RUSHA - NASDAQ

Good day, and thank you for standing by. Welcome to the Rush Enterprises First Quarter 2024 Earnings Results Call. [Operator Instructions] 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, CEO and President. Please go ahead.

Good morning, and welcome to our first quarter 2024 earnings release call. On the call are Mike McRoberts, Chief Operating Officer; Steve Keller, Chief Financial Officer; Jay Hazelwood, Vice President and Controller; and Michael Goldstone, Senior Vice President, General Counsel and Corporate Secretary. Now Steve will say a few words regarding forward-looking statements.

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, 2023, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved first quarter revenues of $1.9 billion and net income of $71.6 million or $0.88 per diluted share. We are proud to declare a cash dividend of $0.17 per common share. Class 8 new truck production has caught up with market demand. And that, along with other economic factors led to a decline in our Class 8 new truck sales in the first quarter. The freight recession and elevated interest rates are negatively impacting over-the-road customers, both small carriers and large fleets. We are pleased to significantly outpace the industry in Class 4-7 truck sales, and we achieved year-over-year growth in used truck sales, which were the bright spots in a challenging quarter. In the aftermarket, our parts, service and body shop revenues were $649.2 million, flat compared to the first quarter of 2023 and our absorption ratio was 130.1%. Our results were consistent with the industry, which is experiencing slowing aftermarket demand driven by a depressed freight market. We did, however, see some healthy aftermarket demand from the public sector, refuse and medium-duty leasing customers that along with our commitment to support large national [ fleet lease ] and diversifying our customer base helped us to somewhat offset the challenging industry conditions we faced in the first quarter. As we look forward, we believe aftermarket demand in the second quarter will be fairly consistent with the first quarter, though we expect some seasonal uptick as we enter the summer months. We anticipate the current freight recession will continue to impact aftermarket demand, but we remain committed to executing on our strategic aftermarket initiatives. We believe that our second quarter aftermarket performance will align with our first quarter results. Turning to new truck sales. We sold 3,494 Class 8 trucks, accounting for 6% of the total U.S. Class 8 market and 1.4% of the Canadian market. As expected, economic pressures, such as high interest rates and low freight volumes, along with production levels of new Class 8 trucks catching up with pent-up demand led to a 13% decline in U.S. retail sales in the first quarter. While most of the decline in Class 8 truck sales was attributable to the over-the-road carriers, it is worth noting that we experienced healthy demand from vocational customers, and we expect this to be a good year for vocational truck sales. ACT Research forecasts U.S. Class 8 retail sales to be 228,000 units in 2024, down 16% compared to 2023. Due to the timing of deliveries to certain of our large customers and due to our diverse customer base that includes strong support in vocational markets, we believe our second quarter truck sales will improve compared to the first quarter. However, we expect the current freight recession to continue, causing Class 8 truck sales to decrease in the second half of 2024 compared to the first half of 2024. That said, there is plenty of time for us to sell trucks into the second half of the year and our sales teams are well positioned to take advantage of every opportunity possible to help us navigate through these difficult market conditions. Our Class 4-7 new truck sales reached 3,331 units in the first quarter or 5.4% of the U.S. market and 2.7% of the Canadian market. New and medium-duty truck supply is less constrained than it has been recently and lead times have decreased, though deliveries continue to be somewhat delayed by issues with body manufacturers with steady widespread demand from our customer base and our focus on supporting large national accounts. We are proud of our strong Class 4-7 results this quarter. ACT Research forecasts U.S. Class 4-7 retail sales to be 262,000 units in 2024, up 3.7% from 2023. As we look ahead, we will continue to monitor concerns regarding consumer spending and high interest rates and their potential impact on Class 4-7 demand. Currently, we believe Class 4-7 commercial vehicle sales will improve in the second quarter compared to the first quarter and remain strong for the remainder of the year. Our used truck sales reached 1,818 units in the first quarter, up 8% compared to 2023. We continue to experience weak demand and depressed values for used trucks, largely due to low freight volumes and high interest rates. Even with those difficult conditions, great execution on our used truck inventory and sales strategy allowed us to achieve strong results in the first quarter. As we look forward, the rate of decline in used truck values is slowing, but we believe it may continue to decline somewhat. But with our strategically diverse product mix, we expect our second quarter used truck sales to be similar to our first quarter results. Looking ahead, we are closely monitoring economic issues and the current freight recession impacting over-the-road carriers, which we expect will continue for at least the next several months. We believe that the second half of the year will be tough with respect to new Class 8 truck sales, but we also believe that demand should remain solid for new Class 4-7 commercial vehicles. When it comes to the aftermarket, challenging operating conditions will likely continue, but we should experience some seasonal lift in the warmer months. To help offset the challenges facing our industry, we are taking action to reduce expenses throughout our organization. With these expense management measures, along with our diverse customer mix and our focus on supporting large national fleets, we are confident that we can successfully navigate this difficult market cycle through the second quarter and the remainder of 2024. It is very important that I express my gratitude to our employees for their hard work and for continuing to provide superior service to our customers while staying focused on our long-term goals. With that, I'll take the questions.

