Earnings Call Transcript - RUSHA Q4 2024

Operator, Operator

And good day, and thank you for standing by. Welcome to the Rush Enterprises, Inc. fourth quarter 2024 earnings results. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Rusty Rush, Chairman of the Board, Chief Executive Officer, and President. Please go ahead.

Rusty Rush, Chairman, CEO, and President

Well, good morning, everyone. Thanks for joining our fourth quarter and year-end 2024 conference call. I have with me today Jason Wilder, Chief Operating Officer; Steve Keller, Chief Financial Officer; Jay Hazelwood, Vice President, Controller; and Michael Goldstone, Senior Vice President, General Counsel, and Corporate Secretary. Now Steve Keller will say a few words regarding forward-looking statements.

Steve Keller, Chief Financial Officer

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 other filings with the Securities and Exchange Commission.

Rusty Rush, Chairman, CEO, and President

As we mentioned in our news release, we had $7.8 billion in annual revenues for 2024. Our net income was $304.2 million, or $3.72 per diluted share. For the fourth quarter, our revenues were $2 billion, and our net income was $74.7 million, or $0.91 per diluted share. We are also happy to announce a cash dividend of $0.18 per common share. 2024 was a challenging year for the industry, which faced persistent headwinds, including the ongoing freight recession, high interest rates, and economic uncertainty. These factors hit over-the-road carriers hard, leading to weak demand for new Class 8 trucks from that customer segment. However, our strength in public sector and vocational markets helped balance things out, and we managed to hold our ground in a tough Class 8 environment. Our Class 4 through 7 truck sales were strong across various customer segments, and we outperformed the market in medium-duty truck sales. The used truck market remains challenging, but we continue to execute well on our sales strategy, and we were able to deliver strong results. The same challenging operating conditions that impact new Class 8 truck sales also impacted the aftermarket industry. But our sales force's dedication to our strategic initiatives helped us to slightly outperform the industry. Despite the difficult operating environment that we faced in 2024, I am very proud of our financial results. Focusing on the aftermarket, our parts, service, and body shop revenues of $2.5 billion last year were down 1.8% from 2023. Our absorption ratio was 132.2% compared to 135.3% in 2023. Even though our aftermarket revenues were slightly down, we grew our market share by expanding our national account sales force, which allowed us to enhance our service to large strategic accounts. Demand was sluggish for the over-the-road, energy, and wholesale customers, but we saw strong sales to vocational, public sector, and medium-duty leasing customers. In 2025, we expect aftermarket demand to remain soft in the first few months due to the freight market continuing to struggle, which results in lower over-the-road fleet utilization rates. However, we are optimistic that demand will pick up as the year goes on and the freight market improves. We believe that our focus on growing our national account customer base and our other aftermarket strategic initiatives will result in revenue growth this year. We are also committed to expanding our technician workforce in 2025, particularly mobile technicians, which will allow us to reduce vehicle downtime in our shops, better serve our customers, increase back counter parts sales, and grow market share. Regarding truck sales, we sold 15,465 new Class 8 trucks in 2024, down 11.4% year-over-year, representing 6.1% of the U.S. market and 1.7% of the Canadian market. Market conditions were tough with high inventory levels and competitive pricing. However, our sales to specialty market customers helped offset weak demand from our over-the-road customers. ACT Research forecasts U.S. and Canadian sales of new Class 8 trucks to be 277,200 units in 2025, basically flat with 2024. We expect sales to be challenging in the first half of 2025, but we anticipate that demand will improve in the second half of the year as freight rates recover. In addition, despite uncertainty around engine emissions regulations, we believe the EPA's clean diesel regulations will drive some pre-buy activity later this year. We are optimistic that pre-buys along with strong vocational sales will allow us to achieve strong new Class 8 truck sales and keep pace with the market in 2025. Our Class 4 through 7 new truck sales were up 5.1% year-over-year, with 13,935 units sold in 2024, representing 5.3% of the U.S. market and 3.1% of the Canadian market. Medium-duty vehicle production stabilized, and delivery lead times improved throughout the year. Our strategic focus on diversifying our customer base and focusing on large national accounts paid off, and we outperformed the market in new Class 4 to 7 truck sales. ACT Research forecasts U.S. and Canadian sales of new Class 4 through 7 trucks to be 282,250 units in 2025, up 5.3% from 2024. However, supply has caught up with demand, and we believe the medium-duty market may begin to slow in 2025. Nevertheless, we believe that our expertise in the medium-duty sector and our ready-to-roll program will help us achieve strong medium-duty commercial sales in 2025. We sold 7,110 used trucks in 2024, basically flat year-over-year. The used truck market was challenged due to values continuing to fall and tight credit, but our disciplined inventory and pricing strategies helped us deliver strong results. With freight rates showing signs of improvement and used truck values stabilizing, we are cautiously optimistic about 2025. Leasing and rental revenue was $354.9 million, basically flat from 2023. Our Rush Truck Leasing division continues to be a key contributor to our overall performance. While rental revenue was slightly down in the fourth quarter, leasing revenue increased as we replaced 1,500 units in our fleet. As the age of our leasing and rental fleet decreases, we should recognize higher revenue and lower maintenance and operating costs going forward. We expect our leasing and rental business to remain strong in 2025. I wanted to remind everyone that due to seasonal increases in employee benefits and payroll taxes that occur in the first quarter of every year, we expect our G&A expenses to be sequentially higher in the first quarter of 2025 compared to the fourth quarter of 2024. Lastly, I want to make a final comment on the proposed tariffs that may impact vehicles and component parts manufactured in Canada, Mexico, or China. We are currently monitoring this situation closely. If such tariffs are enacted and significantly increase the aggregate price of new commercial vehicles or parts, we believe the demand for new commercial vehicles and parts could decrease in 2025. Before we wrap up, I want to thank our employees for their hard work and dedication in 2024. Despite the challenges, they stayed focused on our strategic initiatives and expense reduction goals, helping us achieve strong financial results. With that, I will take your questions.

