Earnings Call Transcript - RUSHA Q1 2020

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Rush Enterprises, Inc. Reports First Quarter 2020 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Rusty Rush, Chairman, CEO, and President.

Rusty Rush, CEO

Good morning, everyone, and welcome to our first quarter 2020 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, 2019, and in our other filings with the Securities and Exchange Commission.

Rusty Rush, CEO

As indicated in our news release, we achieved quarterly revenues of $1.3 billion and net income of $23.5 million or $0.62 per diluted share. We also declared a cash dividend of $0.13 per common share. In the aftermarket, our annual parts, service and body shop revenues were $428 million, down 2.4% over 2019. Our absorption ratio was 114.3%. This decline in our aftermarket revenues can be attributed to softness in the market and the significant decline in the energy sector. Regarding truck sales, we sold 3,078 new Class 8 trucks, down 13.5% from the first quarter of 2019. Our truck sales accounted for 6.3% of the total U.S. Class 8 market. This is the result of an industry-wide slowdown in Class 8 truck sales, although refuse, construction, and stock truck sales remain relatively healthy. Our used truck sales decreased 15.3% year-over-year. Our results in January and February were down slightly from the same time in 2019, where we experienced a much more significant decline in used truck sales due to the COVID-19 pandemic in March. Medium-duty, our Class 4-7 new truck sales were 3,264 units, up 24.9% year-over-year and accounted for 6% of the U.S. market. These solid results were primarily the result of activity from grocery and food service customers, in addition to stock truck sales across the country. In most areas of our business, the COVID-19 pandemic had a limited impact on our financial results in the first quarter. However, this does not reflect the significant impact we believe this pandemic will have on our company going forward. We are continuously monitoring the impacts of COVID-19 on the economy and our industry, and we are taking appropriate steps to preserve our financial stability during this pandemic. Rush Truck Centers are classified as essential businesses and remain fully operational across our dealership network, though some hours of operation have been modified. We are complying with all CDC guidelines and federal, state, and local orders to protect the health and safety of our employees, customers, and the public. Going to the aftermarket, our parts supply chain has remained largely uninterrupted today, but we did increase our parts inventories to support an extra 30 days of demands. The investments we made in our strategic initiatives over the past few years, in particular technology such as online parts ordering and web-based communication, help support social distancing measures and capture sales in this tough operating environment. With 2,400 service bays and 500 mobile service units, we are prepared as ever to support our customers with expedited service in a safe environment. Many of our customers have reduced their operations and it is too soon to tell when their businesses will fully reopen. We expect the COVID-19 pandemic will negatively impact our aftermarket results in the second quarter. All our truck manufacturers have temporarily suspended at least some of their global production facilities, causing uncertainty about the availability of new truck inventory. ACT Research recently adjusted its U.S. Class 8 retail sales forecast to 127,500 units in 2020, a 54.8% decline over 2019. Our representatives are actively reaching out to customers and prospects to explore every possible sales opportunity. Many customers are delaying purchases due to uncertainty about the economic impacts of the pandemic. We expect the COVID-19 pandemic to have a significant impact on new Class 8 truck sales in the second quarter. Regarding Class 4-7 truck sales, ACT Research has forecasted U.S. retail sales to be 147,500 units in 2020, a 44.8% decrease compared to 2019. We anticipate that medium-duty sales will also be negatively impacted as those sales generally track with the overall economy. We are taking an aggressive approach to write-downs to new and used vehicles and believe our inventories are positioned well to meet market demand. In the first quarter, we suspended our stock repurchase program and renewed a $100 million line of credit. I have reduced my salary by 25%. Members of my executive team have reduced their salaries by 10% and our Board of Directors have reduced their annual cash retainer by 10%. We are also reducing expenses and delaying other expenses and capital expenditures. While we’re doing everything we can to address the challenges that we are facing, there will undoubtedly be a significant negative impact on our business because of the COVID-19 pandemic. That said, our employees and I take pride in being an essential business and supporting our customers through this difficult time. It is important that I thank them for their unwavering commitment to our company, our customers, and keeping themselves and those around them safe and healthy. With that, I'll take your questions.

Operator, Operator

Your first question comes from the line of Jamie Cook with Credit Suisse.

Jamie Cook, Analyst

Good morning. And I hope you guys are well and healthy. It sounds like everyone is doing okay. It's good to hear your voice, Rusty and Steve. I guess just my first question, obviously COVID didn't really impact the March quarter. Can you talk about trends you're seeing in April both on the truck sales side, as well as the aftermarket side and how you think aftermarket will hold up this year with COVID-19 and your strategy to increase your aftermarket business? And then I guess the last question, what do you think is a reasonable time for BOEs to get back up and running in terms of production? I think PACCAR said they hope to be up and running by the end of the second quarter. I mean how do you think production ramps, I guess in the second or third quarter if you have any insight? Thank you.