[Operator Instructions] Our first question comes from the line of Justin Long of Stephens.

Maybe I'll start with one on the expense side of the equation because, Rusty, I know you mentioned some cost initiatives that are going to be kicking in. Any sense you can give us for the timing and magnitude of those expense reductions and how we should think about those flowing through SG&A in the next 2, 3 quarters?

Well, the timing of -- they will happen and obviously, flow in through the second quarter, Justin. To take full effect, I would imagine by the time we get in the first part of -- when we get into Q3 and Q4. As I've said, we feel pretty good about where we're going into Q2 at. We expect better truck sales across the board, timing. But we do expect decreased truck sales right now in the second half. But as far as getting -- that's the one thing you can always tell by looking at our absorption rate, right, that gives you a good gauge of where you're at. As I said, when you look at Q1, we were off about 6 points compared to last year in absorption and that's with flat gross profit, right? So you can probably gauge that was caused by some expense creep that got a little out of line considering the gross profits from parts and service flattened out some, which we're not used to for a while, but we've been doing a heck of a job you asked me fighting it off. So that's the one good thing is, we have 2 levers, right? You got the gross profit in absorption and you got expenses. So we will manage the expenses to where we're at currently and where we believe that the gross profit side is going to go, is flattened out. So we'll try to get some of that back of that absorption rate. That's 6 points. So I'll try to get somewhere around half of that back, if you'll know the truth maybe a little more. We'll see how it all falls out. But it's just normal what you do. We're quite a cyclical business. This is nothing new or not something this company is not pretty experienced at managing. And the good part is, we run a whole lot our absorption rate through a whole lot more parts and service business than we ever have. So we feel good about being able to do the right proper thing and manage through. That's the good part of what we've done over the last decade is shifting the earnings of the company, where they used to be so reliant upon truck sales to the parts and service side where you can manage the expense side of it along with it, not necessarily dollar for dollar but because that's not the way it works, you still got inflation and things that you have to deal with. And you've got services that you have to provide for customers. So there's a balancing act in what you do, but it does give you a lever. And I think we've proven in the past. We know how to do that, and we'll do it prudently like we have done this and according to the market.

Got it. That all makes sense. And maybe to follow up on parts and service. So you talked about your expectations for the second quarter. But any updated thoughts on the back half of this year? Do you think it's possible for parts and service to start seeing a little bit of growth on a year-over-year basis? Or given the environment for truck sales, could that be a challenge?

Well, obviously, the environment for truck sales, really, it's not just truck sales, it's our customer base, right? When you look -- If you own us [indiscernible] extremely proud of and anybody that studied the organization that have been around in a while should be also, it's the fact that I haven't seen a 2-year freight recession that I can remember for decades, okay? And we truly are dealing with the 2-year freight recession. While we have a diversified earnings streams in parts and service, something we're very proud of, we talk about all of the different markets we manage, a dozen different market segments, and that's the good thing that if we were solely reliant on just the over-the-road business, the large customer and the small fleet, I mean our unassigned accounts, we call it, which is the small customer, they're down, again, continue to be down double digits from last year, 12% actually. But to answer your question, you better believe we can get some growth in the second half. Now from which sector, I'm not exactly sure. But the good thing is, we attack all different market segments, okay? That's how we go to market. We don't just go to market attacking one, just trucks, we look at each market segment, we have assigned -- from the top of the corporation to the store level, we have people assigned to different segments. So do I believe there's room for some low, low single to small mid-single-digit growth in the back half? Yes. We're not looking at any kind of double-digit growth this year, but I do believe, given our approach to the market that I'm telling you, is I would be more sophisticated than the most with our systems and such that we have the opportunity to grow some of the back half of the year. I really do believe that. So I mean, without getting too much into proprietary stuff, you better believe it. And so hopefully, that along with some better expense management as we get into it, will allow us to maintain levels similar to where we were last year from an absorption perspective. I don't know that we'll be all the way there because you do have inflationary pressures that gets you on the expense side. But there are market segments. I mean, I could tell you right now, year-over-year, like oil and gas was down in Q1, you go what, Well, it was. It was a little softer. The small customer was a little soft, but we were up, say, in refuse, we were up in the public sector, we were a little off in wholesale -- without me going into every market segment, we have our arms wrapped around it tightly, so I promise, and we are putting more resources or focusing where we do believe that there are opportunities to grow in those certain market segments. So to answer your question, I don't know, I'm long-winded as always, but I'll be happy to answer plenty of questions this morning. But yes, we're not talking about big double-digit growth, but we're talking about growth. We do believe it's possible.

