Rush Enterprises - Q4 2023
February 14, 2024
Transcript
Operator (participant)
Hello, and thank you for standing by. Welcome to Rush Enterprises, Inc reports, fourth quarter 2023 earnings results. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. I would now like to hand the conference over to Rusty Rush, President, CEO, and Chairman of the Board. Sir, you may begin.
Rusty Rush (President, CEO, and Chairman of the Board)
Well, good morning, and welcome to our fourth quarter year-end 2023 earnings release call. On the call is Mike McRoberts, Chief Operating Officer, Steve Keller, Chief Financial Officer, Jay Hazelwood, Vice President and Controller, and Michael Goldstone, Senior Vice President and General Counsel and Corporate Secretary. Now, Steve will say a few words regarding forward-looking statements.
Steve Keller (CFO)
Certain statements we may make today are considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Because these statements include risk 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 31st, 2022, and in our other filings with the Securities and Exchange Commission.
Rusty Rush (President, CEO, and Chairman of the Board)
As indicated in our news release, we achieved annual revenues of $7.9 billion and net income of $347 million, or $4.15 per diluted share. In the fourth quarter, we achieved revenues of $2 billion and net income of $78 million, or $0.95 per diluted share. In addition, we are pleased to declare a cash dividend of $0.17 per common share. Throughout 2023, there was pent-up demand for new commercial vehicles due to limited truck production over the past few years. With respect to new Class 8 trucks, that pent-up demand was largely fulfilled by the end of 2023. With respect to the Class 4 through 7 commercial vehicles, demand remains solid.
The manufacturers we represent were able to increase production throughout the year, which led us to significantly outpacing the industry with respect to new Class 4 through 7 commercial vehicle sales. Despite a challenging operating environment in 2023, caused by low freight rates and high interest rates, which led to great general softness in parts and service sales industry-wide, we were able to achieve healthy growth in the aftermarket revenues. The growth was due primarily to our ability to support large fleets and strong demand from the diverse range of market segments we support, including our refuse, public sector, wholesale, and energy customers. In addition, our aftermarket revenues also increased due to the addition of 215 service technicians to our network. Expanding our service technician workforce is a key aspect of, and a center of our strategic initiatives.
Overall, we are very proud of both our operational and financial performance in 2023. In the aftermarket, our annual parts, service, and body shop revenues were $2.6 billion, up 8% over 2022 aftermarket results, and our annual absorption rate was 135.3%. As I previously mentioned, we added 215 service technicians to our network last year, which enhanced our ability to execute on certain of our strategic initiatives, including express services, contract maintenance, and mobile service offerings. We also experienced healthy parts sales growth from our energy, refuse, and leasing customers. Looking ahead, we expect the challenging freight conditions and high interest rates will continue to impact our customers, and that aftermarket demand in the first half of 2024 will be similar to the second half of 2023.
However, we are cautiously optimistic that the current freight recession may begin to ease in summer. In addition, we believe that our diverse customer base, our ability to support large national fleets, and our ongoing focus on our strategic aftermarket initiatives will allow us to outpace the aftermarket industry and to achieve flat to modest aftermarket growth in 2024. Turning to truck sales, we sold 17,457 new Class 8 trucks in 2023, accounting for 6.2% of the total U.S. Class 8 market and 2% of the Class 8 market in Canada. As previously stated, we experienced healthy demand from a variety of market segments. However, the pent-up demand in the Class 8 market has been satisfied.
ACT Research forecasts Class 8 retail sales to be 214,300 units in 2024, down roughly 22% from 2023. Though the industry is expecting new Class 8 truck sales to be down significantly in 2024 due to challenging economic and industry conditions, we are confident that we'll be able to navigate a down year and outpace the industry in 2024 due to our strategic decisions we made in prior years to diversify our customer base and focus on vocational customers. Our Class 4 through 7 new truck sales reached 13,644 units in 2023, or 5.1% of the U.S. market, excuse me, and 2.9% of the Canadian market.
In addition to pent-up demand due to limited new medium commercial vehicle production over the last few years, the manufacturers that we represent were able to increase production throughout the year. Those factors, along with our ongoing efforts to diversify our customer base and support large national accounts, allowed us to significantly outperform the industry in 2023. We are still experiencing delays from truck body companies, and these delays impacted deliveries during the fourth quarter, which limited our growth somewhat. ACT Research forecast Class 4 through 7 retail sales to be 254,250 units in 2023, up slightly from 2023, 2022. As we look, excuse me, 2023.