Operator, Operator

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question comes from the line of Andrew Obin of Bank of America. Your line is now open.

Andrew Obin, Analyst, Bank of America

Yes. Good morning. Can you hear me?

Rusty Rush, Chairman, CEO, and President

Yes. We have got you, Andrew.

Andrew Obin, Analyst, Bank of America

Excellent. Rusty, given your commentary about second-half recovery, how should we think about earnings seasonality in 2025 versus a normal seasonal pattern? And I'll just throw in, specifically, when does parts and service turn positive again? So two-part question. Thank you.

Rusty Rush, Chairman, CEO, and President

You got it. Andrew, it is going to be an interesting year. The first half of the year, we are still feeling lingering effects of the freight recession. We expect weakness in the first quarter. We are seeing signs of activity despite the softer numbers earlier. Order numbers were down in January, but in the last few weeks we have seen signs of increased activity. That suggests we could see improvement in the over-the-road business in the back half. Vocational business remains strong. From conversations with large over-the-road fleets, we are hearing signals that contract rates may move up into the mid-single digits as contracts renew. That has to take hold and will not happen overnight, but it shows growing confidence among over-the-road carriers. We have to see how government regulation uncertainty develops with the new administration, and I can comment more on that later if needed. Overall, I believe the year will ramp up from beginning to end: a tougher start and improvement into the back half. I looked at national deliveries in retail in the U.S. in January; we are down roughly 2,000 units from last January, so only a modest decline. I firmly believe the back half of the year will continue to ramp up and could close better than 2024. We expect the freight market to improve and support greater demand. Regarding parts and service, the trend should track truck sales—ramping up throughout the year. We may see some inflation that could positively affect parts and service revenue totals, but we will have to see how it shakes out. We expect the first few months to be fairly flat and then to ramp to mid-single-digit growth in the back half of the year. I don't want to overstate the case, and I prefer to be conservative in our outlook, but we have confidence we will participate as the market improves. We also have runway left in our strategic initiatives behind the scenes that will help. So that's my view: ramping up throughout the year, especially after uncertainties around regulations settle.

Andrew Obin, Analyst, Bank of America

I see. And just a follow-up question. As things ramp up, how should we think about SG&A? SG&A was one of the sources of upside in the quarter. Do we think about SG&A control as you ramp into the next cycle? Will it look similar to the prior cycle, or are there any incremental savings as you get efficiency? That will be it for me. Thank you.

