Earnings Call Transcript - RUSHA Q3 2022

Operator, Operator

Good day and thank you for standing by. Welcome to the Rush Enterprises Incorporated Reports Third Quarter 2022 Earnings Results. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the call over to Rusty Rush, CEO, President and Chairman of the Board. Please go ahead.

Rusty Rush, CEO

Good morning and welcome to our third quarter 2022 earnings release conference call. On call today are Mike McRoberts, Chief Operating Officer; Steve Keller, Chief Financial Officer; 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 31st, 2021 and in our other filings with the Securities and Exchange Commission.

Rusty Rush, CEO

As indicated in our news release, we achieved third quarter revenues of $1.86 billion, net income of $90.4 million, or $1.59 per diluted share. We're proud to declare a cash dividend of $0.21 per common share. We're pleased with our results in the third quarter, which were largely driven by pent-up demand for new commercial vehicles and continued strong demand for aftermarket parts and service. New truck production remains limited due to component suppliers, but our Class 8 new truck sales significantly outperformed the industry. Our results were also positively impacted by 17 locations in the South and Midwest acquired in the fourth quarter of 2021 and 15 locations in Canada, where those operating results are now included in our financials due to our additional investment in Rush Truck Centers of Canada Limited. In the aftermarket, our parts, service, and body shop revenues were $622.1 million, up 34.4% year-over-year, and our absorption ratio was 136.2%. In the third quarter, we experienced strong widespread demand for most market segments, especially refuse, leasing, and energy. Our growth was also driven by the addition of aftermarket sales professionals and service technicians throughout our company, which allowed us to better support our customer base, especially large national fleets. While parts supply constraints are still impacting the industry, we're beginning to see parts supply catch up through the needs of the market. In addition, we expect demand for repairs and maintenance to remain strong through the end of the year, but to be tempered by fewer working days in the fourth quarter and seasonal softness that the industry typically experiences through the winter months. Turning to truck sales, we sold 4,200 new Class 8 trucks, accounting for 6% of the total U.S. Class 8 market and 1.4% of the Canadian Class 8 truck market. While new truck production remains limited, we continue to experience healthy demand from most market segments, including both over-the-road and vocational customers. ACT Research forecasts Class 8 U.S. sales to be 258,600 units in 2022, up 13.7% from 2021, and Canadian Class 8 retail sales to be 3,150, up 7.2% from 2021. We expect truck production to remain constant for our fourth quarter Class 8 commercial vehicles to be similar to what we achieved in the third quarter. Our Class 4-7 truck sales reached 3,223 units in the third quarter, accounting for 5.3% of the U.S. Class 4-7 markets and 1.7% of the Canadian Class 5-7 market. While production remained limited, we saw healthy demand from a variety of market segments, particularly vocational and food and beverage customers. ACT Research forecasts U.S. Class 4-7 retail sales to be 230,975 units in 2022, down 7.5% from 2021, and Canadian medium-duty retail sales to be 11,025 units, down 16.6%. As we look ahead, we expect the production of Class 4-7 trucks to improve slightly, and our results will align with the industry in 2022. Our used truck sales reached 1,763 units in the third quarter, up 8% over 2021. Overall demand softened for Class 8 on-highway used trucks due to an uptake in new truck production, weak spot rates, rising interest rates, and high fuel prices, which continue to burden owner-operators and small fleets. As we expect used truck values to continue to decline for the remainder of the year and into 2023, we made the decision to minimize our used truck inventory to a historically low level during the third quarter. We will continue to closely watch used truck values and manage our inventory levels to allow us to meet the needs of the market while minimizing the negative effect of declining used truck values. Our lease and rental operations continue to be a significant contributor to our company's overall profitability, with third quarter lease and rental revenues increasing 37.1% year-over-year. This growth is driven largely by our recent acquisitions, as well as higher than normal rental utilization rates caused by limited new truck production. As we look to the future, we are carefully monitoring inflation, interest rates, fuel prices, and other economic factors that may impact consumer spending, our customers, and our industry in general. However, there is still significant demand for new commercial vehicles and aftermarket parts and service, which we expect will continue through the year. With our ongoing focus on disciplined expense management and executing our strategic initiatives, we believe our financial results will remain strong for the foreseeable future. As always, I would like to thank our employees for their outstanding work this quarter and for their continued commitment to our company's goals. With that, I'll take your questions.