Okay. That's good to hear. And I guess I'll just ask one more question. To your point about the freight down cycle lasting for 2 years now, I think it's lasted longer than everybody anticipated. Has that changed your view at all on the trough earnings and free cash flow potential of the business this year?

Well, you would reflect on something I threw out there a couple of years ago, that would be trough earnings, and the answer is no way, okay? That's not happening. Okay, I'm more confident in that than I ever have been when I look at the organization right now and how we're going to market. So I put that out there a couple of years ago, but no, I'm extremely confident in that statement, more confident now than when I made it then. And also what I think peak will be. If things fall out the way everybody believes it will in 2026, that should be the big earnings of the organization based upon projections now, everything can change. The economy, can move and change. But based upon all the information we have with all the new EPA guidelines coming into [ first of ] '27, et cetera, we're very confident in both the trough, which -- look, '24 is nothing more than what I've told you the last couple of years, okay? I've told you '24 was going to be, you had a great '22 and '23 and a good '24 but off. I mean, I still think we're going to be, what's it, 13% off on truck sales so far, but 20% in the month of March, okay. But first quarter was all 13%. I know ACT is at 16%. This one time I'm going to say it's probably going to be a little more off than that. But I do believe there's going to be a large prebuy in '25 and '26. It's just difficult for folks. Go look at all the public earnings, all the over-the-road truckload now. LTLs, obviously, are still doing extremely well with what happened with Yellow last year and the way the dynamics are in the distribution business. But look at what's going on out there. Everybody is suffering. So that's why I'm extremely proud of what we've done. I'm more confident than ever that we will handle both that and the free cash flow side will still be extremely strong this year without question in my mind. Not as strong as last year, but it will be extremely strong when you look at historicals for sure.

Okay. That's a great way to wrap it up.

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

This CARB law thing is confusing, Rusty, sorry. So a question, can you talk about your confidence, given the weakness in over-the-road freight, what's your confidence of actually sort of being able to manage your inventory into the second quarter? You said that you sort of have confidence in your used truck, but maybe a little bit granularity of why you're so confident given the weakness in the market?

