Earnings Call Transcript - RUSHA Q1 2021

Operator, Operator

Good day and thank you for standing by and welcome to the Rush Enterprises Inc. Report First Quarter 2021 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. I would now like to hand the conference over to your speaker, Mr. Rusty Rush, Chairman, CEO and President. Please go ahead.

Rusty Rush, CEO

Good morning and welcome to our first quarter 2021 earnings release conference call. On the call today, are Mike McRoberts; Chief Operating Officer, Steve Keller; Chief Financial Officer, Derrek Weaver; Executive Vice President, Jay Hazelwood; Vice President and Controller, and Michael Goldstone; Vice President, General Counsel and Corporate Secretary. Now, Steve will say a few words regarding forward-looking statements.

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, 2020, and in our other filings with the Securities and Exchange Commission.

Rusty Rush, CEO

As indicated in our news release, in the first quarter, we achieved revenues of $1.2 billion, net income of $45.3 million or $0.79 per diluted share. We're also very proud to have declared a cash dividend of $0.18 per common share. Our results were driven by the nationwide economic recovery and healthy activity for most market segments we support. Gradual increases in product and service activity, along with healthy demand for new Class A trucks and rising truck values, contributed to our strong quarter, along with our continued focus on expense management, which significantly increased our net income compared to the first quarter of 2020. As we look ahead, supply constraints will likely affect the availability of parts and new trucks in the next few quarters. However, we expect supply chain constraints to begin to subside late in the third quarter, and for demand for trucks and aftermarket services to remain strong throughout the year. We believe our financial results will be strong in 2021 as the economy continues to recover and businesses reopen throughout the country. In the aftermarket, our first quarter product, service and body shop revenues were $415.7 million, and our absorption ratio was 122.6%. Our aftermarket revenues decreased by 2.9% compared to the first quarter of 2020, but we are seeing some pockets of strain, particularly regarding product sales and activity from refuse, construction, and public sector customers. Service revenues are recovering at a slower pace and for parts. We continue to add technicians to our dealership network in the first quarter in anticipation of increased demand later in the year. As we look ahead, we expect supply constraints to impact products available in the industry for the next few quarters. But we are leveraging our nationwide inventory to lessen any impact that may have. We continue to focus on expanding our technician workforce and service offerings, especially contract maintenance and preventive maintenance. We believe this will contribute to increasing aftermarket demand as the national economy continues to recover through the rest of the year. Turning to truck sales, in the first quarter, we sold 2,995 new Class 8 trucks, capturing 5.4% of the total U.S. Class 8 market. Consumer spending and freight rates continue to be strong, and customer demand was widespread, particularly strong activity from over-the-road, vocational, and construction customers. ACT Research forecasts U.S. Class 8 retail sales to be 249,000 units in 2021, up 27.2% from 2020. While we expect the country's economic recovery to continue, component manufacturers' supply chain issues will limit the growth in Class 8 truck sales in the next two quarters. However, we do expect supply constraints and truck production to improve late in the third quarter. Our Class 4 through 7 new truck sales reached 2,334 in the first quarter, accounting for 3.8% of the U.S. market. Our decline was driven by weak demand from our leasing and rental customers and food service customers, in addition to production shutdowns from some of the manufacturers we represent and component supplier constraints affecting other manufacturers. ACT Research forecasts U.S. Class 4 through 7 retail sales to reach 251,500 units in 2021, up 8.4% from 2020. We expect demand for medium-duty vehicles to remain strong, with our annual Class 4 through 7 truck sales in 2021 being relatively flat compared to 2020. Our used truck sales reached 1,924 units for the first quarter, up 23.5% compared to the same time period in 2020. Demand for used trucks remained high due to new truck production constraints. Further, used truck values increased approximately 10% over the fourth quarter of 2020. We believe that demand and pricing may decrease somewhat as more new trucks become available, but demand remains strong this year. We are confident that the volume and pricing of our inventory will meet the needs of the market. It is important for me to recognize our employees for providing superior service to our customers while remaining focused on protecting the health and safety of those around them. Their hard work has directly contributed to a strong start to the year. With that, I'll take your questions.

