Earnings Call Transcript - RUSHA Q3 2025

Operator, Operator

Ladies and gentlemen, thank you for being here. I would like to welcome everyone to Rush Enterprises, Inc. as we discuss our Third Quarter 2025 Earnings Results. Now, I will hand the conference over to Rusty Rush, our President, CEO, and Chairman of the Board. You may begin.

W. Rush, President, CEO and Chairman

Good morning, and welcome to our third quarter 2025 earnings release call. With me this morning are Jason Wilder, 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. 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, 2024, and in our other filings with the Securities and Exchange Commission. As indicated in our news release, we achieved third quarter revenues of $1.9 billion and net income of $66.7 million or $0.83 per diluted share. I am pleased to announce that our Board of Directors approved a $0.19 per share cash dividend. The commercial vehicle industry continued to face challenging operating conditions in the third quarter of 2025. Freight rates remain depressed and overcapacity continues to weigh on the market. In addition, while the industry gained some clarity regarding the tariffs that will be imposed on certain commercial vehicles and parts beginning November 1, economic uncertainty and regulatory ambiguity remains, especially with respect to engine emissions regulations. These factors are impacting our customers' vehicle replacement decisions. Despite these headwinds, I am proud of the financial performance our team delivered in the third quarter. Our employees' commitment to operational discipline and customer service was evident in our ability to maintain strong aftermarket results and manage expenses effectively. And I'm deeply grateful for their dedication. Our aftermarket operations accounted for approximately 63% of our total gross profit in the third quarter, with parts, service and collision center revenues reaching $642.7 million, an increase of 1.5% compared to the third quarter of 2024, and our absorption ratio was 129.3%. In the third quarter, our aftermarket products and service businesses remained resilient despite ongoing market challenges. Our strategic focus on technician recruiting and retention, expanding our aftermarket sales force and identifying new customer segments helped to offset weak demand. Looking ahead, we anticipate continued challenges in our aftermarket business due to seasonal trends and broader industry headwinds, but we remain confident that our diversified customer base and operational discipline will allow us to successfully navigate the remainder of the year. With respect to truck sales, we sold 3,120 new Class 8 trucks in the U.S. during the third quarter, accounting for 5.8% of the total U.S. market. While this represents an 11% year-over-year decrease, we outperformed the market primarily due to stable demand from our vocational customers, underscoring the strength of our diversified customer base. Looking forward, economic and regulatory uncertainty continues to dampen customer demand, particularly with respect to new Class 8 trucks. We believe that the weak demand the industry is currently experiencing will negatively impact new Class 8 truck sales for at least the next two quarters. That said, if stricter emission laws become effective as planned and if capacity continues to exit the market due to bankruptcies, retail sales being below replacement levels, and continued enforcement of government policies regarding English language proficiency and non-domiciled drivers, Class 8 truck sales may be strong in the second half of 2026. In the medium-duty market, we delivered 2,979 Class 4 through 7 medium-duty commercial vehicles in the U.S. in the third quarter, representing an 8.3% year-over-year decrease and a 5.6% market share. We also sold 448 Class 5 through 7 commercial vehicles in Canada, which represents 10.7% of the new Canadian Class 5 through 7 commercial vehicle market. Despite ongoing industry headwinds, our medium-duty results in the third quarter outpaced the broader market. Our performance was bolstered by a significant increase in bus sales following our acquisition of an IC Bus franchise in Canada, which further diversified our customer base. Looking ahead, we expect medium-duty commercial vehicle sales to remain stable through the remainder of the year. We sold 1,814 used commercial vehicles in the third quarter, essentially flat compared to the same period in 2024. While financing remains a challenge for used truck buyers, we believe our inventory is rightsized and that our used truck sales strategy is on track. Unlike the new truck market, the used truck market is less exposed to tariff concerns and regulatory uncertainty, which may provide customers more confidence and incentive to consider used trucks as part of their fleet mix in the near term. We expect fourth quarter used truck sales to be in line with the third quarter. Rush Truck Leasing achieved record revenues of $93.3 million in the third quarter, up 4.7% year-over-year. Our full-service leasing revenue increased as we brought new vehicles into service, which also helped lower operating costs and increased profitability. Rental utilization was lower year-over-year, but improved sequentially, and we are confident our leasing and rental performance will be solid for the remainder of the year. On the capital allocation front, we remain focused on returning value to shareholders during the third quarter. We repurchased $9.2 million of our common stock as part of our expanded $200 million repurchase authorization, and we also paid a cash dividend of $14.8 million in the quarter. In summary, despite the aforementioned industry headwinds, I believe we've delivered solid results, and I'm proud of our team's performance in the third quarter. Our employees across the U.S. and Canada continue to demonstrate resilience, and I'm deeply grateful for their dedication. With that, I'll take your questions.

