RUSHA - NASDAQ

Good day, and thank you for standing by. Welcome to the Rush Enterprises Q2 Earnings Release Conference 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, CEO. Please go ahead.

[Audio Gap] Vice President and Controller; and Michael Goldstone, Senior Vice President, General Counsel and Corporate Secretary. Now over to Steve for a few comments.

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, 2024, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved second quarter revenues of $1.9 billion and net income of $72.4 million or $0.90 per diluted share. I'm pleased to announce that the Board of Directors approved a $0.19 per share cash dividend, a 1% increase over our prior quarterly dividend and our ninth increase since announcing our intent to begin paying a quarterly cash dividend in July 2018. Market conditions remained difficult in the second quarter as the industry continues to face a freight recession that has persisted for more than 2 years and continues to face uncertainty with respect to trade policies and engine emissions regulations. As a result of these factors, many of our customers are delaying vehicle acquisition and maintenance decisions. However, despite these many challenges, our employees remain focused on the operational discipline and customer service in the quarter, which helped us deliver solid results. So I want to thank them for their hard work and dedication. Our aftermarket operations accounted for approximately 63% of our total gross profit in the second quarter, with parts, service and collision center revenues reaching $636.3 million, an increase of 1.4% compared to the second quarter of 2024, and our absorption ratio was 135.5%. In the second quarter, aftermarket revenues reached their highest level in the past 12 months, and we saw sequential growth from owner operators and small fleets, which we hope and believe may be early indicators of improving demand. Technician turnover reached a 12-month low, and we expanded our aftermarket sales force, further strengthening our ability to support our customers. Looking ahead, we expect stable aftermarket demand in the third quarter with potential for modest sequential growth. With respect to truck sales, we sold 3,178 new Class 8 trucks in the U.S. during the second quarter, accounting for 5.4% of the total U.S. market. While this represents a 20% year-over-year decrease, it is important to note that it is primarily due to the timing of several large fleet deliveries that occurred in the second quarter of last year, which made for a difficult year-over-year comparison. In Canada, Class 8 sales totaled 81 units, representing 1.2% of the market. Although demand from large over-the-road fleets remains weak, we achieved strong sales in the Class 8 vocational market, highlighting the strength of our diversified customer base. We expect vocational demand to remain solid for the remainder of the year. However, due to ongoing uncertainty around trade policy and engine emissions regulations, new Class 8 truck sales may decline sequentially in the third quarter, and the market outlook beyond the third quarter is difficult to project at this point. In the medium-duty market, we delivered 3,626 new Class 4-7 commercial vehicles in the U.S. in the second quarter, representing a 1% year-over-year increase and 6.2% market share. We sold 177 medium-duty vehicles in Canada, which represents 4.6% of the Canadian Class 5-7 market. Our medium-duty results were solid in the second quarter with both year-over-year and quarter-over- quarter sales growth. Demand was broad-based across all of our customer segments, and we saw particular strength with lease and rental customers. We believe that our Ready-to-Roll inventory program continues to differentiate us, enabling faster delivery and improved flexibility for customers. Looking ahead, we expect Class 4-7 truck sales in the third quarter to be consistent with our second quarter. We sold 1,715 used commercial vehicles in the second quarter, essentially flat compared to the same period in 2024. While financing remained a challenge for used truck buyers, we believe our inventory is rightsized and our used truck strategy is on track. Unlike the new truck market, the used truck market is less exposed to trade and regulatory uncertainty, which could give truck buyers more confidence and incentive to consider used trucks as part of their fleet mix in the near term. We expect third quarter used truck sales to be in line with the second quarter. Rush Truck Leasing achieved record revenues of $93.1 million in the second quarter, up 6.3% year-over-year. Our full-service leasing revenue increased as we brought new units into service, which also helped lower operating costs and increased profitability. Rental utilizations were lower year-over-year, but improved sequentially, and we are confident our leasing and rental performance will be solid for the remainder of the year. On the capital allocation front, we remain focused on returning value to shareholders. During the second quarter, we repurchased $83.9 million of our common stock as part of our expanded $200 million repurchase authorization. We also paid a cash dividend of $14.5 million in the quarter. And as I previously mentioned, we just increased our quarterly dividend by 5.6%. In summary, I am proud of our team's performance in the second quarter. Through disciplined execution, we continue to deliver solid financial results and return value to shareholders. As we move forward, we will continue to remain focused on operational efficiency and providing our customers with best-in-class service. With that, I'll take your questions.

[Operator Instructions] Our first question comes from the line of Daniel Imbro with Stephens Inc.

