Rush Enterprises, Inc. (RUSHA) Earnings Call Transcript & Summary

Well, thank you so much for joining us. It's Andrew Obin, and I have with us the management of Rush Enterprises. Rusty Rush, the CEO; and Steve Keller, the company's CFO. Can you hear me guys okay?

We're good here, Andrew.

Excellent. So I think the way we're going to do it is -- I have a set of questions, and then I think people who are online can actually -- who are dialed into the Vericast system can submit questions electronically or you can just e-mail them to me at [email protected] or you can IB them to me on Bloomberg. First of all, thank you for joining us, Rusty. I'm hosting this from New York City. I'm watching my city burn due to our mayor and the governor. So hopefully, things are better down in Texas because...

Of course, they are Andrew.

Our mayor just announced that he's going to keep us locked down for another month. Of course, if it wasn't for him screwing up in the beginning, the death rate in America would be half of what it is right now, but that's just me bitching because my apartment value is about to collapse.

Having said that, Rusty, why don't we talk about more pleasant things like truck industry outlook? Why don't we start out with outlook for truck production into second half 2020, 2021? What are you hearing from OEMs, customers? And I said -- hopefully, the rest of the country looks better than New York City and managed better as well.

Well, thanks, Andrew. It was a good intro there. I don't know if I can top that one, but I can talk about truck business, right? Obviously, the manufacturers have all been shut down. I know Peterbilt was shut down for 6 weeks, just opened up last Monday, PACCAR -- Peterbilt site. Navistar was shut down also. I think they may be -- they got the plant in Springfield; one in Mexico, in Escobedo. They were producing a few trucks. It was sort of spotty as to what they were producing. Peterbilt is still shut down, I believe, in Ste-Therese, which is their medium-duty plant. They're still shutdown in Mexicali, which is where they produce their garbage trucks, and Kenworth has a plant there. So when you look at it from that perspective, just -- and by the way, I could walk you through Ford and Hino and Isuzu, okay? They're all pretty much shut down, okay, still. Okay. So you really don't have anything going on. So what does that look like in the back half of the year? Obviously, you got to have demand, too. And obviously, everybody, just like the tortoise, had pulled their heads in pretty tight when it comes to demand -- customer demand. Obviously, we saw April's numbers were 4,100 Class 8 units, lowest since '96. So let's talk about looking forward. I got to believe the run rate -- I don't see how -- when I talk about U.S. class -- U.S. retail deliveries, which obviously do flow in with production, I usually talk about retail deliveries. But I think you're talking about a 2009/2010 run rate on retail deliveries. That's the run rate. You're talking about 100 -- it was 97,000 the whole year in '09. It was 110,000 in '11 -- in '10. And I think that's pretty much what the run rate is going to be for retail deliveries. Now more than that will get done because it was 47,000 -- or sorry, 48,000 in the first quarter of the year. But that will be the run rate. You look at what's being built right now. I would tell you, they're about 30% to Peterbilt factory of where they were at peak, roughly around that number. So when you do that, you do have -- your backlog stretches out a little bit. So I think they've got about a 60-day backlog, I would guess, at the run rate they're running at right now. I don't want to give out their numbers, but I'm trying to give you rough or about where they're at. I hate to do that to them. There are some issues with supply base. They might have opened up a week earlier where there have been supply base with stuff coming out of Mexico. I think everybody has been dealing with that. So there's -- and there continues to be possible supplier issues going forward. That may be one thing that hampers ramping up build rates for a lot of OEMS, to be honest with you, outside of demand. So you say, what's demand look like? Well, pretty much it was about nothing for a while. I am seeing a little bit of activity increase right now, not a lot. But gradual increase, okay, is what I believe we're seeing. We're seeing some gradual increase in activity. And that's in quoting activity. I'm not saying it's translated totally into deliveries yet, but that's in the quoting activity on that side of it. So I feel -- you feel okay, that's good. So maybe that should translate, we hope, in some more orders a little bit, but not sure, right? Just you quote with somebody. You got to remember that customer base is looking at the same thing you're looking at, what you started just the call off with, Andrew. So they're not going to jump out. Remember, because we're coming off the second largest 2-year run in Class 8 truck sales. Other than '05 and 06, '18 and '19 was the second largest run of 2 years that we've had. So you had a pretty fresh fleet out there to begin with. So -- and there are certain market segments that are doing fine and certain segments that are not doing as well. You can't have everything shut down and not be feeling the effects of it. I do believe that people are going to be very cautious. I see glimmers, but it's going to be very cautious. I don't look for anything to ramp up to 100 and -- even 150,000 or something like that run rate. I do not foresee that in the next few months, I really don't. I think it's going to be a slug-it-out summer. And if we can get something going on by fall, then we can get it ramped up to some more -- like I said, that 150,000, 160,000 annualized, not 200,000 even. We got a ways to go to get our run rate up to the 100,000, 110,000 that I see that right now on the Class 8 side. It's just -- I mean, folks, it's -- I don't have to tell you. Like you said, it's not pretty in your city. You said it was burning. We're not burning, but we're not seeing...