Operator, Operator

Your first question comes from Jamie Cook.

Jamie Cook, Analyst

Hi, good morning. Hope you're well, and nice quarter. I guess a few questions, Rusty. First, the margins in the first quarter on trucks were 9.4%. Would that be due to used truck pricing? If you can help me there? My second question relates to the supply chain side, where are the shortages outside of semiconductors? I'm trying to balance how I think about the cadence of your sales, as you're saying the second and third quarter will be impacted by the supply chain, but you're also talking about market share gains for Rush. So I'm just trying to balance those two. So I guess why don't we start there? Thank you.

Rusty Rush, CEO

No problem. Yes, you hit it on the head. From a margin perspective in the first quarter, that had the highest used margin that I can ever remember. So decent volume and high used truck margins. I expect that going forward, used truck margins will still remain high, maybe not quite that high. Supply side is probably the biggest issue. I feel we have a decent inventory. The supply of used trucks across the nation is somewhat limited, so obviously, the whole supply and demand situation is driving prices up. If you go back to COVID, they're up 30% to 35% from April of last year. We expect those numbers to remain high. When you talk about things outside of semiconductors, it's just a myriad of things, Jamie. One day it can be wiring harnesses, another day it might be dash clusters, seats, I think it's just across the board with your Tier 2 and Tier 3 suppliers. They are managing as best they can, but I think they are facing different issues with different suppliers. When you freeze and the supply chain down, you have trouble getting parts out of Mexico. Keeping up with it has been very difficult for Tier 2 and Tier 3 suppliers, not just on the semiconductor side. From a parts perspective, we have more parts backordered right now, and that's one of the issues you run into. You can see this trickle through to parts and service too. I do believe these issues will resolve themselves; they typically do. The chip shortage could last longer than expected, based on some things I read. However, I believe we are past the worst of it, especially here in April and May. Most of this has been expected for a couple of months since February, and I think you'll see improvements as we get later into the summer and into the third quarter. But as for market share gains, if manufacturers are producing less due to these challenges, we will gain our share of the market. I believe our deliveries will be back-end loaded this year. Given the current issues, I expect Q2 to still be flat, slightly up from Q1, but not significantly. A lot of this is dependent upon the shortages.

Operator, Operator

Your next question comes from Joel Tiss.

Joel Tiss, Analyst

I wonder if you can do your presentation over again. I couldn't understand you with your mask on.

Rusty Rush, CEO

Yes, that's my voice, you know.

Joel Tiss, Analyst

So I wonder if you can talk a little bit about your ability to, like, structurally what you've done to change your cost structure and the ability to keep the costs below where they've been historically.

Rusty Rush, CEO

Well, you learn a lot, Joe. You learn a lot in 2020. We are trying to take some of the lessons we've learned and carry them forward. We're doing more with less, and if the current pace continues, we will face some expensive increases. We can’t sell parts, service, and trucks without employing various means to do so. We have internal goals that we will spend less as we grow than we have in the past. We feel we have learned a lot, and we will be able to do that. Expenses will rise, but they won’t increase as steeply as they have in past cycles. We believe we can manage it better. We learned a lot, and we have put controls in place. It's just a balancing act. We’d like to believe that our experiences last year and tighter control will make for more thorough decisions on investments and expenditures. These aspects are part of the bigger picture, and it aligns with keeping expenses low as our growth rates fluctuate.

Joel Tiss, Analyst

Is there anything, maybe not concrete, but anything you can share with us? Perhaps, like peak to peak, we think SG&A could be 100 basis points lower or anything like that we could sort of thought about?

