RUSH ENTERPRISES INC \TX\ Q1 FY2024 earnings call

• Achieved first quarter revenues of $1.9 billion and net income of $71.6 million or $0.88 per diluted share, and declared a cash dividend of $0.17 per common share.
• Class 8 new truck production caught up with market demand, but Class 8 new truck sales declined due to economic factors. Class 4-7 new truck sales outpaced the industry, and used truck sales had year-over-year growth.
• Aftermarket parts, service and body shop revenues were $649.2 million, flat compared to Q1 2023, with an absorption ratio of 130.1%, consistent with the industry experiencing slowing aftermarket demand.
• Taking action to reduce expenses throughout the organization to navigate the difficult market cycle, and expressing gratitude to employees for their hard work.

First quarter revenues were $1.9 billion. Net income was $71.6 million or $0.88 per diluted share. Class 8 new truck production caught up with market demand, but Class 8 new truck sales declined 13% in the first quarter due to economic factors like high interest rates and low freight volumes. Class 4-7 new truck sales reached 3,331 units in the first quarter, outpacing the industry and achieving year-over-year growth. Used truck sales were 1,818 units, up 8% compared to 2023. In the aftermarket, parts, service and body shop revenues were $649.2 million, flat compared to the first quarter of 2023, with an absorption ratio of 130.1%. Class 8 new truck sales accounted for 6% of the total U.S. Class 8 market and 1.4% of the Canadian market. Class 4-7 new truck sales were 5.4% of the U.S. market and 2.7% of the Canadian market.

• Expect second quarter aftermarket demand to be fairly consistent with the first quarter with some seasonal uptick. Anticipate second quarter truck sales to improve compared to the first quarter, but expect Class 8 new truck sales to decrease in the second half of 2024. Believe Class 4-7 commercial vehicle sales will improve in the second quarter and remain strong for the rest of the year. Cost reduction measures will flow in through the second quarter and be fully effective by Q3 and Q4.

• Freight recession and elevated interest rates negatively impacting over-the-road customers. - Aftermarket demand challenged by depressed freight market. - Potential issues with new EPA guidelines including cost and performance concerns around after-treatment.

Q: 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?

A: 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?

Q: 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?

A: 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.