It's an exaggeration. It's a personal frustration.

I know what it is, Andrew. I know you're just frustrated. I don't blame you. I would be, too. I am glad I'm in Texas, by the way. So no disrespect meant by that at all. But we're slowly opening up here in this state. And it's interesting. You have to watch all the states, but I'll let you ask the questions. But I don't look for anything -- any big ramp-up more than what I'm seeing, 30% of peak build right now until more orders come in. You keep getting -- 4,100 units isn't going to get you much, okay? You're going to chew up what backlog's out there.

So how should we think about -- this is the discussion we had at the dinner last year when this conference was in Boston. How should we think about your sales relative to the industry? And specifically, what I'm referring to, how is your mix different, large fleets, waste, off-highway? And what does it mean for your relative performance versus the market? But also, if you could explain to people how is Peterbilt different from the market and how is Navistar different from the market because I think it all sets up.

Yes. No, obviously -- I'll start off with the OEMs and I'll circle to motors. Peterbilt has probably more vocational-based, more diversified customer base. That's good and bad. We're pretty strong in the oil and gas business. Well, there's none of that, okay? But it's also...

But it's now 2%, 3% of your company, right?

Correct. On the parts and service side, it was 3%. It may be 1% now, Andrew, when you're down to 400 rigs, going to go to 200. So -- but that's on the parts and service side, right? We've diversified the company a lot since 2016 when it was more like 15% of our business, right? So that said, they still -- they get into the construction side a lot heavier. They're in the refuse side. They're a little bit more diversified in the smaller fleets, in the cranes and the things like that, the mixers and stuff like that. They play very well in that. Navistar is still more of an on-highway vehicle. They've got a nice product offering they brought out a couple of years ago for the mixer market and stuff like that. But they're still grabbing -- it's a nice product, but they're still getting a foothold -- trying to get a foothold in those markets. Even though they're making progress, but it's -- they're not quite as diversified a customer base. They played in the medium side. Now they play a much more diversified arena in the Class 6, 7 business, and then they've got their new offerings that are out there right now, too. For us, we are -- the same way, we fall right in line with the OEM. I mean we're more diversified on the Peterbilt side of the house when we go to market, a lot more diversified. We're still in the large fleet business there but not as many -- we have large fleets that we do, but right now, they're not purchasing...

And that's because you have -- it's because you do have more vocational and because you are in the south of the country. So does that mean that you should be -- and because you did diversify away from oil and gas. Does that mean that you should do better than -- is it fair to say Peterbilt should do better than the country and you should be better than Peterbilt?

We should -- I would say our market share -- their market share and our market share will be better in a smaller market, okay? Yes. If that's the question you're asking, the answer is yes. Okay? What that number is, I don't have. But typically, if you look back historically, Peterbilt does better in a not huge over-the-road year. They had a nice year last year, if you could remember. It was as big a year as it was all over the dealers. And we'd do better. Our market share will be higher. Our market share was higher in Q1. The only issue would be, for us, is that we still -- we did enjoy selling some energy trucks. There are going to be no energy trucks this time. The other market segments, we'll do what we always do in them. But there is 0 going on in that field. So that might be a little bit of a headwind, but I still expect our market share to be higher this year than it was last year.

So you and I, I think, we've spoken quite a bit over the past month, and I really appreciate it. So I think the last we've heard on your call -- your quarterly results call is that you were talking about parts and services stabilizing for a couple of weeks. I think that was back in April. I hate to do this, but what have we seen over the past several weeks? And any material changes by industry and geography?