Operator, Operator

Our first question comes from Andrew Obin from Bank of America.

Andrew Obin, Analyst

I'm sure the team works very hard. Just a question, could you just tell us, we've been stuck in this cyclical malaise for a while now. We've been waiting for the turn of the cycle for a while now. Can you just expand and tell us what are you seeing? When do you feel things actually bottom? And what's the path going forward? What gets this thing sort of on course and just lets the sales actually go up eventually?

W. Rush, President, CEO and Chairman

Right. And I'm guessing, Andrew, that you're speaking about from my customers' perspective. Is that correct?

Andrew Obin, Analyst

Yes, correct. Yes.

W. Rush, President, CEO and Chairman

I recently spent a couple of days in San Diego at ATA, the largest truck convention, where I met with several customers. As I noted in the press release, this is the first time I'm mentioning that we've been experiencing a freight recession for three years. Typically, such downturns last only 12 to 16 months, and I have never seen one persist this long in my career. The supply hasn't exited the market as expected. Demand is more influenced by economic factors like tariffs, which I can’t comment on as thoroughly. However, from the supply standpoint, it’s surprising how slowly it has come out. After rates peaked in '21 and '22, we've seen a prolonged period of depressed freight rates, particularly in the truckload segment, though less so in LTL. I believe the government has finally started to address some issues. While I was there, I learned that many people are discussing the non-domiciled driver situation and the importance of English-speaking proficiency. Regarding non-domiciled drivers, I've heard various estimates, and if enforcement happens, it will rely on the states. Some figures I've heard suggest 5%, but when I spoke to certain carriers, they indicated that estimate was much lower. Currently, around 15 to 20 states are beginning to enforce these regulations, and they all need to join in. This could potentially reduce the number of drivers by up to 15%, likely affecting smaller carriers who have been barely managing to survive. These smaller carriers typically exit during freight downturns, unlike larger, better-capitalized firms; it's the smaller ones that frequently fluctuate based on rates. And so that's one of the things that I believe will, for sure, help. Also, I think we — people continue to buy trucks after we came off of allocation; we should have not slowed down selling trucks or producing trucks quicker than we did because there's two sides to it, right? That's the attrition side. Well, the other side is what are you producing, right? Well, right now, the last — the back half of this year, I mean, you're talking we're going to be down in production 30%, 35%, 40% at all the OEMs combined. I'm not sure exactly where it is, but it's down dramatically. And I think that's going to continue into the first quarter for sure, maybe the first half. If you add that, you think about that, so you're shutting down the supply side, the intake side, you're taking people out of the attrition side. Well, you should start to get a more rightsized or balanced fleet out there with what market demand is, right, or what freight tonnage is. You can see that there's a change coming. While carriers would prefer a delay in the new law that reduces NOx particulates from 200 to 35, the legislation is set to take effect as it stands. I understand the carriers' position and support them, but there is pressure from customers on the EPA to postpone this change. If the law goes into effect as planned, it will likely decrease warranties because the costs associated with it will rise. This will add to the existing financial burden from new tariffs, impacting an industry already experiencing a three-year downturn. The carriers are advocating to maintain the current limit of 200, and I stand with them. However, according to the law, it will drop to 35, which means increased costs by the end of next year. With the new tariffs starting soon, which have been in place throughout the year, and the implications of the new 232 rule, the cost of trucks will definitely rise by the end of next year. This, in combination with a more appropriately sized fleet for the environmental demands, suggests we could see a much stronger performance in the latter half of next year. Now I would prefer that we also have freight tonnage growth with that. So it's not just regulatory driven. I think if we can get some freight growth, which I hope we get some certainty. I mean, uncertainty for everybody has been the craziest thing trying to run a business all year, okay? But we get some certainty around whatever it is, add that in, like I said, take it supply out. And even if it stays that 35% will help truck sales, but I'd like for my customer to be more healthy. And I think getting the right-sized fleet is the most important thing with a pickup in freight tonnage. And that's why you see some optimism. I'm more optimistic now than I have been after coming back from San Diego, that's not happening right now, okay? Remember, we had 5 months, 6 months of the lowest order intake since 2009. I'm the tail of the dog. So we are going to feel it in Q4 and Q1 without question. At the same time, it feels good to really believe that you can see real drivers to get back and get the market rightsized long as the economy stays in good shape. That's sort of the way I see it.