Rusty Rush, CEO

Sure. Well, I’m going to take you in reverse order real quick, Jamie. As far as the manufacturer perspective goes, it's different for all of them, right? I don't want to get into their plans exactly. That said, I expect on the back yard side, I expect them to be up and running here in the first part of May, and I think that's their intentions. A lot has to do with the supply chain. I'll be honest with you. I think both manufacturers are prepared to get up and running, but there are issues with the suppliers, and I think there are some issues across the border with Mexico and some other places that folks are working through. I think that's probably the biggest issue that they have right now, besides obviously smaller order boards. So when they do come back, I would expect build rates to be down, but that's indicative; there’s no difference than what we would expect normally in this type of time as part of the cycle. But I would say within the next week to two weeks, you'll have them up and running. I believe and how that goes forward, I'm going to tell you, we saw where the orders were in March, and I don't anticipate much difference in April. I think it's going to be hand-to-hand or hand-to-mouth how we want to look at it going forward. It's really hard to project. I mean, if you look at ACT's numbers, I mean, yes $127,500 is $104,000 run rate in the last three months. That's retail. So that's the lowest run rate since 2009. It's lower than 2010 when it was $110,000 US retail. So, I’m in line with them, I guess would be my answer. Back to your other question, how we... Well, I'm not going to get out much further faster in the second quarter than what I'm living right now to be honest with you. Obviously, truck sales are going to be less across the board from a Class 8 perspective. With the factory shutdown for six weeks, you know the sort of stops, we're the tail of the dog, that does you got that gap; you've got to make up for a while. With that being said, we have stuff that was in process delivery that is being delivered, but there will be that gap, no question because that was being... So it’s hard for me to give you an answer; it will be down. I’m still trying to get my arms around how far down. I mean, they have started back to work; you know you asked me one question to - you asked that question two weeks ago; it probably would have been different than it is now because I thought we were going to be back to work sooner at the factories than them. So it's been put off at all the factories. Everybody is given one or two weeks typically a couple of weeks, and then we look at it and may give another week or two, and that's what we've gone through three times. So that has a direct impact on what we're going to deliver, right? So, you know they're not building anything; my end process delivery starts right now that I've got in the pipeline because we always have that because we are that retail guy on the end. So obviously, down it’s hard for me to give a number right now for Q2, really really is. Once they get up and running, I can see the flow and how many they're building and what we're getting of our backlog, I'll be able to give more down. Yes, significant; it’s not going to be cutting in half or anything, but it's going to be down. I would expect it to be down significantly in Q2 just based on the factories not being in production now. The most important thing is parts and service, right? When I look back- when we look at it, when all this started taking place, I decided we have two Marches, until March and split it in two months, okay? Because it was back half of March and it was the front half; they weren't the same month, but it has, you know, gradually it wasn't, it didn't steeply drop, but it's gradually decreased. You know, if you'd asked me a week ago, I might have said something a little different than this week, but I would tell you right now and I'm hoping that we're finding a bottom, but I haven't... I can't answer that for sure, because how long I look at one week or three weeks of stability. I'm looking for a couple more weeks. I feel pretty stable from last week to this week. I mean we're talking about, I'm just giving you what I'm feeling here, I feel pretty stable from last week to week parts and service wise, but if I'm going to tell you - give you a range of what it's all from the Q1 quarter, I'm going to tell you a daily run rate from Q1 is somewhere - I’m going to range you somewhere between 11% and 14%, something like that all from Q1 run rates right now in parts and service. I hope it's borrowed, but we're not quite there. I’ll tell you what I think I’ll get on those mic, and I’ll be happy to give anybody updates as we go along, but no. I think you can't call me, but obviously that's where I think we're at. Okay. I think right now - and I'm hoping that what I've seen, but I don't - there's no guarantee because this is - I'll get into my description, this thing is working its way through the system. Remember that construction was still going on; that I mean new projects are being led. Not all retail shut down. So you've got different market segments doing different things where retail maybe started going to come back as things start opening back up, other segments maybe going down that were still running. So it's - I’m going to have to really - I know I’m giving you a broad answer here, but really that's the facts. Different market segments are doing different things. I expect some to start coming out of it as we open back up, I expect some others to start declining. That’s all I’ve got.