Well, Rusty, I'll start maybe on the industry a little bit. I'm sure visibility into orders is about as clear as mud. But how are you thinking about the third quarter as we sit today? And then from a strategic standpoint, just related to that, with the lack of visibility, I guess, what are the OEMs communicating? Are they taking down production? Are they still pumping out new trucks and telling you guys to deal with them? Kind of what's the order backdrop? And how is that changing with the OEMs?

Well, good question, sir. Dramatically different in the back half of the year from the first half of the year. Every OEM is taking production down. Every OEM has shutdown days. I'm not going to get into specifics, but you can broadly say across all brands, all manufacturer, it is going -- you're going to see a lot less trucks built, okay? You say, so what causes all that? Well, as I talked about, it's the uncertainty. I mean, I'll get to the emissions stuff and if anybody wants to know my opinions on all that and where we stand from a 232 and a tariff perspective there. But let's just look at April, May and June. April, May and June were the worst 3 months of order intake since 2009, okay? The U.S., Canada and Mexico took in less than 30,000 Class 8 trucks, okay? That eventually comes to fruition inside of the build that we see. There's just still so much uncertainty to know what -- we had -- we built a lot of trucks. So, actually, Q2 retail deliveries were flat to slightly up for the whole country. But I think that everyone pulled everything forward that they could. And right now, production is going to take -- is dramatically hit from quarter sequentially as we've seen since COVID, okay? When you -- and I put COVID as an outlier, really, since you go back way further than that to see, you're going to see from a production, not necessarily all the way through retail. Retail will be down, too, but production will be drastically down across all OEMs currently. Because there's just not any demand out there because uncertainty is there. I mean, I don't -- I guess, what was it, Tuesday? We pulled the GHG3 stuff, but that still has not given any clarity as to what we're going to get from an emissions perspective. Is it going to stay 200? Is it going to be 0.035? Is it going to go to somewhere in the middle? These 4 engine manufacturers and OEMs don't even have direction yet from the government. So by what we're dealing with is creates uncertainty on through the chain to the end user on top of the fact that we're still in a freight recession, et cetera. So -- but as I've said in the release, for sure, I'm expecting to be down in third quarter. Don't even ask me what the fourth quarter is going to look like, because it's hand to mouth and with less trucks for sure going to be built with people canceling ships, folks laying off employees, folks taking shutdown days, large numbers of these, taking 2, 3 weeks off. Every manufacturer has their own philosophy, but no one is right now currently as we sit, everybody is handling the same, to be honest with you, different but the same. Because there really is not any demand because there's still no firm knowledge of where we're going to be from an EPA perspective into January of '27. Is it going to stay at 0.035? Is it going to stay at 200 stay at 200 go to 0.035, which is what the rule of the law says it is right now. But that is very much in question right at the moment, somewhere in -- but I have no exact idea. And so customers, by nature, are just waiting to get some direction. Now I think I said somewhere in the release that, well, maybe things will start shaking out and looking a little better. And what I'm talking about is activity. I'm not saying orders. I'm saying by the time we get to Q4, I hope in the latter part of the year that we can finally get some solid trade stuff down from a tariff perspective and the Congress and the administration is looking at the 232 rule, if that gets where we stand on that, if we get where we stand from an emission perspective, then you know how to play your game, right? You know what to do with your business. I mean if it goes and stays at 0.35 (sic) [ 0.035 ], we're probably going to see -- probably we will see a pickup next year, I think, in order demand. If it stays at 200, not sure what that means, right? You won't have the additional cost. You won't have the change in technology to deal with. So fleets won't be looking at -- I mean, I hate to use the word -- I heard it, but I haven't used the word in a while, 'prebuy', but I didn't even say it. There might be a slight pre-buy if we go to [ 0.3 ], stay at 0.35 (sic) [ 0.035 ] next year. I mean -- and I know I'm answering -- I'm trying to give you a broader answer. I can't help myself, maybe your question, but trying to give you some outlook beyond where we are right now in Q3 and Q4, but into next year because I think that's what's important to understand is to try to get an outlook into where it's really going to go. But I can't tell you because I don't have the answers to these questions right now, right? And so all that does create uncertainty. And we are finally seeing the fulfillment -- true fulfillment of the uncertainty we talked about on the last call back in April. But it only continues to intensify because the further down -- you still don't know, right? And it just continues to beg, what do I do? What should I do? Are engines going to go up X? Are they going to -- we need some clarification. I think once we get that, I think we should -- may be able to -- regardless of how much activity, I'm not going to get -- it will depend on what some of these rulings are, also some of these tariff trade policy decisions. But I think we'll be able to get kicked off really. I think we're almost in a lull till we get these answers, to be honest with you. And besides, remember, I would tell you from what I've been reading in the last couple of weeks, most of your public carriers -- I would say the reports are slightly better than they were in Q1. They're not outstanding by any such. But I think more people have gotten to their numbers as depressed as they are than what -- you can see slight green shoots in there, but not a lot. There's still -- it's still a tough road out there because we're still out of balance, right? And I know I keep throwing out all these things, but we've still got too much capacity. I think it's continuing to slight cut out slowly out of the marketplace and to meet the demand level that's out there. But there you go, I'll shut up.