Andrew Obin, Analyst

And just a follow-up question. I ask it on every call, but what's your read on the macro, just general macro outside of the stuff that feeds into your customer base? Is it getting better? Is it getting worse? What are you excited about? What are you worried about?

W. Rush, President, CEO and Chairman

No, I'm not an economist, Andrew. What I worry about is unemployment, which would definitely impact consumer demand. That concerns me. I don't believe we have fully experienced the effects of tariffs. We had prebuying before August, but as we deplete those inventories, we need to restock. I’ve noticed many large companies, manufacturers, and customers across various sectors have absorbed a lot of those costs. I don't think they can sustain this indefinitely, which will eventually be passed down to the consumer. Those are my main worries. I hope we can navigate these challenges. In a slightly more inflationary environment, if tariffs are implemented, given that many people had pre-bought before August and now we’re draining those stocks, it could lead to increased unemployment. I've come across some anecdotes that make me a bit uneasy. I can’t predict exact outcomes, but I have concerns as I observe what's happening around me. I might not be an economist, but I have a substantial understanding of various companies and the current situation.

Andrew Obin, Analyst

I'll take the opportunity to ask one last question. How is your parts and service business performing on a daily basis as we approach the year-end? Is it improving or declining? This is a crucial factor and significantly impacts your financials.

W. Rush, President, CEO and Chairman

Yes, it was flat to slightly up for the third quarter, but September was softer than I had hoped. We naturally have seasonality, and I've mentioned before that if I could skip over November, December, January, and February for business reasons, I would, although I would keep the holidays for the kids. From a business perspective, it can be challenging, especially for our stores in the South. We usually see a decline of about 3% to 4% from Q3 to Q4 and Q1. I expect things to pick up again by late February or March, but September saw a quicker downturn. I will know more once October is complete. I'm aiming to be close to flat compared to last year. I believe we might achieve that, but it remains to be seen. There are indicators showing that we have the same amount of backlog in our parts and service work in progress. I'm hopeful that the changes are just typical seasonal fluctuations, with one less working day impacting our gross profit, particularly given the significance of our parts and service operations. With the holidays and factories shutting down between Christmas and New Year, it's something we deal with every year. I expect to stay within our usual range. I was disappointed with September and generally anticipate starting off stronger in October. We’ll see once the month wraps up tomorrow night on Halloween when all the tickets are closed and everything is accounted for. I anticipate that our numbers will be close to last year’s, and if we can achieve that, I’ll be satisfied given the current environment.

Operator, Operator

Our next question comes from Brady Lierz from Stephens.

Brady Lierz, Analyst

I wanted to begin with the outlook for the remainder of 2025 and the first half of 2026. You've mentioned a couple of times that you anticipate a challenging end to 2025 and that this will continue into the first quarter. Could you provide more detail on that? What are your customers saying about why they are not placing orders? Is it due to uncertainty regarding regulation, uncertainty around tariffs, or both? If we had more clarity on these issues, could we expect to see a significant improvement? Also, your vocational customers seem to be more resilient. Are there specific company opportunities that could help mitigate this weakness and allow you to outperform the market?