Rusty Rush, Chairman, CEO, and President

You put the heat on me on G&A. Remember one thing: 'S'—selling expense—is directly tied to selling trucks. We run the business with G&A controls. Selling expense will remain in a relatively consistent range tied to truck gross profit. G&A is what we manage daily. That was a big contributor this last year; we were down almost 5% year-over-year in G&A. I believe we did an outstanding job managing that expense. As volume ramps up, parts and service growth will require people and support, so you will see some G&A associated with that. Our goal is to retain a meaningful portion of incremental gross profit dollars—if possible 40% or more of incremental gross profit during a ramp-up period; I seek 50% but historically it averages around 40% over a cycle. We also track absorption; we were at 135 and down to 132 in absorption, which correlates with parts gross profit and expenses. We lost some gross profit last year, but we managed expenses well to produce a solid year despite negative parts and service trends in some periods, which is not easy. Looking forward, technology and e-commerce trends should help reduce some expense over time. We have roughly 390 outside parts and service salespeople, and they are not going away, but over the longer term we see opportunity to take some costs out while continuing to compete. It is a mix: technology can reduce expense but also make the landscape more competitive. In short, I expect us to do a good job managing G&A as we ramp up, and we will look to improve efficiency where realistic.

Andrew Obin, Analyst, Bank of America

Thank you so much.

Rusty Rush, Chairman, CEO, and President

You bet, Andrew.

Operator, Operator

Thank you. One moment for our next question. Our next question comes from the line of Daniel Imbro of Stephens. Your line is now open.

Brady, Analyst (on behalf of Daniel Imbro, Stephens)

Yeah. Thanks. Good morning, everyone. This is Brady on for Daniel. Rusty, I wanted to start by asking about your different end markets. You have talked about how resilient vocational has been in recent years. How did that market end the year? While we talked about how Class 8 fleet sales probably take until the back half to recover, how are you thinking about that vocational side of the business in 2025?

Rusty Rush, Chairman, CEO, and President

We believe vocational will remain strong. We are starting to fulfill some of the backlog, but demand remains healthy. Construction business is solid. I could even see some pickup in oilfield-related activity, which we haven't seen much of recently. The refuse business is still strong going into 2025. We expect vocational demand to remain durable, perhaps with a smaller backlog than at peak, but still strong. There were transmission supply issues last year that pushed out builds, and we are working through that backlog. We are not backlogged with year-long lead times like in 2023; lead times are closer to roughly 60 days now. Factories are not running at full tilt currently, but they can ramp if demand increases. When over-the-road demand picks up, it can happen quickly. So as we move into the back half, I would not be surprised to see stronger demand; I would not call for allocation in 2025 yet, but a lot depends on regulations and other factors. Overall, vocational remains strong and we feel good about it.

Brady, Analyst (on behalf of Daniel Imbro, Stephens)

Okay. Great. Thanks for that color. I wanted to switch gears a bit for my second question, see if we could touch on medium duty. Medium duty has been very strong for you guys in recent years. Could you just talk a little bit about what is driving that strength and what you are expecting from medium duty in 2025?

Rusty Rush, Chairman, CEO, and President

What drove the medium-duty strength was pent-up demand created when manufacturers prioritized heavy trucks during supply constraints in 2022 and 2023. That left medium duty with backlogs that have been chewed away. As Class 8 slowed last year, medium duty delivery times shortened, and you can now get a medium truck in about 60 days in many cases. ACT Research projects medium duty growth, but I am cautious on the magnitude for 2025. We should have a good year and expect medium duty to remain strong, but I think it may be closer to flat year-over-year because much of the pent-up demand has been satisfied. We don't have the huge backlogs we once had. So I expect medium duty performance to be solid, but not necessarily a big incremental lift relative to 2024.

Brady, Analyst (on behalf of Daniel Imbro, Stephens)

Okay. Great. Thanks for the time this morning, Rusty. I will pass it along.

Rusty Rush, Chairman, CEO, and President

You bet.

Operator, Operator

Thank you. One moment for our next question. Our next question comes from the line of Avi Jaroslawicz of UBS. Your line is now open.

Avi Jaroslawicz, Analyst, UBS

Hey. Good morning.

Rusty Rush, Chairman, CEO, and President

Good morning.

Avi Jaroslawicz, Analyst, UBS

It sounds like you are interested in talking about some of the policy uncertainties. I'm interested in unpacking some of that. Starting with the emissions regulations and the engine changeover, what are the latest cost conversations with customers looking like around the pre-buy? Are you hearing any more uncertainty or less?