No, always helpful, and I appreciate the answer there. I guess maybe on what is more in your control right now, I guess the parts and service improvement in 2Q was notable. I think revenue was up. It sounds like ad and retention got better. I guess, one, can you talk about what you guys changed to actually drive that or improve retention and hiring? And then two, if you were to size up maybe what the earnings power or revenue uplift you can get from the hiring you've done? Like how should we think about the earnings power that you could add that's more in your control from growing parts and service over the next year relative to everything else out of your control, like the Class 8 demand?

Well, I think right now, by maintaining flat to slightly up, I think we're growing compared to the market, okay? I think we're doing better than the aftermarket for the reports. And remember, getting aftermarket comps is probably the most difficult thing there is because you get them from different sources, right? It's not like vehicle. Vehicles is a real simple and they're titled, right? It's easy to count those, getting to understand what the overall aftermarket is. But I think we're doing it slightly better than the overall aftermarket. I would tell you that I think our historical traditional way we go to market is what's allowing us to be fairly good. I would tell you that we're working really hard. We just finished the strategic offsite here in June to really try to -- not refocus, but even more double up with some more strategic initiatives to try to really accelerate the growth in our aftermarket business, especially going into next year. Right now, if we can maintain, which I will tell you, since I'm on the box, I guess I can say what I want now that I've released earnings, July continued and maybe a little better than June, not great, let's just call it flat. We're continuing to maintain which from a company perspective, given the environment, I almost feel like we're growing, okay? I mean it may have said 1.4% to revenue with a little expanded margin. Well, to me, it was better than that just given the environment, right? So we're -- to quantify it exactly what those -- because they were slight. We grew our sales force slightly. I'm not going to sit here and kid you. We didn't add double digits or anything like that because I'm not sure the market is accepting of that right now. But I'll tell you what, we're positioned to do things like that. And we've got a few other things. But again, some of this stuff's proprietary from my perspective. So I'm not going to get into everything. But trust me, we're hands down committed to continue to do what we have traditionally done plus a throw a few new things at it as we move forward, especially into '26 and '27. Like I said, I believe we can maintain where we're at in parts and service based on what I'm seeing. We haven't seen anything go way out of whack or out of line. And as you know, as I was at the earning, anywhere 63% last quarter of our profits come from parts and service. So that being the much more stable. That's why sometimes I think our business model is underappreciated in the fact whether it's truck sales, it's new, it's heavy, it's used, it's medium, our leasing operations and what they contribute to the company. Obviously, our parts and service operations and the stability. And then our ability to manage expenses where -- if you look at the earnings this quarter, it's the first quarter over the last 3 or 4 that we weren't down 4% or 5% in G&A. We were slightly up but basically flat. But you have to go back and understand that we made those cuts over a year ago. So -- but being able to maintain that, I'm very proud of people. In spite of inflationary pressures and things like that, we've been able to maintain that piece of it. So as usually, like I said, I'm ramping off on other tangents. But at the same time, I'm trying to give you a flavor. I was really proud of the quarter. When you look at the truck sales pressures that we had and compare them to year-over-year be less than 10% off of what we were last year with 25% less trucks or so, I was Class 8, saying. I was really proud of that, and it was driven by the parts and service operations, right? And I do believe we have growth back to your original question in there. I'm not sure that it takes place dramatically this year, but I am very comfortable. Like I said, what makes me feel good is even though we're only slightly up, I feel like it's more than that given the environment that we're dealing with now.

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

Just a follow-up on the parts and service question. As it seems that a lot of the production shutdowns have to do with the fact that it's more regulatory uncertainty more than anything else. Meanwhile, your parts and service business would indicate that people will continue to utilize the trucks in the field. Wouldn't the setup result in more wear and tear and older trucks, just lack of natural replacement. Wouldn't that drive an uptick in parts and service over the next 6 to 12 months?