Operator, Operator

Thank you. Our first question comes from Jamie Cook from Credit Suisse. Your line is open.

Rusty Rush, CEO

Good morning, Jamie.

Jamie Cook, Analyst

Sorry, I cut out. I couldn’t hear you say my name. Sorry about that. Hey, good morning. Nice quarter. I guess, Rusty, a couple of questions. First, you gave a little color on the used inventory and how you're trying to reduce the inventory levels. Can you just provide color on how much we did in the quarter? What's left in just the used impact on margins on a go-forward basis, like how to think about normalized margins on the new and used trucks? And then my second question, I was impressed with the growth in the parts and the service business. Again, this has been fairly impressive all year. So can you talk about market versus market share and, assuming the macro continues to deteriorate, how do you think about the parts' ability to grow in a normal truck downturn? Thank you.

Rusty Rush, CEO

Sure. Over the past five quarters, we've experienced some of the most significant fluctuations in used truck values I've ever witnessed. I want to acknowledge our team's efforts in navigating this situation. We had margins averaging between 18% and 19%, but as expected, those conditions have changed. We recognized midway through the last quarter that our operations wouldn't really kick off until this current quarter. As values began to decline, our inventory had increased to about 2,400 units, but by the end of this quarter, we managed to reduce that to 1,200 units and adjusted them according to market standards. Looking at our performance, we were up to a margin of 1.6%. If you compare this to Q2, we had an impact of approximately $13 million to $14 million. Accounting for a one-time gain from our Canadian acquisition in Q2, our actual margin was around $1.75. Used trucks accounted for over 90% of the difference between the second and third quarters. Moving forward, I anticipate a shift toward normalized margins and do not foresee used truck margins falling to 1% again. The inventory cleanup we executed should help, but if values keep declining, it might weigh on us a bit. However, I am confident we won't see used truck margins at that low level again. Overall, I’m pleased with what we accomplished this past quarter. Traditionally, our normalized margins for used trucks are between 8% and 10%. While I am uncertain if we will reach that range again soon, I expect us to recover to at least 6%. I believe we are at the bottom now. From an inventory standpoint, I feel optimistic about our situation this last quarter. While we might see margins between 5% and 8%, it will certainly not return to 1%. This performance and inventory cleanup were beneficial. In the previous five quarters, our actions were necessary, as declines in values can happen rapidly, typically between 1.5% and 2% each month, with recent results showing drops of 6% to 7%. We’ve made significant progress in managing our inventory.

Jamie Cook, Analyst

Yes, please continue. I was just going to mention that.

Rusty Rush, CEO

So, I'm just going to say that yes, you bet. Do you want me to ask about the parts and service? So, from a parts and service perspective, obviously, we've had an outstanding year with record absorption rates at the same time while even bringing in new stores that probably don't perform to the levels of some other stores we have, right? So, I'm very proud of that. There's some runway there, we think, as we really integrate these other stores. In August, we just finished putting the Canadian operations on our SAP business systems. We just finished in May with the Summit acquisition. So, there's a learning curve within that. I think there's a lot of runway for us in all those new stores yet in spite of all that. And by the way, it can be a little bit of a detriment on the front side that the first 60 to 90 days of business system changes can be tough on them. So, I would tell you there's probably that was inside of all of what happened too. As you look forward, our outlook gives us a little bandwidth. We took market share, but we also benefit from inflation. So, don't think for a minute that it was all just us taking market share. It was a combination of both. Sometimes it's hard for me to discern how much was that as you look through it. But I would tell you we probably took high single-digits in share and the other was some inflationary activity that was out there. Looking forward to next year, we think that the inflationary pressures will continue, on the parts side. I know we're seeing it on the labor side too because that's also impacting our quarter. We had labor but getting into some G&A questions; costs because we have to. But I do believe that next year will not be quite as high because I think inflation will subside. We expect to take share as well, and I still expect to have some inflation in the high singles, low double digits; somewhere around 10%, that's what we're looking for. That's based on subsiding inflation. What if inflation continues to run rampant like it did this last year? That number could go up. But I expect to take share somewhere in the mid to high single-digits, and then inflation will be on top of that. That's our goal. That's the investment we continue to make in all our systems and all the things we have going on. And we're investing in a lot of stuff we're not even seeing in the numbers. But you're always doing that. So I think our continued investment over the last 10 to 12 years will show in the numbers, Jamie—you want around long enough? And we will continue that. Hopefully, we'll continue to grow our absorption rates and our returns just like we have been.

