Earnings Call Transcript - RUSHA Q4 2021

Operator, Operator

Good day, and thank you for standing by. Welcome to the Rush Enterprises, Inc Reports Fourth Quarter and Year-End 2021 Earnings Results. At this time all participants are in a listen-only mode. Please be advised that this call is being recorded. I would now like to hand the conference over to your host today, Mr. Rusty Rush, Chairman, CEO, and President. You may begin.

Rusty Rush, CEO

Good morning, and welcome to our fourth quarter and year-end 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, we achieved annual revenues of $5.1 billion and net income of $241.4 million or $4.17 per diluted share. In the fourth quarter, we achieved revenues of $1.3 billion, net income of $68.6 million or $1.18 per diluted share. We are proud to declare a cash dividend of $0.19 per common share. Throughout the year, healthy consumer spending and an overall strong economy led to increased demand for new commercial trucks and aftermarket services. That said, the component supply chain has negatively impacted the production capability of truck manufacturers and aftermarket parts component suppliers as well as our truck and aftermarket sales in 2021. Demand for trucks and parts and services remained strong, especially from our large fleet customers. We remain committed to our strategic initiatives and to diligently managing expenses, which contributed to our outstanding financial results this year. We grew our network of Rush Trucks substantially in 2021. In addition to adding three new locations in Arizona, California, and Illinois, we entered into our largest acquisition in company history, acquiring 17 full-service dealerships and other locations from the Summit Truck Group. In January of 2022, we closed our agreement with Compass, which acquired a 50% interest in Momentum Fuel Technologies. All of these changes reflect our commitment to strengthening and enhancing not only our network but also our products and services we offer to our customers. Looking ahead, supply constraints will likely continue to impact the industry through mid-2022. But we expect healthy demand for new trucks as well as aftermarket parts and services due to the country's continued economic recovery. We believe our continued focus on aftermarket initiatives and expense management, along with network growth, will contribute to increased revenue and profitability in 2022. In the aftermarket, our annual parts, service, and body shop revenues were $1.8 billion, up 12.1%, and our annual absorption rate was 129.8%. We added approximately 150 service technicians to our workforce in 2021 and remain focused on our strategic aftermarket initiatives, including our Express services, mobile service, and ongoing maintenance. Considering that there are fewer working days in the fourth quarter, we were particularly pleased with our fourth quarter aftermarket revenue, which was essentially flat compared to the third quarter. We expect some supply constraints to continue through the middle of the year. But we believe the demand for aftermarket parts and services will remain strong. As we continue to add technicians to our workforce and implement our existing strategies at new locations, we believe our 2022 results will outperform the industry. Turning to truck sales, in 2021, we sold 11,052 new Class 8 trucks, representing 4.9% of the total U.S. Class 8 market. An ongoing economic recovery has led to strong demand for new Class 8 trucks, but limited new truck production has impacted our deliveries throughout the year. In the fourth quarter, consumer bidding remained healthy, and we experienced an increase in sales as the year ended, which historically equates to improved truck sales results in the first quarter. According to ACG Research, U.S. Class 8 retail sales are forecasted to reach 247,500 units in 2022, up 8.9% from 2021. While we expect to continue feeling the effects of production capacity limitations, demand for new truck sales remains strong. Due to our recent acquisitions and a strong backlog, we believe our Class 8 truck sales will outpace the industry this year. Our Class 4-7 new truck sales reached 10,485 units in the third quarter, accounting for 4.2% of the U.S. market. Although demand remained strong throughout the year owing to a healthy economy, production capacity was limited as some manufacturers focused on increasing heavy-duty production over medium-duty. Our Class 4-7 retail sales would be 263,700 in 2022, up 5.6% from 2021. As we look ahead, we believe demand will be healthy, but production constraints for Class 4-7 will likely continue. We expect our results in 2022 to grow at a pace similar to the expected growth in the industry. Our used truck sales reached 7,527 units in 2021, up 1.7% year-over-year. The used truck demand and values remain strong, largely due to production limitations of new Class A trucks and strong spot rates across the country. In 2022, we expect used truck management to remain strong, although values may begin to normalize in the second half of the year. In 2021, we made significant strides in developing strong expense management processes to achieve record-high profits, pay off all of our remaining real estate debt, and restructure our lease and rental fleet debt to allow us to take advantage of our strong free cash flow while we paid the majority of the purchase price of our acquisitions in cash. We are proud that our approach has helped us maintain our balance sheet and cash positions while we continue to return value to our shareholders through earnings growth, quarterly dividends, and our stock repurchase plan. While expense management will remain a focus in 2022 due to normal seasonal increases in employee benefits, payroll taxes, and equity ramps, we expect our general and administrative expenses to be sequentially higher in the first quarter of 2022 compared to the fourth quarter of 2021. As always, I want to thank our employees for their outstanding work in 2021 for providing superior service to our customers and for remaining committed to our long-term growth goals, especially given the continuing challenges of the COVID-19 pandemic. It is important that I emphasize that our net income and EPS results could not have been achieved without their dedicated work and focus. With that, I'll take your questions. I also understand my voice is worse than usual today, so bear with me; I always have a deep voice, but I am suffering from laryngitis right now, though I feel great otherwise. So we'll take questions now.

