Rush Enterprises, Inc. (NASDAQ:RUSHA) Q1 2024 Earnings Call Transcript

Rush Enterprises, Inc. (NASDAQ:RUSHA) Q1 2024 Earnings Call Transcript April 24, 2024

Rush Enterprises, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to Rush Enterprises’ First Quarter 2024 Earnings Results Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [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.

Rusty Rush: 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.

Steven Keller: 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.

Rusty Rush: 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 delivery 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 outpaced the industry in Class 4 through 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 part 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 leads 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 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 2020. 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 through 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 through 7 results this quarter. ACT Research for US Class 4 through 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 through 7 demand.

Currently, we believe Class 4 through 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 allow 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 procession 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 through 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.

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Q&A Session

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

Justin Long: Thanks and good morning. 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 two, three quarters?

Rusty Rush : Well, the timing of it, they will happen, obviously, flowing through the second quarter, Justin, to take full effect, I would imagine, by the time we get into the first part, 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 your absorption range, right. That gives you a good gauge of where you’re at. As I said, when you look at Q1, we were off about six points compared to last year’s 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 if you asked me, fighting it off.

So that’s the one good thing is we have two levers, right. You’ve got the gross profit and absorption, and you’ve 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, that absorption rate, that six points, we’ll try to get somewhere around half of that back, if you want to know the truth, maybe a little more. We’ll see how it all falls out, but it’s just normal, what you do, like we’re a cyclical business. This is nothing new or not something this company’s not pretty experienced at managing. And the good part is, we run a whole lot of our absorption rate, do 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, shifting the earnings of the company, where they used to be very 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 then and according to the market.

Justin Long: 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?

Rusty Rush : 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 want something I’m extremely proud of and anybody that has studied the organization or been around in a while should be also, it’s the fact that I haven’t seen a two year freight recession that I can remember for decades, okay. And we truly are dealing with the two year freight recession while we have a diversified earning streams in parts of service something we’re very proud of, we talk about all the different markets we manage, a dozen different market segments. And that’s the good thing that if we were so reliant on just the over-the-road business, the large customer of a small fleet I mean our on assigned accounts we call it which is the small customer they’re down again continue to be down double digits from last year, 12%.

Actually, so 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 against acting one just truck. 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 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 giving our approach to the market that I’m telling you is I would, more sophisticated than 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 keep 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 saying refuse. We were up in the public sector. We were a little off, without me going into every market segment.

We have our arms wrapped around it tightly, 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 know I’m long-winded as always, but and I’ll be happy to answer plenty of questions this morning. But yes, we’re not talking about being double digit growth, but we’re talking about growth. So we do believe it’s possible.