Jamie Cook, Analyst

Okay. Thank you. I appreciate the color.

Rusty Rush, CEO

You bet.

Operator, Operator

Thank you. One moment while we prepare for our next question. The next question comes from Andrew Obin of Bank of America. Please go ahead.

Rusty Rush, CEO

Good morning, Andrew.

Andrew Obin, Analyst

Yes, I'm not on mute. Can you hear me?

Operator, Operator

Yes, we can hear you now.

Rusty Rush, CEO

Now I can, Andrew.

Andrew Obin, Analyst

Okay, sorry about that. Yes. Just a question. Look, as I said, our earnings estimate, I think when we started the year was around four something, and it looks like you're going to print well over six. So how should we think about the normalized earnings power of Rush? If I look at just generally at the multiples for a lot of distributors, people are clearly seeing across the board we're at peak numbers. But what sort of a normalized number for Rush through the cycle these days, given everything you've done? And how much should we expect Rush to make in a recession? I'm not asking you to say when a recession is. But as I said, the numbers seem to be about 50% plus higher this year than I expected, so I'm trying to recalibrate how to think about Rush's earnings power going forward in the long run. Thanks.

Rusty Rush, CEO

You know I'm not wanting to go much out on it, Andrew, but here you go. Obviously, we are in an industry that does have a little cyclicality, just like this whole country does too. So as I look back and I try to look at troughs, Steve and I get out there a little bit here. But I go back to 2016, split adjusted — that was a trough to me. We made $0.75. In 2020, we made $2; we believe that we could probably – when I say trough, get somewhere down with new product sales at around 200 to 210. We believe we can double what 2020 was. How is that for a trough? Now, if it goes lower than that, we'll figure it out from there, but hopefully it doesn’t, and most projections are not for it to go lower than that. Obviously, and we continue to do the things we're doing; we peak back in 2025, 2026. I'd like to think there's more to achieve, especially when you look at new acquisitions and the things that are just being integrated, and those are some of the tailwinds I still believe are still there, particularly with the Navistar side. I mean they just got bought by TRATON a year ago. The backlog's always going to be a tailwind for us. But I think their investments will continue to flow out into the future for those dealerships. From the Peter perspective, we will always continue to do an outstanding job, and I think we've been exemplary for a long time with Packard's commitments there. So, with both of our OEMs' commitment and our commitment, how we manage what we do, those things that you can see in the numbers now that just drive you a little bit crazy if you're me. And I realize we're getting a peak multiple, but we're getting treated like that now, but that gives you a little color. When you say normalized, I don't want to see anything normal in this industry, okay? There's not much normal anywhere. But there are peaks and there are troughs, and that should give you where I think we can—I don't make your rates, but we're using pretty good at delivery, where we think a trough around the U.S. market would be.

Andrew Obin, Analyst

Yes. No, I mean, I think it's useful. So, like sort of $4 plus at the trough seems like the new number, at least that's what I've heard. Second question, if you could just walk us through what you're seeing in different regions of the U.S. and also what you're seeing by verticals, because obviously, you have exposure to energy, you also sell to FedEx, you sell to truckers, you sell to contractors. So, you have as good a view as anybody in the industry and you have a lot of experience. Thank you.