W. Rush, President, CEO and Chairman

From a delivery standpoint, we slightly outperformed the decline in Class 8. The market was improving more than that during Q3. Looking ahead to Q4 and possibly into the early part of Q1 or even Q2, it's hard to predict. Remember, as I mentioned earlier, we are at the end of the supply chain. Analyzing the order intake from April through September, September was particularly low at 20,000 units, with some months dropping to 7,400 units. In North America, we saw levels around 11,000 units. Those were the worst order intake months since 2009. Every manufacturer has had to take more downtime since July. Everyone produced as much as possible in the first half of the year and not a single manufacturer has avoided substantial downtime and reduced production this quarter. Consequently, we are building fewer trucks, which means there is less available for sale due to diminished demand. You can identify the key factors influencing the business. It primarily revolves around their operations and the broader industry. The current uncertainty related to tariffs affects freight costs and truck prices. Additionally, there's a question about the emissions regulations expected next year. Many I've spoken with believe that if their operations can adapt, which isn't happening right now due to ongoing supply challenges I mentioned earlier about the truck availability needing to align with freight demand. If we can establish some consistency regarding emissions regulations, whatever they may be, I believe the major freight customers will likely attempt to advance some of their orders. While they may not make significant pre-buys, they could shift purchases initially planned for early 2027 into the latter part of the year. If it remains unchanged and there is no pause, they may experience some relief, which could negatively impact my truck sales in the latter half of the year. However, for their benefit, I hope they find that relief. They really need to align the supply with tonnage in order to secure better contract rates. On the truckload side, achieving a 2% increase was considered fortunate this past year because rates have significantly declined by 10% to over 15% in the previous years. Meanwhile, costs related to trucks and operational inflation have continually risen, leading to unfavorable operating ratios that are not in line with historical performance. Conversely, less-than-truckload services have performed better, particularly due to the previous advantages stemming from the exit of Yellow, the third largest carrier, which created higher barriers to entry in the LTL market. Consequently, the LTL sector has managed to cope better than truckload. Nevertheless, I must emphasize that the upcoming quarters are likely to be challenging, as indicated by the order intake trends. It hasn't been a scenario where everyone is rushing to order trucks; in fact, it has become quite difficult to provide pricing for truck deals. But remember, the tariffs were just defined 1.5 weeks ago, and manufacturers are currently sifting through the information to ensure they fully understand it. The complexity arises from how these tariffs are calculated based on where products are manufactured and the origins of their suppliers, as various suppliers are involved. I expect we will have much more clarity on how things will unfold in the next 30 to 45 days. There hasn't been much clarity at ATA because the situation is beneficial for some manufacturers and detrimental for others. They are working to understand the implications of Rule 232, which was released about 10 to 12 days ago, and people are currently trying to analyze it thoroughly to ensure they comprehend it correctly. To be frank, it’s challenging to price for many clients right now. When you can’t provide accurate pricing to manufacturers, it complicates the purchasing process. This year has been chaotic, as quotes have often been valid for only 90 to 120 days due to the constantly shifting environment around tariffs. There are numerous uncertainties; if certain conditions are met, then a specific outcome will follow, but if not, it's ineffective. This is the environment we have been navigating for over six months, making things quite challenging. All I can emphasize is the need for clarity and reducing uncertainty while continuing to manage supply. I hope to see a slight increase in freight early in tonnage, but I don't observe it at the moment. However, I remain hopeful that by early next year, we will see some positive movement as we progress from the first quarter into the second. As we reduce supply and decrease truck production, the overall truck supply should naturally tighten. The tricky part has been that during the freight recession, we continued to build and sell more trucks than we probably should have. Now, we are focused on right-sizing, combined with the government initiatives regarding drivers that I mentioned earlier. So, while I do have some optimism, I don't anticipate significant changes in the next six months.

Brady Lierz, Analyst

That's very helpful color. And if I could just follow up on medium-duty. Medium-duty has continued to kind of be a stable growth driver for your business. Can you talk about what you're seeing in medium-duty into the end of the year? And just maybe any preliminary thoughts on medium-duty in 2026?

W. Rush, President, CEO and Chairman

Medium-duty operates in a distinctly different environment compared to the Class 8 market. We anticipate it will remain relatively flat in the fourth quarter compared to the third quarter. The majority of the decline will definitely be on the Class 8 side. As I've mentioned, we will undoubtedly deliver fewer trucks because the order intake suggests a significant reduction in deliveries across the country, as we haven't received many orders in the past six months. There's significant leasing activity in the medium-duty sector and with our Ready-to-Roll inventory. This is primarily influenced by the general economy, particularly the housing market. I'm optimistic about our prospects for the upcoming year, although we may experience some challenges, though perhaps not as severe. I believe the medium-duty market will remain more stable than the Class 8 market over the next few quarters. While I do not expect to match our performance from this year, I anticipate the downturn will not be as significant as seen in the heavy-duty sector. Currently, the situation remains quite competitive. There are many opportunities available, as most manufacturers still have open slots. The industry typically experiences shutdowns from November 1 and in the last ten days of December, and many backlogs remain unmet, leading to these shutdowns. Overall, I believe the medium-duty market will handle a downturn better due to its diverse market presence. However, it will still experience some impact.

Brady Lierz, Analyst

That's super helpful. Maybe just a final quick follow-up. Could you share what you're seeing in the used truck market, particularly how is used truck pricing trending just given this, like you said, a volatile backdrop to say the least?