Rusty Rush, Chairman, CEO, and President

It is interesting. When you go into unknown territory, it's good to have a map. We thought we had a reasonably clear map about where things were headed, though not perfectly clear. Prior guidance indicated increasing BEV requirements for certain markets, and that created expectations for pre-buys. That clarity is not present right now. The EPA's clean truck rule and related greenhouse gas measures were recently challenged on procedural grounds, and the status is in flux. The new administration may adjust timing or enforcement of various rules. My view is that diesel emissions regulations intended for 2027 are unlikely to be abandoned entirely; we have cleaned up diesel multiple times over the decades. However, some provisions—such as long after-treatment warranties that raise costs—could be adjusted. OEMs have already spent heavily preparing for new after-treatment requirements, and those costs are significant; some of the after-treatment and warranty-related costs people talk about can be in the $15,000 to $20,000 range, depending on the specifics. There are rumors that certain warranty or cost provisions could be altered, which would affect the total incremental cost. I expect regulation around diesel emissions will proceed in some form, but other elements tied specifically to BEV mandates or certain timelines may get stretched out to allow technology and infrastructure to catch up. We have over a century of infrastructure supporting internal combustion; converting truck applications, which are diverse and far more variable than passenger cars, will require time and significant investment in charging and grid infrastructure. Some applications—local, urban, and vocational—are more viable for BEV now, but long-haul and other heavy applications present greater challenges. In short, I expect some pre-buy activity, but how much and when depends on how the regulatory process resolves. There will likely be adjustment and debate around warranties, after-treatment requirements, and timing, which will influence customer decisions. Historically, when major emission changes occurred (for example in 2010), the industry encountered implementation issues; we should plan for some friction as technology and rules evolve. Longer term, BEV, hydrogen, and fuel cell technologies will take more share, but that transition will occur over many years.

Avi Jaroslawicz, Analyst, UBS

I appreciate shifting over to tariffs. I know you noted the uncertainty around that and the prospect that it could really increase the price of trucks and squeeze demand. Two things: can you help frame for us what that impact would be beyond the cost of a new truck? And, with urgency, are you doing anything differently this year in terms of managing your inventory to try to mitigate that risk?

Rusty Rush, Chairman, CEO, and President

Seventeen or eighteen days ago there was discussion of a potential 25% tariff on automotive goods from Mexico and Canada, and there is also concern about China. The automotive and truck supply chains are heavily integrated across North America. A 25% tariff would be very disruptive—it's not just finished vehicles, but many components cross borders during manufacturing. The impact would likely be material and could add tens of thousands of dollars to some vehicles, depending on the product and the proportion of content affected. For example, the added cost could be several thousand dollars on autos and could be in the range of $10,000 or more for certain commercial vehicles when all components are considered. Supply chain reconfiguration and shifting production would take time and be costly. Border crossings and ports such as Laredo, Texas, are critical to supply flows, and many suppliers and assembly operations are in Mexico as part of integrated North American manufacturing. From my perspective, imposing such tariffs on our two bordering neighbors does not make economic sense and would create significant disruption. OEMs and suppliers have contingency plans and have considered scenarios, but implementing changes at scale would be cumbersome and costly. We are monitoring this closely. If a tariff were enacted with near-term effective dates, there would be limited ability to mitigate immediate impact. Behind the scenes, OEMs and dealers do think about contingency plans, and we are discussing responses internally. But I personally believe such tariffs would be more likely to be negotiating leverage or headline-making than a long-term durable policy change, though I could be wrong. In summary, the potential impact is large—higher prices, supply disruption, and demand pressure—and we are monitoring and planning where appropriate, but rapid mitigation would be difficult if imposed abruptly.

Avi Jaroslawicz, Analyst, UBS

That makes sense. Moving a little away from the uncertainty toward what we are seeing today: second half last year there was some discounting on new truck pricing. Is that something we should expect for the first half of 2025 as well?

Rusty Rush, Chairman, CEO, and President

Right now, I do not expect broad-based discounting. We have already taken some margin compression last year, and most OEMs have adjusted expectations. You might see occasional one-off deals, but not broad industry discounting. We have maintained a blended margin north of about 9% by balancing new, medium, and used sales, and I expect overall pricing to be fairly flat. If there is pre-buy activity later in the year, there could be localized dynamics, but I don't see widespread additional margin erosion from discounting in the near term.

Avi Jaroslawicz, Analyst, UBS

Alright. Very helpful. That is it for me. Appreciate the time. Thank you.

Rusty Rush, Chairman, CEO, and President

You bet. Thank you, sir.

Operator, Operator

Thank you. I am showing no further questions at this time. I would now like to turn it back to Rusty Rush for closing remarks.

Rusty Rush, Chairman, CEO, and President

Okay. I look forward to talking to everybody in April. This is the shortest time between calls; I'll be speaking with everyone again in about two months. Thank you for your participation today.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.