Rusty Rush, CEO

Well, I hate to specify that. We have projections internally, but from your perspective, it would not make a lot of sense. I explained it internally to my team, but expressing it this way wouldn't serve a purpose. Just remember, Joel, you have to segregate those away from G&A because it will fluctuate with how truck sales perform. It is always driven by sales. When sales increase or decrease, axles rise or fall. The G&A piece is what we are focused on. We will spend less relative to the gross profit we create, but I would prefer to keep the specifics internal for now.

Joel Tiss, Analyst

An easy one for Steve, and then I'll leave it for everyone else. Why is the share count rising? And can you give us your estimate of the tax rate for the full year?

Steve Keller, CFO

Yes, the share count, Joel, especially when you look back to 2020, it's a timing issue as much as anything. We continue to repurchase shares. However, a bulk of the shares we repurchased in 2020 happened in the first quarter when the stock dipped. We were opportunistic and bought heavier during that time. Since then, we have continued to repurchase shares, but not at a very high level recently. The other big difference is the way diluted shares are calculated. At this time last year, our stock was trading in the low to mid-20s. Now we are trading in the upper 45 to 50 range. Our diluted shares outstanding, when the stock price is higher, have contributed to the share count increase, along with options that were exercised last year during the last few quarters because our stock price increased significantly. Going forward, it should flatten out because we expect to continue to repurchase shares, and there will be some exercise of options that will likely offset that somewhat. The tax rate was low in Q1 at 20%, which boosted Q1 earnings by about $0.03 from what it will normally be for the rest of the year. For the rest of the year, you should forecast tax rates around 24.5%. Without diving into all the details, this rate reflects some permanent differences between book and tax income that are discrete to the first quarter and primarily relate to option investing and stock price.

Operator, Operator

Your next question comes from Justin Long.

Justin Long, Analyst

Thanks and good morning. I was wondering if you could give us a sense of how parts and service revenue trended on a month-to-month basis throughout the quarter, and maybe an update on April as well, just because weather clearly impacted February. So just wanted to get a better understanding of how the business was trending excluding the weather effects. And then for the full year, I think you talked about parts and service revenue approaching 2019 levels on the last earnings call. Is that still a fair expectation?

Rusty Rush, CEO

Yes, I think that's a fair expectation. Parts and service revenue has been ramping up starting with January, although we did have a dip in February due to weather. Prior to the weather dip, everything was trending upwards too. After that week, it trended up again in March and so far this April, it’s trending up over March. Although it's not dramatic, it's gradually going in the right direction. We expect this trend to continue, especially as we get into these warmer weather months, where we typically see a rise in things like air conditioning services. We normally have a seasonal increase during the summer. Given the number of miles currently driven by trucks, our equipment is getting more usage. I don't see any reason why we won't continue to trend upward and approach 2019 levels. Remember, we started lower last year, but were relatively flat except for the weather issues.

Justin Long, Analyst

Great. What you said at the end was my next question on the parts and service initiatives. I know last year with the pandemic, it was probably all hands on deck, just addressing the challenges posed by that. Can you update us on where you stand in terms of implementing parts and service initiatives? What inning are we in that process? And should we expect to see more of a benefit from those initiatives in 2021 and 2022 now that we are hopefully reopening the economy across the country?

Rusty Rush, CEO

Without getting into specific customers, I have specific customers in mind that we've captured with those initiatives, even during the COVID year. I was out this week conducting presentations and there seems to be a thirst for some of the offerings we can provide given our expansive network and the investments we've made in these initiatives. To answer your question directly, we may be at the top of the first inning; however, we might not yet be into the second inning. I genuinely believe we have significant room for growth ahead over the next couple of years as regulations come into play and the expected growth in the economy continues to materialize. I believe this will strengthen our competitive position with the initiatives we've implemented.

Operator, Operator

Your next question comes from Andrew Obin.

Andrew Obin, Analyst

Hi, Rusty. How are you?

Rusty Rush, CEO

Very good.

Andrew Obin, Analyst

Congratulations to you and the team on a great quarter.

Rusty Rush, CEO

That's more of the same. And it is, thanks Andrew.