Rusty Rush, CEO

Well, as I said, geographically, it's still pretty strong almost everywhere. I don't see one geographic spot hitting hard. Some regions are stronger than others. California is still very strong; I thought it would have slowed down a little. I mean, Florida is doing well. We're doing well in the Midwest too; I mean it's pretty broad. Now, when you get into segments, and what I expect to happen, our biggest segments would be refuse, and we have seen a larger pickup in oil and gas, but don't think for a minute now, it's like it was years ago when oil and gas was 15% of our business. It may have increased from 3% to 4.5%. When I look at parts and service, it is up on the major accounts. It is up more than everything else. Our growth with national accounts—which is what we really look at—is what we do, and we manage to take care of all our local and regional stuff and do a really nice job of that. But the biggest growth we've had on a consistent basis and what we believe will be the biggest growth for us going forward is our national accounts. That's because of our map; we can differentiate off a map because we have a map that no one else in our industry has. Regardless of what brand we represent, you’re still a Rush customer, and we can service you in ways across a larger map than anyone else. That is really the biggest strength in my mind. Our people is our biggest asset. But at the same time, that map there and us continuing to leverage and go to market as one—we realigned all our revenue creation about a year and a half ago and really put it all under one umbrella, and that's how we focus and go to market nowadays. And we have customers we don’t sell trucks to that we do millions of dollars of business with in parts and service because of that map. That list of customers continues to grow and then it just creates opportunities to sell products down the road. So I know I got off base a little from your question, but I think it’s important to understand that. But really, Andrew, the leasing segment is still strong. I do anticipate, obviously, housing to slow down some due to the rates, but that’s upcoming, and it will have effects eventually. But we do believe we're well-diversified in how we go from a market segment and geographic perspective. We'll do it well in the future, and we continue to believe in ourselves and how we're going to market and what we've got and the growth dynamics that I talked about.

Andrew Obin, Analyst

And just a question, just going back to the question on trough. So how should we think about, and maybe you can give us an absolute number or however, how should we think about the trough and parts and services? Because it's such a driver of your earnings as a company. How should we think about what kind of decline we can see in parts and services and recession? Once again, if you could calibrate or just it keeps growing because you keep putting in money and we're in an inflationary environment.

Rusty Rush, CEO

Well, I don't think it will ever go down as bad as I've seen it before, given the investments we've made in it, but I'm not going to be naive enough to sit here and tell you that it couldn't slow down. That's being a little bit naive, especially in this high inflationary environment, how that assists as far as the growth rate scale. From going backwards, Andrew, this is just a stab. I guess if we got into a pretty medium recession, people are funny listening to economists talk; maybe 5%. I don't really see us going backwards much more than that in any case. I don't think we have normal seasonality like usually in winter; things do slow down a little bit. But as far as overall single digits, I don't see—I’m not projecting that. But I won’t be naive enough to disregard that if the economy forces its hand overall. So something like that could happen, and then of course it may be up to us to manage through it by pulling some of the levers we’ve got.

Andrew Obin, Analyst

Rusty, thanks so much. Really appreciate your extensive answers.

Rusty Rush, CEO

You bet. Thank you, sir.

Operator, Operator

Thank you. One moment while we get ready for the next question. Now, the next question is coming from an unidentified analyst. Your line is open.

Unidentified Analyst, Analyst

Good morning. Can you hear me?

Rusty Rush, CEO

Yes, I can hear you now.

Unidentified Analyst, Analyst

Okay, great. I wanted to start with a quick question on parts and service. Do you have what the organic growth number was in the quarter? And then, Rusty, I'd love to get your thoughts on the truck Class 8 number for 2023.

Steve Keller, CFO

Okay. The same-store parts and service growth rate, if that’s what you mean by organic. That was 19.9% in the quarter. Obviously, that has inflation in it of probably 14%, 15% along with growth of around 5%. So that’s the organic number; I think, is what you're asking for.