Yes. I think -- let's see, I was -- we thought it sort of stabilized and it bounced along, Andrew. Let's just say -- look, I'll go at it this way. We're off about, I think I said on the call, 11% to 14% or something like that. We're more in the 14%, 15% range right now. But that being said, I do believe we're on the bottom and bouncing along, I hope. Okay? It's -- if you look at the last 2 weeks, for example, we've seen a gradual, gradual, I'll say that again, increase in calls and ticket write-ups, okay? And a couple more -- and we manage by how many accounts have bought, and our accounts have dwindled down a lot through the first half of April. I would tell you, in the last couple, 3 weeks, really the last -- it bobbled there. But it seems like in the first 2 weeks of May and last week of April -- or the last few weeks, not including today, I haven't had time to go look and see what we did over the weekend or Friday's numbers yet, I can't just wait to talk to you all, we may be writing a few more tickets and taking a few more inbound calls. That said, the issue we're dealing with is revenue per transaction. People are only buying what they have to buy, okay? Your upsell to other stuff is going to be very difficult. People are doing what they have to do to get buy. They're not going to, "Hey, let's -- we like to upsell sometimes because there's other things to do. "Well, no, I'll just wait on that," right? They'll just hold off on that. And so maybe our revenue per transaction seems to be off a little bit even if transaction seems to be gradually going up, if that helps you anywhere. But when I talked to you before, I remember I went around the country, at that time, I thought Florida was hanging in there. Well, the Mickey Mouse ears have caught Orlando -- 4 stores in Orlando area. They're feeling it, right? And we're still feeling worse. Obviously, the oil and gas continued to get worse out in West Texas -- South Texas, where we had some of that. I do feel there's -- California, for whatever reason, seems to not be terrible. They seem to be doing okay. Arizona seems pretty good. But overall, I would tell you we're bouncing along the bottom at that number sequentially that I talked about, okay? So...

Which is down low single -- down low teens?

Yes. We -- yes, low teens, whatever, 14%, 15%, sequentially over Q1. Okay? So that's -- and I would -- I mean there are other indicators I have that tell me -- and Andrew, your rental fleet, I'm looking at, and things like that are usually good indicators to see where you're at. I think, I pray and hope that that's what we're seeing around, is we're just sort of bouncing along this bottom here with some maybe glimmers of hope as things start to crack -- the door starts to crack back open. Not open all the way wide, but as things start to open up, as the economy tries to start opening up, that we'll start to -- we're starting to see a little bit just -- as I said though, the average ticket transaction people are just doing what they have to, not all they can do. They're fixing what they need to, to keep running.

And what are you seeing on the lease -- what's the experience on the lease in terms of sort of payment delinquencies? As the states reopen, is that getting better? And how have you dealt with it?

Well, we've dealt with -- we've got 8,000 power units. I would tell you that I've had to extend some terms but not on as many as you think, maybe at 250, something like that, units, so nothing drastic. Remember, that's over 8,000, like 8,200, I don't know where we're at today, but of that, 80% are long-term lease, 20% are rent. So you can say 6,500 long-term lease units. Okay? That being said, maybe 225, 250, we might have extended -- given them 90 days extension because they just -- to help them along just because they had -- you look at the credit. If it's a good credit and they're just caught up in a pandemic, you're going to stick with the guy, right? You're not just going to drop them in the grease. You don't want the vehicle back when you believe they're going to pay for it. You believe the country is going to open back up. So it is not as bad as I thought it might be. I thought, by this time, I'll be talking to you about 500, 600, 700 units, but I haven't.

So that has been better than expected?

Better than I would have told you 1.5 months ago. If you talked to me middle of March, I would have said no, I'm going to be 600, 700 units in right now [indiscernible] Now I would say this, rental is a good indicator. Why? Because rental is rental. So I think we're bouncing on the bottom. We typically run well over 80% utilized in our rentals, just say 80%. We got down to -- we were down to 60 -- 59%, 60%. Last week, we were back to about 64%, 65%. I don't know this week. So if it stays in that 60s, that tells you you're bouncing on the bottom, right? Okay. That lets you know you're not just totally continuing down that slide down a slippery slope. So I'll be interested here. I usually check it mid-week to see where we're at mid-week. But -- so another indicator that tells me, not that it's a very deep end of the pool, but we're bouncing along the bottom of the pool. I'll -- okay.