Operator, Operator

Please stand by while we compile the Q&A roster. And our first question comes from Jamie Cook from Credit Suisse. Your line is now open.

Jamie Cook, Analyst

Hi, good morning. Congrats on a good quarter. And Rusty, you sound great. A couple of questions: one, understanding energy is a small part of your business at this point, just given the rebound in prices, can you talk about if you're seeing any sort of signs of life that could be a potential positive for 2022? And then my second question relates to what you're seeing on the pricing front on the new truck side and the market share opportunity with some of PACCAR's big product launches this year, both on medium and heavy? Thanks.

Rusty Rush, CEO

Thanks, Jamie. When it comes to oil and gas, we are seeing some pickup from a parts and service perspective. It has picked up, but it is gradual. I was speaking with people on my board; one gentleman in particular is quite knowledgeable about it, and we both agreed that the actions of the country regarding the oil business are not different; there is a much more disciplined approach, but it is coming back slowly. I think we are able to see some drilling activity gradually returning. That's a positive sign, but I can't sit here today and say that it’s going to make a huge difference in our results. People in the industry are taking a much more disciplined approach, especially regarding capital expenditure. While there is still room for potential improvement in truck sales, we haven't been able to attribute any significant changes to the energy sector just yet.

Jamie Cook, Analyst

There are two questions: what you're seeing on the pricing front? And then I just wanted to get into the market share opportunity for some of the new product launches.

Rusty Rush, CEO

Yes. All manufacturers are catching up to the supply chain and inflationary pressures, so that is going to translate directly to increases for the end-user. It took a little while during the year, as you know, with different surcharges applied by various manufacturers trying to adjust to those price changes, especially after experiencing significant disruptions in the supply chain. These price increases are a reality, and I expect that pricing will continue to go up. Manufacturers are exhibiting some discipline in managing their pricing in order to avoid repeating last year’s experience. Regarding the market share opportunity with new product launches, we have not only retained our historical areas of responsibility but have also expanded due to our acquisitions. As we look at our numbers, they indicate that we will have an increased allocation, which no doubt should translate into greater market share growth moving forward.

Jamie Cook, Analyst

And then the last question, about the market share opportunity for Rush with some of the new product launches.

Rusty Rush, CEO

No question; we are poised for better market share with our recent acquisition given that we hold assets in Midwest markets, which are significant fleet areas. However, the allocation remains the constraint as we foresee a limited product availability impacting our ability to expand into new markets and capture further business opportunities. I am optimistic about our allocation numbers for this year and anticipate that we'll be able to deliver a larger number of trucks than last year, which is a positive outcome given the supply chain setbacks. Let’s talk about the Summit acquisition. We just completed our first month with the acquisition. While we've done due diligence, the real test comes from experiencing the operations firsthand. My preliminary assessment is very positive—there's a great team in place, and we are pleased with the early results. Transitioning to our operations platform will take time as we have not yet switched them over but plan to do so in the coming months. There will be an acclimation period for the teams involved, but we see potential for synergy here, particularly in expanding our technician base and adding mobile services. However, these changes won't happen immediately; they will roll out over the next year or two.

Justin Long, Analyst

Understood. So you talked about truck sale expectations this year. When you think about the parts and service business, what are your expectations for growth in 2022, I guess both organically and then once you layer in Summit?