Rusty Rush, CEO

As far as ACT's number, I think they've got three numbers if you ask Kenny, I got a little heart, a big heart, and a middle heart. I think what he prints is the 232 that's out there right now. I've seen some reports saying it’s going to be flat with this year. But those are at 260; I have a problem with that. I think your big fleets are going to continue to buy. I think you're smaller to midsized customers that are levered up, rely on good used truck values, and borrowing money—they're going to have higher interest rates to pay. I think that’s going to happen in that sector. So, point being I’m going to go with that $2.25 to $2.30 range would be mine. I don't believe—and I think it will be more front-loaded. I do believe that will be more front-loaded, because I do think what the Feds are doing will have to take hold and have some effect on that small to mid-sized buyer as we get more into the year.

Unidentified Analyst, Analyst

Okay. Got it. And I wanted to ask about the fourth quarter and just the cadence of EPS. You gave a few of the moving pieces on expectations for truck sales, but anything on G&A or anything else sequentially we should be mindful of moving into the fourth quarter?

Rusty Rush, CEO

No, I would look for G&A to flatten out a little bit sequentially. When I take that view of it, we'll be off a little bit in parts and service because it's fewer working days. You've got holidays that they can deal with. That's just normal; that's just the way it works. A lot of companies shut down between Christmas and New Year's, and that's no different than any other year. So, similar quarter, a little less, given the fewer working days that we'll be dealing with—that's just seasonality. As far as the per-day averages, right now, they remain solid. They have continued to slightly go up. I don't expect them to go up, as they typically don’t during the winter. You will see a little softening in a few less working days. So, that really would be the only negative that I see in Q4 as I view it; it's just the fewer working days, holidays; but we deal with it every year. But that can soften a little bit of the returns, but still, when you look at the numbers we're printing, they're still pretty solid.

Unidentified Analyst, Analyst

Got it. And last question, I just wanted to ask about capital deployment and where you're seeing the best opportunities today? And then maybe tagging on to that, Steve, interest expense went up by a good amount in the quarter. Curious what we should be thinking about going forward?

Rusty Rush, CEO

Right. We've had a consistent shareholder return plan now for five years. As we've said, we're going to return 35% to 40% of free cash flow to shareholders, and we have consistently raised our dividends, averaging right now it's $0.21 on $0.84 a year, $0.21 a quarter, which is around just under 2% return from a dividend perspective. We approved last year a $100 million repurchase. We spent $88 million repurchasing stock. It's so cheap to me; that’s the best thing we can do is buy more stock back, to be honest with you, from my perspective, and we'll probably be approving another repurchase soon; we're discussing it with the Board. But I mean, we’ve been consistent in that over the last few years—what we spend may change, but we have consistently bought stock back. We do not see either one of those changing over the next 12 months. The numbers can vary, but we will continue to return dividends as we have, not going backwards, and continue to buy stock back especially if we see opportunities, being opportunistic when we feel we're very undervalued.

Steve Keller, CFO

Steve mentioned interest rates increased $3 million or $4 million. Sequentially, we were up $3 million from Q2. It’s a product of two things: Our floor plan levels are up because we've delivered a few more trucks and we have more inventory on our balance sheet for a longer amount of time, and our floor plan rates are variable. So, interest expense that you see on the income statement is driven by floor plan and interest on the lease and rental fleet. The only thing that would drag it down is if the truck market probably in 2024 when it does turn down, our inventory levels will soften. And I guess we've got one more rate increase coming of 50 to 75 basis points. So, that's what's driving it.

Rusty Rush, CEO

Yes. The other thing to remember is, as we know, the labor market has been extremely tight. So, we did have, in the course early on July 1, we raised pay quite dramatically across the whole company—like double plus what we usually do. So, that was—we had the full effect of that in the third quarter too. So, it’s important to understand that as well.

Unidentified Analyst, Analyst

Makes sense. Thanks. Appreciate the time.

Operator, Operator

Thank you. I would like to now turn the call back over to management for closing remarks.

Rusty Rush, CEO

Well, I appreciate that. Thank you, everyone, for listening today and participating. I hope everyone has a happy holiday. It will be sometime in February before we talk to everyone again. So, wishing everyone happy holidays, and thank you very much. We'll see you in February. Bye-bye.

Operator, Operator

This concludes today's conference. Thank you all for participating for the rest of your day. You may disconnect.