And look, can you just update us -- because I think the most exciting thing for us about Rush stock and Rush company and your strategy overall is your strategy for growing your parts and service revenue. And just can you remind us what are the key initiatives, where are you in terms of progress and how has COVID-19 impacted your strategy? And I'll throw you sort of an easier one. A lot of companies, for example, are highlighting the fact that online has become a much -- they discovered over the past 6 to 8 weeks that online, all of a sudden, is a much bigger part of their strategy. And I know you guys have invested a ton in software. So just maybe you can take the conversation there.

Sure. We feel really good about where we're at in the online space from the truck parts and service -- from the parts perspective. But at the same time, it's still a very small -- still not the majority of how business is done. Is it going to be the growing piece? Of course, it is, just like it is with everybody. We feel we're on top of that, and we'll continue to take more of that share as that grows. Our strategy hasn't changed, not one iota. Is it masked right now as we manage the hell out of this thing given what we're dealing with? Yes, because you're caught up in all this management of G&A. I mean that's all I've been -- we've been grinding for 6 to 8 weeks on the G&A side. I know you'll ask me about it here in a minute. But from a strategy perspective, we still want 6% of the parts share. We had grown from something like 3.8% to like 4.7% or so of the parts market over the last 3 years with a goal to get to 6%, and we still have that goal in mind. Okay? Now have I measured it in the last 6 to 8 weeks? No, I hadn't really paid a lot -- been more focused on managing this hand-to-hand combat, right, at the moment. But nothing has changed when it comes to that. Have we had to -- we've had to tighten the screws around this place when you're going to need to go off -- when you have a slight downturn like that, but fortunately, not as bad as other businesses have. But no, we still have the goals of growing our parts and service business. And it's something like 65%, 66% of our gross profit currently and will probably continue to be that. I want it to be even more without truck sales going down as we go forward.

And parts and service, can this be up -- can parts and service be at least flat this year, you think?

Not right now, my friend. Like I said, I'm down mid-teens. We have to have a big -- remember, once you get -- once you fall in the well, you got to get back to 0, which is what you're asking me to do. So I'm going to have to have a big uptick in the back half to do that, right? So if I'm off -- we were off 2% or so, I think, Q1 over Q1, if I remember right, a little over 2%. So -- but the problem is going to be the second quarter right here. It's going to be very difficult to make it back up. Now I would like to say that we're back up to -- if I could get back up to Q1 levels later this year given where we're -- how we're managing our G&A, we'll be okay. We'll be -- we could get back to that back half of the year. Well, I don't see it right now.

So I actually do have a question from an investor. And I know that you have provided detail on parts and services, but the individual is asking for, can you just provide more color on mechanic's activity, work hours, rates, whatever you can sort of give more color?

Sure. First off, every one of our stores is open. Okay? Let's start there. We're an essential business. We have not shuttered the doors on any stores. Okay? Next thing, have we adjusted any hours? Yes, we've made some slight adjustments, okay? Some of the hours that we keep some time are more around customer-centric than they are profitable hours, taking care of some folks. So we might have squeezed a few hours during this pandemic we're dealing with in some areas where it was really wasn't cost beneficial for us. Okay? And you got to also remember not -- I know some customers are driving lots of models, some customers not so much, okay, depending on what their focus was, what market segment they're in. So we have adjusted a few hours. Rates have not changed. When it comes to labor rates and things like that, we have not. We always -- look, you always got posted rates and then you've got customer rates with discounts, et cetera, et cetera, depending on the size of the customer and volume, the stuff that they do with you. We have national account programs for many, many, many people. But that has -- we've not adjusted anything really from that perspective. It may get -- now margins are going to be tougher. It is a more competitive marketplace. You can see a lot is -- whether on the parts side, on the All-Makes Parts stuff, a lot of that independent stuff, they're struggling out there. Some of the independents still make up, if I'm not mistaken, somewhere in the high teens of the parts that are sold in the industry. And a lot of it's in the all-makes side. And so there -- a lot of people are just trying to cash flow, right? They don't worry about profit figures, but they're cash flowing, right? I don't pay for it for 60 days or whatever it is, I'm trying to cash flow because of this mess. So you're going to get pressures, right now, that we won't -- it will be very difficult for us to grow margins in this environment right now. Our job is to maintain. We were down to 36.5% blended in the first quarter. I hope we can maintain. I don't know that we'll be totally there, but we're working very diligent to do our best to here in Q2. And then hope...