Rusty Rush, CEO

We're aiming for high single-digit growth driven by some inflationary pressures, and with the addition of Summit, we're looking for high teens growth rates on both the service and parts sides. However, these are early projections, and there are numerous moving pieces. As we gain more insight into our operations post-acquisition, I believe there may be more upside potential.

Justin Long, Analyst

Thanks, and last question for me. Just looking at the first quarter, I know there are a lot of moving pieces with Summit getting layered in. I think you mentioned earlier, Rusty, G&A would be up sequentially. Any way to help us think about kind of EPS from Q4 to Q1 and what you're expecting? Maybe put some numbers around that G&A increase.

Rusty Rush, CEO

When it comes to EPS, I’m not going to give specific numbers. Historically, Q1 is our softest quarter. We're layering in more G&A in addition to equity compensation and other seasonal expenses. However, I do expect strong sales results, especially as our business is solid. While G&A will be higher and we are adding Summit to the mix, I believe it will normalize as the year progresses, particularly in Q2, Q3, and Q4 as we resolve the supply chain constraints. I expect future performance to improve as the year goes on and we ramp up deliveries.

Andrew Obin, Analyst

Hey Rusty, how are you?

Rusty Rush, CEO

I'm fine.

Andrew Obin, Analyst

Yes. I would say you sound almost presidential. That's how I would just start to feel.

Rusty Rush, CEO

Let's leave politics aside this morning.

Andrew Obin, Analyst

So the question I have for you is, given all the inflation, right, clearly, the execution has been the differentiating factor in your results, given all the inflationary pressures, right? When we talk to you guys, it seems that the way you run a company differently this cycle, right? You've committed to no cost creep in this cycle, right, keeping control over costs over the next couple of years. You've changed, I think, internal compensation metrics; you changed communication internally, right? So the question I had for you, how do you manage or how do you pivot your strategy on containing the costs while being able to grow in this environment where we're short of labor, short of components and clearly, costs are going up? Thank you.

Rusty Rush, CEO

Great question, Andrew. I can't hide from inflation—it's real and present. However, if we manage to capture revenue increases, then we can mitigate the impact of rising costs on the expense side. My aim is to maintain that critical balance between revenue and expenses. Higher fuel and labor costs affect everyone, but if we have the right controls in place to manage costs and maximize revenue, we can achieve proportional growth. The lessons learned during the pandemic have shaped our current strategies, and we are more prepared going forward. Our goal remains focused on maintaining that efficiency and profitability ratio in this inflationary climate.

Andrew Obin, Analyst

Thank you. And the other question I have, when we do our channel checks, there is a debate about the impact of higher interest rates and the expectation of high-interest rates on the underlying economy. You've been around for a while. You touched a lot of industries, a lot of geographies. First, can you just tell us what you're seeing in the broader economy? And second, could you share your thoughts with us based on the conversations you've had with customers about the potential impact of higher interest rates on just the underlying economy, not the truck cycle, but just the underlying economy as I said, because clearly, you now touch a very broad swath of the economy.

Rusty Rush, CEO

Well, right now, the concerns about increased interest rates are valid, but I haven't seen it slow down business. The balance sheets for many companies remain strong. The smaller companies may feel a pinch as they typically do during such shifts, but the larger players seem to be retaining strong purchasing power. I haven’t seen anyone change their decision-making process yet, although historical trends suggest that eventually, higher rates will slow down purchases. For now, the demand remains robust, and I don't foresee immediate changes to the operational posture among our larger customers. Yes, you should think about the broader economy as still being quite strong, allowing for some leeway concerning interest rates. The initial reactions seem to be muted, especially among larger players who are less leveraged. This dynamic could change if rates escalate further—small to medium-sized businesses may struggle—but at present, demand remains high.

Andrew Obin, Analyst

Rusty, in my 25 years, you are one of the smartest, sharpest guys I have met, and despite sounding presidential, I would take your advice over anyone else's.

Rusty Rush, CEO

Thank you, Andrew. I appreciate the kind words.

Operator, Operator

And I'm showing no further questions. I would now like to turn the call back over to Rusty Rush for closing remarks.

Rusty Rush, CEO

We appreciate you taking the time this morning to listen to our fourth-quarter and year-end results. We look forward to talking to you soon, about the middle of April with our first-quarter results. Thank you very much. We'll see you then.

Operator, Operator

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