As we look ahead, we expect they will continue to see improvements in the medium-duty commercial vehicle production for the manufacturers we represent, and we expect customer demand to remain strong. If both of these things occur, we believe our Class 4 through 7 commercial vehicle sales will remain strong in 2024. Our used truck sales reached 7,117 units in 2023, relatively flat compared to 2022. Due to high interest rates and soft freight rates, demand for used trucks was weak, and used truck values declined throughout 2023. In 2024, we expect that demand for used trucks will remain flat, but that the rate at which used trucks are depreciating will continue to decrease, and that used truck values will stabilize somewhat over the course of the year.
We are confident our diverse product mix and ability to move inventory throughout our network will help us to continue to effectively navigate the used truck market in 2024. Excuse me. Looking ahead, we expect demand for Class 8 trucks to be soft, while demand for Class 4 through 7 commercial vehicles remains healthy. It should be noted that delays from body companies may continue to impact deliveries of new Class 4 through 7 commercial vehicles. We will continue to monitor freight rates, interest rates, consumer spending, and other economic factors that impact both commercial vehicle sales and aftermarket demand in our industry.
Despite challenging market conditions, we are confident that the strategic decisions we've made in the past several years to diversify our customer base on supporting large national accounts and to add technicians to our workforce, has us well positioned to perform in 2024. As always, it is important that I take a moment to thank our employees for their incredible work during 2023, and providing world-class service to our customers while staying focused on our company's long-term goals. With that, I'll take your questions.
Operator (participant)
Thank you. Ladies and gentlemen, as a reminder to ask the question, that's star one one. Please stand by while we compile the Q&A roster. Our first question comes from the line of Justin Long with Stephens. Your line is open.
Justin Long (Managing Director and Transportation Equity Research Analyst)
Thanks, and good morning.
Rusty Rush (President, CEO, and Chairman of the Board)
Good morning, Justin.
Justin Long (Managing Director and Transportation Equity Research Analyst)
Morning, Rusty. So I, I guess to start with the parts and service business, you've talked about the divergence in the trends between national accounts and the smaller customers. I'm curious how those two buckets performed in the fourth quarter and just your general-
Rusty Rush (President, CEO, and Chairman of the Board)
Sure.
Justin Long (Managing Director and Transportation Equity Research Analyst)
-level of confidence on a net basis that the parts and service business is bottomed.
Rusty Rush (President, CEO, and Chairman of the Board)
Well, I'm pretty confident, like I said in my notes, we expect to remain at least as good as where we are. I didn't want to push up. I think there's room for growth in parts and service in 2024. As I said, at the worst, we would just be pacing along where we were in the second half of the year in 2023. When you look at... If you take, you know, that's what I always love to do, is take it into parts and pieces, right? At the end of the day, you look at the small accounts, right? We talked about this before, the last six months, last couple of calls. The fact that for the year, they were down almost 12%.
Now, quarter-wise, I don't have that in front of me, but I know it started only off about 8%, 6%, so 7%-8% in Q1 through, you know, and ramped up throughout the year. So I've got to believe that Q4 was probably down somewhere in the 13%-14% range. And what we call those are unassigned accounts. But what you don't realize is sometimes those, those accounts still make up 32% of our business. So when you look at what we did and you talk about being down like that, really, you know, continuing to decline over the year, you know, you got to feel good about where you're at.
Like I've said before, you know, maybe our margins were a hair softer because some of the shift in what were the business we are doing over to more national accounts, which obviously, you know, demand, you know, a better pricing, along with... That's why they're national accounts, right? So we were able to make up that, you know, that's 32 1/3 of our business was down, probably, like I said, I don't have that in the fourth quarter right in front of me, but it was pushing 12 for the year, and I know it can decline more as the year went on. So I got to believe it's in the 14%-15% range in Q4, right? So, you know, it's, you got to feel good about where we're at, the focus that we've had. And it's not just over-the-road customers, right?
When I talk about, you know, the diversity of our customer base, I'm very proud of what we've done by putting a focus individually on each of these sectors. You know, assigning people at the highest corporate level through the mid-level to assign, we have over 300+ outside parts and service salespeople. While they focus on some of their, you know, their local midsize accounts, we have really put the push on to the national accounts. When you do that, you've got to, you know, you have to form relationships at both the high end of a corporation all the way down to the street level on the, in the individual areas that, you know, they have terminals or they have, you know, shops or whatever they have, whatever business they're in across the network.