W. Rush, President, CEO and Chairman

I believe the situation has been relatively stable. A year ago, I would have said that depreciation was much higher, but now it aligns more closely with typical expectations from a percentage perspective, which is a positive change. We've done a commendable job managing our used truck inventory, especially during the challenging winter months. It's important to be adaptable when it comes to taking trades, and we've intentionally increased our inventory slightly over the past couple of quarters to facilitate more movement. Overall, our current inventory levels reflect a balance between past and present strategies since it's crucial to turn over our used inventory. While our turnover rates may not be as tight as they once were, maintaining adequate inventory is essential for our production goals. When thinking about used trucks, they don't have to deal with tariffs or emissions, which gives them an advantage. There is certainly a level of certainty with used trucks, so buyers don't have to worry about those factors, which is a positive aspect. We've had a strong year, and we anticipate maintaining that performance moving forward. However, the challenge lies in the fact that volumes can't compensate when heavy-duty sales decline. It's important to remember that our company has multiple revenue streams. Our leasing fleet is performing very well and is highly profitable, and we also see profits from our parts and services. While truck sales are a significant part of our business, they aren't the most stable; parts and services provide consistent revenue without the fluctuations seen in the Class 8 truck sales market. Thankfully, our diverse revenue streams allow us to manage challenges effectively, and we perform exceptionally well when all areas contribute. But the good part is, unlike some other businesses where they're tied to just one or two revenue streams, we have many more, which allow us to get through environments like we're seeing right now and continue to put out the kind of results we do. Are they the best results we've ever had? Of course not. But we're not going to sell as many trucks, but they're going to be solid and they're going to be good. And forgive the environment, a whole lot better than my customer base has had to put up with. I feel sorry sometimes what they've had to go through the last three years.

Operator, Operator

Our next question comes from Avi Jaroslawicz from UBS.

Avinatan Jaroslawicz, Analyst

So I know parts and service business is a pretty big focus area for you guys in trying to grow that. Can you just remind us what you're doing to pick up more share in that part of the business? And is that more challenging to pick up more share in a softer market like that, like what we're seeing now? And also, where are you still seeing opportunity within that space?

W. Rush, President, CEO and Chairman

It is definitely more challenging because the overall market is down. However, we are managing to hold our own this year. I can't say we've gained as much as we hoped to, as this environment has become more competitive, especially with the inflation issues we've encountered in the parts sector this year. Some companies are focused on generating cash, which sometimes means prioritizing immediate returns over margins. Therefore, we need to find a balance between gaining market share and maintaining margins and results. This is particularly difficult when the sector isn't growing, as we have remained relatively stable throughout the year. I would say we are performing in line with, or perhaps slightly better than, the overall market when comparing independent dealers and regular dealers. From a dealer perspective compared to other dealers, I believe we're in a strong position. Independents tend to be more aggressive in this type of environment. However, our overall approach is what matters. I prefer to evaluate our performance annually and over a span of a few years rather than quarterly. If the market grows by 5%, we aim for a 6% increase, which indicates we're gaining market share. Historically, we have managed to do this and, with some mergers and acquisitions, we have outperformed in certain years. While I can't say we've achieved that this year, I feel we've made some progress, even if it’s not as much as I'd like. Our goal is to be 20% better. Achieving that means gradually increasing our market share, rather than expecting quick results. Our technology and data capabilities are unmatched, and we continue to enhance them to support growth. We always have projects aimed at improving our operations, making it easier for our customers to do business with us. This is a crucial aspect as we look to the future. The industry isn't as fast-paced as consumer sectors, which can be a challenge since we need to keep up with our customers. I don’t mean to criticize our industry, but it generally requires a more hands-on approach compared to other consumer markets. Nevertheless, technology is becoming increasingly important. I prefer not to discuss some of our specific activities as I view them as proprietary. Our investments in people and our growth in the mobile service sector are clearly defined with specific goals. Many investors are aware of these objectives as we often elaborate on them during conferences. I have three upcoming presentations over the next month to share details about these investments. Our aim is to expand our mobile service fleet and grow our outside service and parts, known as ASRs, as well. However, it's important to proceed cautiously in a tightening market. We believe there is still significant growth potential and we intend to uphold our targets, aiming for around 20% improvement in growth. If the market grows by 5%, we want to exceed that with a 6% growth rate. We won't chase unrealistic gains; taking a 15% share in a 5% market isn't feasible if it means sacrificing value. I don't believe that approach is wise.

Operator, Operator

That concludes the question-and-answer session. I would like to turn the call back over to Rusty Rush, President, CEO and Chairman of the Board, for closing remarks.

W. Rush, President, CEO and Chairman

Well, everyone, this is the longest gap between earnings calls. We won't be talking to everybody until February. So in the meantime, I wish everyone a happy holidays and safe holidays, and we'll talk to you in February. God bless you all. Thank you.

Operator, Operator

This concludes today's conference call. You may now disconnect.