Operator, Operator

Your next question comes from the line of Justin Long with Stephens.

Justin Long, Analyst

So, I wanted to shift gears a little bit to G&A and I was wondering if you could provide an update on how you're thinking about the cuts we could see going forward. As you react to this downturn and maybe a little bit of color on when those cuts should start to kick-in?

Rusty Rush, CEO

Well, they are going to start kicking-in in this quarter, okay without a doubt, but we're in the process still of doing it. As we were looking at them, as I said that you know the business is - we had already made some prior as you know like in November. We did some stuff earlier, but that was preparing for a normal market, not for this we’re almost cyclical the cycle stuff that we deal with. We're in the midst of them right now. I've got some goals from G&A, I mean G&A was off about a point over last year in the first quarter, okay. We saved; you know that doesn't sound like a lot, but we can consider the normal inflationary pieces that we had last year, et cetera, et cetera. Our personnel base is down from where it was a year ago and it will probably continue to - we will probably have some more reductions around there, just giving the overall market. To give you a little color, I'm hoping to arrange it $15 million and - $15 million maybe in Q2 out of G&A, but a little less somewhere between let me range that and say $12 million to $15 million of G&A out of Q2 from Q1. We will be attempting to do maybe a little bit more, but some of that's going to roll in when it all be effective. It's started to get it all effective in Q2. But we will be extremely diligent in managing to the market as we always have, and I'm comfortable we will manage this. We won't be able to make all the lost revenue up; there's no question about that, okay. I can't take all the meat off the bone. That being said, we've shown in past cycles that we do know how to manage through it. And even in 2008 and 2009 when I reflect back on that, we managed through it, remain profitable every quarter. I'm hoping we're able to do something along those lines; it just hit me telling you a number is very difficult in this environment. I’m just going our past performance and we will do everything reasonably right to manage to the market that we're dealt with, but - it's really moving, guys. It moves as we measure it daily right. Just because I see a little stability for the first three days of this week does it mean that it's stabilized. One was just stable off the last week. So I'm open, but we'll just keep managing and - but those numbers on your G&A comment, I'm sure I was pretty comfortable with those and we'll attempt to get more.

Justin Long, Analyst

Okay, that helps. And then maybe to follow-up on customer mix I know you've got a lot of vocational exposure on the new truck side. But how are you thinking about your exposure to small and medium sized fleets that are likely to be in some pretty significant financial distress in this downturn? Is there a way to help us think through that risk as it relates to both new truck sales and your parts and service business?

Rusty Rush, CEO

Yes, I mean - those guys are going to get hurt worse, right? They don't have the big contracts, you know - the large contracts, the dedicated because many trucks do dedicated hauls, things like that. And it's going to be more market segment-driven, I think as much as anything you know, but over the road, there's no question those guys are probably going to suffer here over the next quarter or so. We're still seeing business. I think one of the things I'm hoping is that by the factories shutting down, our stock truck sales will feel some of that, right? So we can use our inventories to fill in there. But there's no question the small guys are going to get hurt worse than the big over the road guys. We check regularly across the board with every - and with our large customers and our small ones. I mean we're in contact on a weekly basis because we have a backlog; it’s not just all big fleets; it is small customers too. And so far, with a few minor exceptions, it seems to be holding together fairly well. Now that's the backlog. What intake is going to be the issue right now and I think everybody is in a little bit of a hold pattern from an intake perspective till they get their arms around - as everything starts opening back up and things start moving in a more normal pattern, more normal fashion. But there's no question the little guy will get hurt worse. I think unfortunately, we do a lot of business with small customers, but we also have a lot of large customers. So, I’m hoping that that will help us. Typically, in a down market like this, we take share; I don’t think it will go back to 16, go back to 16, it can go back to any time. We take share typically. Our market share, as you can see, was up in the first quarter, and I would hope it continues to be up across the latter half of this year. So I feel good about that. The parts and service business those - basically the same answer, you know. Those guys are going to be the ones that take it harder. And you get people just spending what they need, not what they want right now. And that's what we're seeing a lot of that going on. When you look at the average size of tickets, et cetera, you look at how many tickets are done every day, you also look at the average size. Obviously, we're seeing some impact from what people are buying. They're buying what they need, not what they want.

Justin Long, Analyst

Okay, that helps. And then maybe just the last one for Steve, obviously the energy market has rolled over substantially recently. How much energy exposure is left in your parts and service business when you look at the first quarter?

Steve Keller, CFO

Probably, certainly less than 5%, probably 3% to 4% of the volumes from the energy segment.