So, you know, with that, that allowed us to achieve an 8% growth rate, with it being down 12% on a third of your business. So you can see, you know, you can, you can extrapolate, what, you know, how good, how well, what that meant to the company, right? That's why we're, why it was a little softer, because, you know, the unassigned accounts are your small accounts, and they're a little higher margin accounts, right? But we were able to overcome them with, you know, I'd like to say, overcome a third of your business being off 12% by the focus that we had. So, you know, and we don't see that changing.
So, you know, if when the small guy does come back, you know, you got to feel real good about what you, where you're going to be when that, you know, when it pivots back the other direction. Which you've got to believe, we've been in a Freight recession for what? A year and a half, 2 years almost, it seems like. While the country's been doing decently well, the freight market, as you know, all you got to do is read all the reports, has been under a lot of stress here this last year and a half.
Justin Long (Managing Director and Transportation Equity Research Analyst)
That's helpful. And the national accounts, do you have a number on how much they were up for the full year, just to compare that to what you're seeing with the unassigned accounts?
Rusty Rush (President, CEO, and Chairman of the Board)
Yeah, they were up in the high teens, so around 20%, you know, somewhere between 18% and 20%. I don't... Again, I don't have the total number, depends on which of the stores we're talking about, but, you know, they were up somewhere in that. And, you know, we break it into so many different segments, too, because we've still got a lot of mid-sized customers, too. You know, national accounts are, while they're the largest growing thing we have going on, we still have a lot of mid-level, mid-sized customers that, you know, we forget about them. They're a piece of it also. So you've got roughly, what, 32% in the small, and you've got about 28%, we would call national accounts, okay, of our business.
So the other 40% is really that middle bucket, which is the largest bucket we touch, right? So, you know, that, that diversity of, of customers is, you know, really what's allowed us to navigate what, you know, what has been a rough, rough time for a lot of our customer bases. And that focus on vocational, right? When I talk about refuse being up, and I talk about, you know, oil and gas being up, and our wholesale business still being up, and municipal being up, all these other areas are up, they're up, okay? And regardless of whether they're national accounts or mid-level accounts, we break it into a lot of different buckets, but those are the areas that have allowed us to overcome, when 32% of your customers are off 12% and still post out a positive year.
Justin Long (Managing Director and Transportation Equity Research Analyst)
Got it. And I was wondering, too, if you could share anything on expectations for the first quarter, maybe truck sales, parts and service. And Steve, I know typically you see an uptick in G&A, so maybe some thoughts there as well.
Rusty Rush (President, CEO, and Chairman of the Board)
Yeah, well, first quarter is always, you know, G&A goes up. We didn't put it in the releases this year. We put it in for the last 25 years, but it's nothing's changed, right? You know, all the equity comp and taxes and all that ramp back up and get expensed out in the first quarter, and that is natural for our business. You can go back and model it every year. So we definitely expect that. From a truck sales perspective, we are going to start declining, okay? There's no question, and, you know, everyone knows, we've known it for a couple of years, that 2024 was going to be a little bit soft, due to and no one expected 2023 to be as big as it was, you know, with all the demand, the pent-up demand.
But the key thing in the truck sales side is, this is nothing that we didn't expect, but we're not expecting. ACT has it down about 22%, and I'm going to agree with that. I don't expect it to be down 22% in Q1, but I do expect it to be softer. And we expect to do better, by the way, given the diversity in our customer base, right? I, I can tell you that the over-the-road business is going to be, down more like 30+ for the whole year, I believe. But the key thing is, we've got 2025 and 2026 coming.
With EPA regulations of January 1, 2027, there will be, I'm guessing as we get to the back half of this year, folks are going to wake up and realize that they are probably going to pre-buy into 2025 and 2026, given not just the new technology, but the... I mean, I don't, I won't get into it, pricing, what the engines are going to cost and go up by January 1, 2027, with all the new after-treatment systems that are going into play to meet the new EPA regulations. So we believe the freight market will come back. Remember, the over-the-road business is still the biggest piece of volume out there. It's not in Rush. Our, we're 50/50, right, between vocational and that. But in the real market, it's still the biggest piece.