You bet. Well, it goes back to -- first off, we -- I must take them in inverted order here, Andrew. I'm going to go to used first. Why? We took down our used inventory we traditionally carry by 40% over a year ago. We took it down that much. We traditionally probably had closer to 2,500 units. We carry somewhere around 1,500 units. Because when you got into this very accelerated declining environment that used was in over the last 2 years, you had to be turning fast. So your turns had to accelerate from what maybe they had been historically. So by doing that, we've been able to really mitigate any losses that we might be -- had been taking in some of our used truck inventory because our turns were accelerating. And with that, what it has allowed us to do is take advantage of opportunities that are out there, right? So we've been able to take advantage of other opportunities because we don't have an inflated used truck inventory. We keep it at a level and we turn it fast. And so our used is -- good used quarters, we probably, not I'm going to say we've ever had, but we had extremely strong used quarter, which is quite unusual, not necessarily volume or but just turning it fast has allowed us to maintain a higher margin. So because we're not getting caught with used trucks that are decelerating valuations quicker than what historical norms are. When it comes to medium duty, I mean, medium duty, I can look at the order board, I feel good about it. I mean it's solid. I'm not going to say we're all sold out. But unlike the heavy side, we're way further along to selling out because in some ways in our medium-duty side, we still have some allocation [indiscernible] involved on medium duty because remember, medium-duty when we had that huge markets in '22 and '23, medium duty got -- especially in '22, everybody -- manufacturers they build medium and heavy shifted towards the heavy side because they made more margin. So medium duty still has some pent-up demand. And along with consumer spending, it's remaining extremely strong in the last couple of years. That has a lot to do with driving medium-duty sales, okay? So when you put it all together, we feel really good about where medium duty is at for the year. As I said, we've had a good first quarter. Second quarter will be stronger -- it is going to be stronger than Q2. And I believe that -- remember, there's fluctuations by the quarter. Sometimes people get so caught up in the quarters. But I would expect our second half to be -- I'm right now believing it will be just as strong as our first half based upon looking at the backlog of where we're at with medium duty. Now heavy duty. Well, heavy duty, timing has a lot to do with things sometimes, especially at least in the first half of the year. The first half of the year, I have a large inventory right now. If you were to look at my inventory, you're going go, oh my gosh, [indiscernible] Rusty, I'm going to say, yes, but understand that the vast majority of that is sold. And so what's happening is we're in the process of delivering a lot of that right now into Q2. So we do believe that Q2 for sure, we will deliver more Class 8 trucks. There's just no question about it. The stuff is on the ground already. We're already almost through April. I'm pretty solid as to where we're going to be in Q2. Now we look into Q3 and Q4. Are there concerns? You better believe it? Is the backlog pretty far off? You better believe it. But you know what, we're not on allocation anymore. You want a truck, I can start one for you in 8 weeks or so. So it's not like -- I can still start a truck in the back half of Q2 to deliver to you in Q3 and Q4. So we feel pretty good about. I do believe we'll be softer. There's no question in my mind. I do mean the second half will be less Class 8 deliveries than the first half, okay? Like I said, Q2 more than Q1, the second half less than the first half. But given the diversification of our market, look, all -- most all of your big carriers have already placed all their orders for this year. The little guys, we're still way oversupplied in trucks out there, just look at contract rates, look at spot rates and we'll tell you what's going on. So that market is going to be tough. But given our diversification into the vocations that we sell into, we're going to be extremely strong in refuse. That's booked out. We already know where I'm at. I'm going to have more construction. Now we do have some supply issues from one transportation manufacturer we're dealing with and some other things on the vocational side, but we still have the opportunity to sell into that. And there are still some private carriers out there that are looking at purchases, right? Not for hire, but private stuff we believe we can sell into, okay? So the year is not done. I'll put our sales team out there and challenge anybody, and we're going to be out there, we're going to be looking for business. And there's going to be some. It's just not going to be what it has been until this freight recession clears itself up. Everybody's got to remember. Still over half the market is the over-the-road market. The LTL is in good shape, but all those orders are pretty much placed. There's 1 or 2 little, smaller ones out there we're working on. But most of that business -- the second half is going to be tougher. But I believe that we end up the year -- when you look at our total market, we will be in a lot better shape when you look at our '24 compared to what the U.S. retail market went down in '24 given our diversification. There's just some timing stuff. But I do expect that as we get into the fourth quarter, you will start to see -- let's not get too shortsighted here, we're going to have a good -- we're going to produce when it comes to the company, I promise just like I've answered a minute ago to Justin. I'm solid as ever about where we're at. But when we get into that last quarter, people will really start -- I do believe you're going to see the order intake go up. And I do believe you're going to see '25 and '26 as we've just finished passing the last greenhouse gas law just 3 weeks ago, and they're pretty strenuous. That are out there that folks are going to have to start focusing on. Right now, a lot of our own business -- they're focused on their own business currently but they're going to have to focus on their fleets and the makeup of their fleets and having to deal with all the new technology and the inflationary price increases to meet the demands that are going to be put on in January 1 of '27. So I would expect that those markets -- well, regardless of the over-the-road market, we'll understand they're going to have to invest, not the small carrier so much but the large carrier regardless of where they are, in their own business, hopefully the freight recession will be clearing up by the back half of this year. Look, I've been watching everybody kicked the can for a year about when freight was going to pick back up. So I'm not going to be the economist here and tell you when. But I know it's got to carry around some time. The further we go and the closer we get to the end of it, you've got to believe. But then you tie that up with the '27 EPA laws, you're going to start to get, I do believe '25 and '26 will still be the kind of years that everybody's been predicting because look, engine prices are going to go up $20,000-plus just for diesel and more when we get into '27, you're going to have demand, so you have to do this much electric, you're going to do this much of that. So people are going to be a little nervous and fearful of that. So I do believe that will guide '25 and '26 to be super solid. We'll just deal with '24, as I said, given the diversification, I'm comfortable. Will it be backwards in the first half? Yes. But we still got time to try to make it a little more decent. So there you go. I don't want I rambled on for a while, but I'm trying to give you a larger look at what we see coming in front of us for the next 2.5 years.

Sure. And just looking at the ACT forecast, which you referenced, what are you seeing the puts and takes for the ACT forecast? What do you think is potential upside to the numbers? And what do you think is potential source of the downside to the numbers?