Justin Long, Analyst

Okay great. I’ll leave it at that; I appreciate the time.

Rusty Rush, CEO

Real quick. One of the things that's good about that if you remember the company four years ago, we had like 15% growth. So even the results we posted in the first quarter, it's got 3% or 4% of energy. So, I'm proud of the organization for the shift and how we’ve diversified our customer base compared to where we used to be three or four years ago.

Operator, Operator

Your next question comes from the line of Joel Tiss from BMO.

Joel Tiss, Analyst

Yes, exactly. So I wonder if there's any way to kind of characterize your customers, you know none of your customers, the truck manufacturers, their rush to get back up and running really just to fill the backlogs that are already out there versus production rates as we go into the second half; like, you know, adjusting production for what the future order run rate is going to be, but you know what I mean?

Rusty Rush, CEO

Well, I mean I know they'll do what they always do; they’ll make those adjustments as they go forward. I mean it was almost 7,000 units in April Class A it was like April wasn't there and medium wasn't anything either. So, excuse me, I mean March; I mean April; I mean by March, but now we're in April. I know, you know, not much has changed when it comes to an order intake perspective where, as you know, it's way off. I'm sure when they come back to work, there's no question the bill rates will be down. I’m not going to get into what their bill rates will be; that's their business. I mean I may know - I know what their goals are but that’s for them to talk about not for me to talk about, because that’s internal information of theirs. So it will be - it's down I have to believe given the size of the market - most people are going to be down from their peaks. I mean got to be down 50% or something I would believe; you’ve got some backlog, but I'm not - but again, that’s going to be theirs to give. I mean I would expect, you know, from peak bills to be significant. I think when you look at what retail sales are going to be and you quantify that to what they were building back when retail sales were 277 or whatever they were last year, you can probably back into the number.

Joel Tiss, Analyst

Okay because it seems a little curious why they are in such a rush to get back to work. And then Steve, can you talk a little bit about if there's any balance sheet impact of being more aggressive on the truck - on used truck write-downs?

Steve Keller, CFO

I mean balance sheet impact is not necessarily what we're trying to do is kind of stay ahead of this. We’re already in a tough used truck market, and with what’s going on, we expect volumes to be soft in Q2. These things - they certainly don't appreciate. So, we try to strike that balance between what was already a tough market and not give it away, but when the market picks up, having price at the right point to move them. We felt it was necessary to you know we always have reserves; that’s a continuous process here and the margins we report to you have those reserves inside of them. What we are communicating is that we went over and above our normal reserve matrix and policies because of the situation we're in. We hope that we can get back to our normal 8% to 10% margins, but we can't tell you that definitively right now. We may have a couple more quarters in this - lower than average run rate. They were 5.7% in Q1, which we tell you historically the issue price at 10% on used truck margins and you know that’s going to hold us next, as we see what happens in the next few quarters. But we’re trying to avoid and stay ahead of the curve on that, and we could have some more mid single-digit margins - used truck margin quarters as this year unfolds, but there is no real balance sheet impact.

Rusty Rush, CEO

No.

Joel Tiss, Analyst

Okay, thank you. Okay, I got it.

Rusty Rush, CEO

But our balance sheet as Steve mentioned, we feel good about - we're double reserved how about that given the environment.

Operator, Operator

[Operator Instructions] Your next question comes from the line of Andrew Obin with Bank of America.

Andrew Obin, Analyst

I may tell Joel why some people might want to go to work, but maybe it's a different discussion.

Rusty Rush, CEO

There is an inch out there. There is some to do - it’s a balancing act, right.

Andrew Obin, Analyst

So just a question just want to clarify for part and services the way you report them. You did say that oil and gas is now at 3% to 4%?

Rusty Rush, CEO

Right.

Andrew Obin, Analyst

Yes, is it the same for parts and services as well? Is parts and services still more overweight to oil and gas?

Rusty Rush, CEO

I think - you mean to say truck sales? Because you said parts and service both times I thought, but anyway, truck sales.

Andrew Obin, Analyst

No, no, I did say - yes, the service business which is more profitable; that's what I’m trying to figure out.

Rusty Rush, CEO

Okay the service business, well, it’s typically we’re weighted both sides; it’s balanced between parts and service, but right now at 3% to 4%. I mean, I don’t look at it going up. The good thing is, it’s like sleeping on the floor; when you're that low, it's hard to fall out of bed and hurt yourself. So when you had only three to four, you cannot fall to zero, that’s what I'm saying. So I think you know, Andrew rather than to tell you it’s that low, you also... I can't think it declined as far as it could for the last four quarters. And it just declined more and more, and we've got a little bit of activity, but again, that’s in the three to four and that was in the first quarter. I'm not sure where it is in this quarter; it could be two to three for all I know this quarter, probably closer to two, I would guess, given that I made a lot of money the other day when he paid me to take a bunch of barrels of oil. So, I just don't see much of a downside to it and where we're at right now to be honest with you.