So, you know, those folks, as they can just get their feet underneath them here, it's been a long year and a half or two, like I said, when they get their feet under, I would expect some, you know, a pre-buy to start possibly in the back quarter, toward the back half of this year, as folks realize what the cost and stuff will be around that equipment. From an aftermarket perspective, yeah, I said the first half would be flat when I went through it a minute ago. I have hopes that we're up slightly, but I don't want to put that out there. I think some of the initiatives we have are still... We keep rolling them out, and we still haven't come to fruition on a lot of the ones that we have rolled out over the last couple of years.
So, you know, I got to believe that we're still extremely focused on... You know, we- remember, we're also battling less inflation, okay? Regardless of the report yesterday, overall, obviously, the inflation is not what it was two years ago or even the first half of last year. So we're, you know, it'll be real growth, it'll be taking share. That's what we focus on every day. We get up in the parts and service business, is to take share. So, you know, I've got to believe that we're going to be, like I said, I wrote-- I said flat. I have hopes to do way better or a little better.
You know, I'd love to say I could be, you know, low to mid singles up for the year, but, you know, it's not as easy to look at as it was the last couple of years, right? It's day-to-day, hand-to-hand, world combat type work. But I have all the confidence in the world, as I always do, and I think the results bear that out for the organization and our strategic initiatives that we've laid out there and what we're focused on, as a whole, as a group, to that we can execute on those, right? I like to believe we've executed in the past and will continue to execute as we go forward, regardless of what the truck sales market is. I can't make a truck market, but I expect to do better.
I don't want to. I'm not going to guarantee, but I expect to do better than 22%, I can promise you that. But, you know, that's gonna be, we're working that every day. You don't have the lead time, you don't have allocation like you had. That's not out there anymore. So it's not like I've got a year-long backlog of trucks. So, you know, I'll still sell you most of the, most of it, I can still sell you trucks. I mean, if you want some in Q2, I'll get you some. So, you know, that's just where we're at. We're back to normal times, okay? Let's just say that when it comes to truck sales. I do think we'll be back on allocation this time almost next year.
That I can, you know, I do believe that will come to pass, whether it's, whether it's February, whether it's, you know, April of next year, I can't tell you, but there's no doubt in my mind that we'll be going back to an allocation market in 2025.
Justin Long (Managing Director and Transportation Equity Research Analyst)
Got it. And last one for me, Rusty. You've talked about earnings expectations and free cash flow expectations and the trough in 2024. Any change to your outlook there?
Rusty Rush (President, CEO, and Chairman of the Board)
None whatsoever. I don't take back anything I've said in the last couple of years, okay? As usual, you know, we're focused on, I like to overdeliver. How about that?
Justin Long (Managing Director and Transportation Equity Research Analyst)
I like it. I'll leave it there. Thanks, Rusty. Thanks, Steve.
Rusty Rush (President, CEO, and Chairman of the Board)
Good.
Operator (participant)
Please stand by for our next question. Our next question comes from the line of Andrew Obin with Bank of America. Your line is open.
Andrew Obin (Managing Director and Equity Research Analyst)
Hey, Rusty, how are you? Good morning.
Rusty Rush (President, CEO, and Chairman of the Board)
Well, good morning, Mr. Obin.
Andrew Obin (Managing Director and Equity Research Analyst)
Are you calling the bottom of the cycle? Because that's what you're—you know, it's, and have you called—I don't think you've called the bottom of the cycle before. It seems that you're basically saying cycle will bottom sometime around this summer.
Rusty Rush (President, CEO, and Chairman of the Board)
Yeah, I think so. I think we're, you know, you're gonna have a little carryover, you know, when it comes, we're talking about truck sales, okay? I'm not talking about aftermarket business. Aftermarket business is totally different. But when it comes to Class 8 truck sales, I think that, you know, the summer's going to be a little more difficult than what we've experienced. You know, there was some carryover to Q1 from finishing up the year. Remember, we're at the end of the frame. We don't manufacture them; we deliver them. A lot of times trucks take bodies and things like that, and it can be up to 60-90 days for those trucks to get delivered to our customer base, especially on the vocational side.
So yes, I would tell you that, you know, the, the trough for us in Class 8 deliveries will probably be sometime this summer. But again, like I said, you know, I do expect, you know, the freight market cannot continue, I don't believe, to be as rough as it's been the last couple of years. So, you know, I would expect that to pick up and along with the, you know, EPA emission laws of 2027, January 1 of 2027, I do firmly believe will be a pre-buy, without question. I think, you know, most people expect 2026 to be the biggest year in history, you know, given decent economic conditions overall in the country, right?