You're right on, Andrew. That's what we're hoping for, okay? Theoretically, you're correct. The other -- but there's one caveat what's your business like, okay? Theoretically, you're 100% correct. But you'll have to take into account what does the customer's business truly look like, right? Are they squeezing it down because their business isn't that good. So where, for sure, the -- you're going to drive old-age trucks. But first, you got to make sure you're utilizing all of them, too. What's your utilization and how is your business. And if all those align, then there's no question what you're saying is totally correct. But those are caveats to that, that you have to take into account also. So yes, without question. Actually -- but yes, in the back of my mind, that's what I'm hoping for, okay? But I've got these caveats that have -- that ride with it, right? Our business has to be decent. So...

Another question for you, and I appreciate sort of the fact that you accelerated buyback. But if you look at your track record, if you look where we are in the cycle, can you share with us the latest thoughts of the Board on maybe stepping up the buyback? Because historically, you've been very conservative with your balance sheet, and I appreciate the reasons for it. But the pushback we get is -- the execution is fantastic. Stock is inexpensive. They have capacity on the balance sheet. How is the Board and your thinking is evolving on the share buyback?

Well, I think we announced during the quarter that we added $50 million to it, okay? I think I've got about $75 million or so left to spend of the $200 million. I would hope that the opportunities present themselves. We wouldn't be approving it if we didn't plan on trying to spend it. But we do it prudently. I'm just not out there, and we do it under a 10b5-1, right? So what happens sometimes is you set prices and you don't touch it for a while because we're in a quiet period. Now we -- Steven and I'll be relooking at that tomorrow as we reset the matrixes up to continue making sure we're purchasing, right? The stock fluctuated some in the quarter. It got down a little bit and back up. And we set a matrix in [ June 10 ], and we'll be -- don't touch it until now, and we'll be looking at it. But we wouldn't approve the money that we've got out there if we didn't want to spend it. So we feel real good about our cash position. Heck, will pick up I don't know, $35 million, $40 million with a big, beautiful bill in cash from a tax perspective this year. So as you know, our balance sheet is nice and flush, and we have the capability to do it. So -- but as you said, we have been -- over time, we've been typically fairly conservative. I'm not going to go out and -- but we -- I think we have proven the ability and the want to and the desire to buy stock back. Maybe not at the pace that some people want, maybe at the pace that some do, maybe too much for others. But it's at the pace that we feel comfortable with. We believe in this organization. We think it's a great opportunity to buy stock back at every moment. I mean, look, I'll just let the track record...

20-year history says there's never want to bad moment to lever up and buy back our stock?

I don't -- you used the word, you're not going to ever get me to do, lever up. Let's step back here a minute, Andrew. It's not rush. I'm sorry. Fire me. I'm too conservative.

A little bit more leverage. A little bit more leverage. A little bit more leverage. How about a little bit more leverage? Let me ask, look, as I said, the execution has been stellar. We appreciate it. Can you talk about just what are you seeing on macro? I keep asking this question. You have fantastic systems. Just maybe walk us across key verticals, across key geographies. And more importantly, how has your thinking evolved over the past, let's call it, 3, 4 months since we've been liberated?

Gosh, I always look back to the 1st of April every day, Andrew, and think of what a liberation it's been. Okay. More uncertainty than you shake a stick at. How have I changed in 3 to 4 months? Well, I know this, you asked about geographies. I don't want to think -- I don't want to be like the whole country like California has been in the last 1.5 years. Let's just say that, okay? No disrespect to my lovely California stores, anyone out there. But from a business perspective, industry-specific perspective, it has been very, very difficult on the truck sales side. No one -- it's almost like gridlock. I mean, no one has -- if the whole country was to act like California has been from a truck sales perspective, it'd be really -- we'd be woeful. It'd be really tough. But fortunately, obviously, we are doing different things here for the rest of the country as the political side fight it out with the Feds, having obviously a difference of opinion than CARB does out there, but I'm staying out of that. But fortunately, that's loosening up and going to a little more what I would call realistic look. You ask what's changed? There's a lot that's changed. No matter where the EPA ends up, it is way different than what it was, November 5 or whatever it was of last year, okay? And it's moved to what I would say, I'm not going to get too far or whatever, but it's moved in the right direction to a more realistic view of what the involvement should be from the EPA's perspective that makes sense for this country, okay? I'm not going to get into how far each way, but I'm going to say that's obviously changed a lot over the last few months. Now it has -- the problem is it hasn't settled down. okay? So once that gets settled down, I think we'll all be able to play the game, right? It's like tell me the rules and then I'll play the game. I don't care if they're good or bad or whatever, whatever the tariff is. Stop changing all this stuff. If I'm a manufacturer, I don't manufacturer to hire 20 people just to try to figure this stuff out on a daily basis, right, as to where they're at. We need a little stability with a little -- looking forward, and I think that will be good for everyone. I really do believe that we're going to get some of that later this year. So I couldn't have told you in April. I feel like it's coming. I feel like we're closer to knowns from the EPA and firm trade policies, I hope. So that whether it's the inflow or outflow of freight for our customer base or for a manufacturer trying to figure out what vehicles cost or what they have to spend and what they have to have their engines, we just need some stability. We need some -- this is what it's going to be. But we're in the middle of -- but we're getting closer, I think, to getting those answers. A whole lot closer than we were in April, right? And that's why I'm kind of proud of the quarter is just because, hey, we took a 25% hit in truck sales, and we took way more than $0.07 difference in gross profit from trucks from Q2 of last year to Q2 of this year. But hey, we went from $0.97 to $0.90. Why? Because we executed like hell on everything else that we have in our touch. And so that's why I know this organization will continue to be fluid enough to be able to keep managing this has proven anything to me. It's that we do have that ability. I'll put our numbers up against anybody's numbers, but I'm the only public really any way sing truck dealer out there of execution in Q2, and we plan on doing it beyond Q2 and into the future, Andrew. It's just I feel closer to knowing the rules. And once -- once we do -- it's not just -- once customers know the rules, they'll be able to make decisions. But we don't have the rules of the game yet. And I think what you see right now is just gridlock on folks ordering trucks. They want to know what's going to happen.