Andrew Obin, Analyst

That makes a lot of sense. Could you just maybe give us color, because you are the largest truck distributor in the country? You're touching a lot of geographies. You're touching a lot of industries, could you just take us around the country and give us what differences you see around the country and also what industries stand out to you both in terms of positive and negative? Thank you very much.

Rusty Rush, CEO

Okay, well, that's a big question. Thank you around the country I guess we'll start East and go West; that’s where the sun comes up. Florida has been decent, okay; I wouldn’t call it - I'm just going to rank them in area and just tell you - roughly Florida has been, if you look at it compared to everywhere else, it's been holding its own fairly well. There was a lot of infrastructure building, a lot of stuff going on in Florida prior to all of this. So you know with everything was going with the increase in, you know how many people were moving, actually from your state down to Florida, right. That was a lot of that going on. So there was a lot of building and construction going on. Maybe they like to work, and they don’t like paying taxes? Yes, that's - well come on to Texas; we run the state. But it’s pretty good there. As you move up into Atlanta, it's a little tougher in the big city there, just a little tougher big medium-duty town, okay? So a lot of stuff is not moving; everything is shut down; you're going up in the North Carolina, and stuff decent; you know, I would say Atlanta hit harder than North Carolina. Ohio is pretty tough, pretty tough up in Ohio right now. Indiana holding in decent; Indianapolis holding pretty decent; Chicago area pretty hard hit. But maybe not as you know I’m going to... it’s not like Atlanta, and I am always giving you a broad description if you’re asking me. Texas depends on where you’re at; you know in the Houston area we're holding in okay; Dallas holding in okay. I mean we're off, but relatively to everybody else not all, maybe this is other. Obviously, West Texas, the Permian Basin, South Texas hit pretty hard; no traffic going to Mexico, no oil. So, you know hit a little bit more difficult there. Colorado decent, but I would put it in and not hit the hardest. It's not hit as hard as say, West Texas or South Texas and California holding pretty; holding fairly well in spite of everything. I'll be honest with you. I mean - we’ve seen the hits out there, but it held on a little longer before even with the ports, even with those issues. Our business is really well - and very diversified out there. It really is so and Arizona's not as bad as say, in Atlanta, Phoenix is not as bad as staying in Atlanta or Chicago area or something like that. So there you go. What was the rest of your question?

Andrew Obin, Analyst

Just the same, no this is fantastic, and it's very valuable to get a real-time because I know you guys have some of the best systems in the industry. Just the same thing, but maybe which industries stand out in terms of strengths and weakness as you see them for end markets? Yes.

Rusty Rush, CEO

A lot of what we're delivering from a truck perspective construction has held in there. I'm concerned about it because it’s projects that were already left, right? Refuse has held in there. There's a lot of garbage; a lot of people staying at home. So there's a lot of garbage being made out there right now. When you look at municipal, we're in the bus business when that will start well - we also have some mover stuff and say in Texas; bus business - yes, it's school bus business. The schools aren't - they’re not in. Municipal, all the cities are shut down. Other than road contracts and things like that, you don't have much going on municipality-wise, why? Because the sales tax revenues are bad, and that's what they depend upon. So municipal then - hit really hard for and obviously, I don't want to go to oil and gas; you understand that. So the construction markets held in. I'm concerned about it because it’s projects that were already on the board. And I do believe that pipeline is shrinking up some. I know it is. You can outline the stats on it. So that's why we're all anxious once we’ve got - as healthy as we can be and just start easing ourselves back - easing ourselves back to planning to get back to some normalcy, but that’s what I want Andrew.

Operator, Operator

I am showing no further questions at this time. I would now like to turn the conference back to Rusty Rush.

Rusty Rush, CEO

Well folks, we appreciate your participation this morning. We look forward to talking to everybody in July. I wish everybody the best of health as we all - do the right things; I mean I'm big on the right thing. We've been doing the right things here at Rush as best we can while providing an essential business. Basically, as I tell my people, we are the backbone of this economy in the truck business and we're doing our best while maintaining all the proper - doing all the proper things, but we're there for you, I can promise that, doing our job. Thank you very much and we’ll see and talk to you in July. Bye-bye.

Operator, Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day. You may all disconnect.