Right. And the issue is -- just part of it is just the discounts from OEs on volume because volumes just are not going to be there, right?

Volumes aren't there, so it's a more competitive landscape. It's a smaller piece where everybody's getting a piece of. So everybody gets really competitive with it, right? So -- and you got plenty...

So we have 5 minutes, so maybe -- I know you sort of want to talk about your G&A actions. Can you talk about your G&A actions? And a lot of companies are also trying to differentiate between sort of permanent -- a, can you describe your G&A actions? And b, in terms of cost savings, are you reconsidering just how to do the business, maybe just sort of longer-term change or how you think about how much footprint do you really need? Are you going to take advantage of this to maybe do something more than just sort of managing the salespeople?

It's a good question. Well, we're going to continue to manage the salespeople, like you said, but it does make you open your eyes. And look, we talked about online earlier. You talk about mobile. I think mobile service guys could be a bigger piece of what we do in the future. Okay? I know it does because these cities will continue to grow and getting trucks moved around and to and from, it becomes much more difficult. So the mobile -- so the aspect of mobile service continues, too. I would look -- when you talk about long-term salespeople, yes, I can see that evolving to where I don't need as many absolute touch points, right, as technology continues to increase and become more embedded in our customer base. Remember, the customer is the boss. And what they're demanding is what will -- and I can see us being able to take long-term cost out from that perspective. It's not there right now. Still, our business is always 20 years behind every other business, the car business or anything else. The truck business tends to be, it seems like. But yes, I can see the model evolving or changing. From a facilities perspective, well, it's hard to make them go away. So I don't see any big facility builds on our foot -- going forward. We are pretty much -- right now, we're not planning on building any other large, large facilities, but we're up -- we're done for now. All we're doing is, whatever, cleanup. And I say that you're just refreshers, you're freshening stuff up. And most of everything we've got is pretty fresh. It's all in the last 10, 15 years, 20 years anyway, these facilities. So as we watch technology evolve from electric and all those other stuff, we'll have to pay close attention to that when it comes to what we -- the investments that we have -- the CapEx investments we have in facilities. I don't understand it all. It's still a ways off down the road. But don't worry, you can rest assured we're watching it. From a G&A perspective, Andrew, we worked diligently, and I think you'll see that when we come out of Q2, in Q2's numbers. And we're still -- we still won't have all the effect in Q2. It will be rolling into Q3 before we get the total effect. Look, we're going to be down almost 1,000 people from where we were -- somewhere 900 to 1,000 people where we were at peak last summer by the end of May. Hopefully, a lot of it was -- you always have the 80/20 rule you're working on and performing. In these kind of environments, they really show up. So I'd like to think we've done a pretty good shot with that. We're...

And the last minute we have, can you just talk about what you're seeing on residual values? And how is it different? What are the dynamics that may be surprising you in used residual values?

You bet. No, on the used side, obviously, used took a pretty big hit this quarter, to start, when COVID hit. I'd tell you maybe a 10% hit in valuation. We believe we were -- you see our margins were off from Q1. We've managed to -- margins are still difficult right now. At the same time, I believe our valuation is pretty good. We're very well accrued when I've got -- for our used truck inventory. I like to think that later this year, used is going to stabilize and come back up again or stabilize somewhere. I don't anticipate another hit in used over what we've already seen. I anticipate continued normal depreciation right now because you're not selling any new trucks really. Okay? So that will allow the market, hopefully, to support the used values when you have new trucks in sales down like they are. And then you would see used values come back first, and then you'll see new sales follow. That would be my comment. We feel good about where we're at from a residuals in our leased fleet. We watch it and monitor it, and we still have gain on sales, so -- unlike some other large lease companies. So we feel good about that. And we -- our used inventory right now is the lowest it's been in 4 years.

Well, terrific. Well, I think we are done. One last question. Are you going to now become buddies with Elon Musk now that he's moving to Texas supposedly?

Andrew, that is a loaded question. No, I don't foresee that to be the case. I doubt we'll be neighbors. I just doubt it.

Okay, Rusty. Well, you never know. Anyhow, it's...

If he likes -- if he wants to buy a ranch, I can send him -- I can go to South Texas. He already has...

Maybe you're going to become a Tesla truck distributor. Who knows?

Never say never, Andrew.

Anyway, thank you so much for joining us, and good luck.

Thank you, Andrew. We appreciate everyone. Thank you very much.