So that trumps everything, right? So it's hard to get a read what the macro sentiment except that because this uncertainty?

No question. That trumps everything right now. What -- are they going to -- am I going to have to go to -- is it going to stay at 0.35 (sic) [ 0.035 ]? Is it going to stay at 200 milligrams? I mean there's a very good chance it could stay. Look, I don't know. I'm not involved. I'm not in Washington, D.C. I don't have a phone number to anybody at the EPA. But I know a lot of people do. I get a lot -- and by the way, those opinions I'm getting are varied. So I'm just trying to form an opinion when it's secondhand information. But I am pretty close to a lot of folks. The funny part is that they're not all the same thought processes, right? So we -- and when you hear this, if you put yourself in my shoes, well, I understand why a customer is stuck in gridlock, okay? I get it. Besides my business being somewhat tough, I'm going to buy what I have to buy. And I mean, I just really have to buy. I'm not going to step out until I know. And at the same time, I want my business to get if I'm an over-the-road carrier, which is still 65% of everything out there or better. I want my business to also be a little better. So even though we -- retail was good, right now, we've hit that sweet point. But I do believe, as I said, just get us some stuff, and I think activity -- now that activity will start. Remember, for me, it's next year business. So okay, Rusty is not saying this is all a fourth quarter great business for us. I'm a tail of the dog. So -- but guess what, it's got to start with activity. Then it starts with pricing and quoting and orders and then manufactured and then all of a sudden has to be done to a truck sometimes after it comes off the line until it gets to that retail space. But I do believe -- not to the volumes but how much will be determined. If it goes to 0.35 (sic) [ 0.035 ], stays at [ 0.3 ], stays where the law is right now, not where we're -- not the 200 we're at, then you're probably going to get -- you're going to get some uptick without question. Now I don't know about the ability to be able to volume-wise produce because we're getting so late in the game. But I'm confident the administration will come with something, I hope, in the next 60 days, just to give clarity to everybody out there from -- this is from a truck sales perspective. Thank God, 2/3 of my profits come from parts and service though as a company. But I do need that other piece, too, okay, I want that other piece with it that trucks the piece at the same time. But again, our leasing business is solid. We expect it to remain solid, not going to grow exponentially, but guarantee it's pretty good. And keep our parts and service stock, maintain discipline inside our expense base. I don't really want to go out there and rip this place apart. We cut it back last year. It was the right thing to do. We've maintained basically exact flat headcount other than adding revenue creation positions. And we're just going to keep hanging in there and producing solid results until we see a catalyst to really -- to drive the market to better than what it's been right now, the truck to the sales market. And also, like you said, guess what, when you talked earlier, your first question earlier, "Hey, Rusty, if they get older, should you work on them more?" True, right? As long as their business is in line with the expenditures needed as the fleet ages, without a question, people have to do more parts and service. That benefits us, too. It's better margin business. But we do want to sell trucks. We need that whole thing working. But the truck sales side is just on a little bit of a hold right now until we get a little more clarity.

Okay. I'm showing no further questions at this time. I would now like to turn it back to Rusty Rush for closing remarks.

Sure. Nothing big here. We appreciate everybody's participation. We will look forward to speaking to everyone in late October, I do believe. So take care. We'll see you now.