class 8 is correct, which forecasts the trough at 217,000 units in 2024 at a peak of 311,000 units in 2026. I've got to believe that our trough earnings would be pretty far north of $4 a share and peak earnings could be north of $8 a share. That’s me stepping out. I usually don't say that. But I don't think people truly understand the company sometimes. When you talk about those multiples, I've been observing it for the last couple of years and it could be a little frustrating from my perspective. So, I think if someone digs deep into the model, looks at it, and lays out the forecast of most industry experts we use, like ACT, that's what you're going to come up with. I don’t know a better way to explain it to you than that.

Justin Long, Analyst

That makes a lot of sense. Thanks, Rusty, appreciate the time.

Marvin Rush, CEO

You bet.

Operator, Operator

Thank you. One moment for our next question. And our next question comes from Andrew Obin with Bank of America. Your line is open.

Andrew Obin, Analyst

Hey, Rusty, it’s Andrew Obin. Hey, guys, hello to the team as well.

Marvin Rush, CEO

Thank you, Andrew. And the team says hello back.

Andrew Obin, Analyst

So the question for you and I think you and I have had this debate for a while. You guys are generating more cash flow. It seems there's a level of frustration with where the stock is. And I know you are buying back stock, but why not get more aggressive on stock buybacks in this environment? Particularly because a couple of years ago we were talking about a $4 as your peak earnings number and now it's your trough earnings number. If the market is missing so much, why not just buy back more?

Marvin Rush, CEO

Well, everything is under consideration. I'm not going to provide specific details right now. As you know, we have been consistent. We continued our stock buyback in the quarter, totaling about $26 million. We have $150 million approved for buybacks and have bought back around $40 million of that since getting approval. We plan to maintain this pace through the end of the year, potentially accelerating it. I understand your concerns. As I mentioned, we increased our buyback authorization to $150 million from the previous $100 million, and we intend to execute on this plan more effectively than in the past.

Andrew Obin, Analyst

No, I appreciate that. Can you discuss the development of your parts and service business? It seems to be performing better than I anticipated. What factors are contributing to this? What do you expect the exit rate for the year to be, especially as comparisons become more challenging? How does the overall economy play into this, considering your shift in business model and your focus on larger customers? Additionally, many of those driving your parts and service business are not necessarily your large new truck customers. There are many underlying factors at play, but could you elaborate on this business for us a bit? Thank you.

Marvin Rush, CEO

That's an important question. I mentioned some aspects earlier. We're really pleased with our parts and service business, which continues to grow consistently. Over the past two to three years, we've exceeded our growth expectations. Often, we underestimate the strength of our extensive network, which is the largest commercial network in the United States. We represent numerous manufacturers and can also cater to various truck brands for larger customers since many do not stick to just one brand anymore. Our strategy leverages this network and our personnel, along with the strategic initiatives we’ve implemented in recent years. We've set ambitious goals, such as doubling our mobile service footprint in the next few years, and we are committed to reaching those targets. Reflecting on the past, I wouldn't have believed we could exceed dealership locations running over 140%, but we've achieved that and are continuously drawing more customers. The market is requesting not only varied performance from service networks but also a unified, clear solution. I genuinely believe we offer the best service available. Although I could discuss the numbers in detail, I assure you we will keep growing, which we feel confident about. The world is changing, and our focus on mobile services aims to enhance our offerings. As urban areas become busier, the traditional approach of taking a truck to a dealership and the inconvenience it brings can hinder revenue production. This makes our mobile service approach increasingly relevant. While I can't delve into all the factors driving this growth, our performance over the years is evident, and I don't foresee any changes to that pattern. Without going into specific figures, I believe these elements position us well to serve our customers effectively. Ultimately, as all our employees emphasize, the customer is our priority.

Andrew Obin, Analyst

Can you provide an overview from a macro perspective? You have significant exposure in various regions like Florida, Texas, California, the Mid-Atlantic, and the Midwest. What are your insights regarding the economy? Your perspective is quite valuable. Thank you.

Marvin Rush, CEO

Absolutely, Andrew. Let's begin with the East Coast. Florida remains robust; I was there two weeks ago, and it's still our largest mobile group with over 60 mobile technicians operating across Florida and lower Alabama. Their business continues to prosper, and we anticipate a year at least as good, if not better than last year for Florida. Moving further Southeast, Georgia is also experiencing growth and strength. I don’t have any negative insights to share. Florida is exceptionally strong, and South Texas is equally strong, with growth in the Houston market. Colorado appears to be improving, and Southern California is also performing well. It's widespread, which relates back to our diverse customer base and market segments. I often emphasize that we don’t limit ourselves to just one market segment. It’s noteworthy that geographically, everything looks solid, although some areas are outperforming others. The Mountain West, particularly Utah and Idaho, is doing particularly well. However, I don't see any weak spots currently. While certain regions are stronger than others, a key aspect of our company's strength is that two of our three largest international customers for parts and service don’t even purchase trucks from us. This demonstrates our ability to serve customers throughout our network, regardless of whether they buy trucks from us directly. Anyway, the Midwest, especially the Chicago area, is also performing well. I could continue discussing our business indefinitely because I’m truly proud of our team's accomplishments.

Andrew Obin, Analyst

All right. Thanks so much, Rusty. Really appreciate it. Look forward to updates on the buyback.

Marvin Rush, CEO

You got it. I'll keep that in mind, Andrew.

Operator, Operator

Thank you. And I'm showing no further questions at this time. I would like to turn it back over to Rusty Rush for closing remarks.

Marvin Rush, CEO

We appreciate everyone participating today. It was a significant earnings day, with many companies reporting. Thank you to all the analysts, and we look forward to speaking with you again in July.

Operator, Operator

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