Andrew Obin, Analyst

Just a question - a lot of questions have been answered. Can you just talk a little bit more about the markets? How is the pace of recoveries proceeding? And just maybe you can look at geography and tell us, which regions look stronger and which end markets look stronger? Specifically, I'd also love to hear your views on parts and services because fracking has historically been a big meaningful component and it seems to have been dormant for a while. Is there any signs of life there? So it's sort of a two-part question.

Rusty Rush, CEO

Well, we see some good geographic performances; the coasts are both doing well. California, surprisingly, even though it's shut down more than other states, has shown strong performance. Florida is doing great, and Texas is doing well too. West Texas is facing challenges, but I would reference it back. Still, it has been successful, just not at the level we had. Oklahoma's doing well. As we move through the Midwest, it is returning more slowly but it is picking up as well. Statistically, Illinois seems to be recovering, as well as some of our stores. All regions are improving; there isn’t one that is specifically lagging but rather they are in different recovery phases. As for markets, construction and refuse are thriving, and the over-the-road business is stable. This lines up with overall strong sales performance across the spectrum. In terms of fracking, it has seen a marginal increase corresponding with higher oil consumption. While we may not forecast large jumps just yet, it could positively impact in the back half of the year as the economy grows. However, we’re not factoring it into our numbers yet. Overall, I'm proud of the diversification we’ve achieved over the last five years; we are much less dependent on oil and gas than we used to be.

Andrew Obin, Analyst

Just another question. Looking back even beyond a decade, I think your systems and your focus on software and things like telematics have always been part of your secret sauce—and have enabled you to take advantage of that scale. There’s been a lot of talk about accelerating digital efforts and software enhancements as a result of COVID. Could you discuss how your systems performed during COVID and what lessons you learned regarding driving the digital backbone of the organization moving forward? Thank you.

Rusty Rush, CEO

You bet. There are two aspects you are referring to: data and our SAP system. We have taken that data and learned how to use it effectively to generate revenue through our Rush Care programs. I am confident that our connectivity with customers has performed excellently throughout COVID. Without the tools we developed, I know we would not have been able to achieve the results we’ve produced. Programs such as Parts Connect and Service Connect have proven invaluable during this crisis. I am proud of how our organization has leveraged investments from the past decade to create these tools and turn them into revenue streams. We are focused on future investments to ensure we maintain our lead within the industry and continue driving revenue higher, especially in our parts and service sectors.

Operator, Operator

And you do have a follow-up question from Joel Tiss.

Joel Tiss, Analyst

Hi everybody. Must be on vacation today. On the last call, you mentioned that you think that this cycle could be more of a three-year upturn. I wonder if you could update us on that and provide some reasons why you think that?

Rusty Rush, CEO

Well, first of all, I believe it would be a three-year cycle due to current regulations set to kick in around 2024. I think there will be a scramble to purchase trucks ahead of those regulations. From my understanding, the stricter regulations could significantly raise costs on diesel engine trucks, which could lead customers to make purchases before the new regulations come into effect. The economy also plays a pivotal role; as long as it continues to grow, truck sales should follow suit. If the economy stays strong along with the regulations emerging in 2024, there is potential for strong sales for at least the next 2.5 years.

Joel Tiss, Analyst

Okay. Lastly, any early insights on trade with Navistar that will help you prepare? Will they be more aggressive on parts, or will they rebrand products that could impact your franchise value? Is there anything early you’re hearing that could inform your business strategy?

Rusty Rush, CEO

No, I don't see anything at this early stage. I think we have to wait and see. I am excited about the stability and long-term potential that the transition brings us, considering the potential for better technology and the global perspective it will provide. I don't have any specifics on parts or other concerns at this point—we need time for those aspects to play out. However, I believe collaborations that have been in the works for the last few years are ramping up, and we are genuinely excited about the new partnership with Navistar.

Operator, Operator

And there are no further questions at this time.

Rusty Rush, CEO

All right. Well, thank you, ladies and gentlemen, and we will speak to you in July with the second quarter results.