Yeah, I mean, I would tell you that truck sales will be, you know, softer in the second and the summer into Q2 and Q3 than what we have seen. But again, you know, we believe, you know, when I say 22%, I think the majority of it will be in the summer, yes. But, you know, I expect to start bouncing back by the end of the year.
Andrew Obin (Managing Director and Equity Research Analyst)
Excellent. And when can you just remind us, when is used pricing bottoming?
Rusty Rush (President, CEO, and Chairman of the Board)
Well, it isn't... I wish I Andrew, if I could tell you that, you better even give me a raise, okay? Which I would gladly take. But anyway.
Andrew Obin (Managing Director and Equity Research Analyst)
I think you're doing fine, Rusty. I think you're doing fine as it is.
Rusty Rush (President, CEO, and Chairman of the Board)
I would agree with that. I'm probably overpaid. Did I say that? Okay.
Andrew Obin (Managing Director and Equity Research Analyst)
Yeah, don't say that either.
Rusty Rush (President, CEO, and Chairman of the Board)
No, Andrew, I'll tell you, I will say this, used—the decline in used truck pricing has continued. While it is not as dramatic as what it was, say, a year and a half ago, it is still declining more than normal. I think our average used truck price was, like, $53,000, I see. And when you look at average, and if you go back to 2019, or was, I think the record is in the 40s high 40s or something like that, 47, 48. So you got to believe with the inflationary of what trucks cost now, that spread has gotten... It, it, there's only so far it could go, but the problem is that pricing is one thing, demand is the other, right?
When you've got spot markets, which are the main driver of used truck values, in such rough shape and down so much, it's still. It'll happen quick when it happens, you watch. I can't tell you when, though. So that means, I guess, I don't get my raise, but exactly when. But I would tell you, I got to believe sometime before the year is out, but I don't look for it in the next., you know, it'll continue to decline at a faster rate, but not as fast as it was declining. There are still trucks being put on the market. I've heard of a couple of batches this week, you know, in big numbers, that people are trying to unload, which puts pressure on it, you know, puts pressure on the market.
But the most important thing is to create demand, which means you got to get the spot market back. You've got to have some of these others, you know, this over-the-road business spot market back to really stabilize it and make it come, you know, and to make used truck values go up again, you know. But it's not. It's still decelerating faster than what I would say normal percentages are.
Andrew Obin (Managing Director and Equity Research Analyst)
Right. And just a question, in terms of macro, and I always, I love asking you this question just because you have great systems. Can you just take us around the country and just by region, is the economy holding up relative to your expectations maybe six weeks ago? And I know that it's only six weeks, but you do have some of the best systems of anybody I cover. Just maybe you can take us around the country and tell us what's Rusty Rush's 30,000 ft view of the U.S. economy.
Rusty Rush (President, CEO, and Chairman of the Board)
Well, obviously, the biggest concentration we have would be in Texas, right? And Texas is doing just fine. Okay, our Texas stores are still, you know, the state's still growing. It, you know, one of the highest growing states in the, nation, and, from both population and a business, you know, perspective for business is still coming in here. Florida is doing great. Then, where are we gonna go up? We're going, we're, and we're getting through, I would tell you, a little softer, maybe lately in Ohio, I think. And, but I think Illinois is decent and doing well. You know, we go out west, California is still in good shape.
I do, you know, I worry about California with the new 2024 CARB laws that came in, and by the time we get to the back half of the year, that they may be suffering on the truck sales side. Right now, they're doing fairly well, but we, you know, we make sure to have some inventory and things like that to carry over into the markets out there. Where else? Oklahoma is still doing, doing strong. Arizona is decent. You know, so pretty decent across the board. Like I said, a little softness in a state or so, and really, probably in Ohio, for whatever reason. I've noticed it was a little softer up there recently, but I don't expect that to hold up. I expect that them to come back. So I hope that gives you some... I mean, go ahead.
Andrew Obin (Managing Director and Equity Research Analyst)
Yeah.
Rusty Rush (President, CEO, and Chairman of the Board)
You know, a lot of times I like looking at markets. I like looking not just geographic markets, but-
Andrew Obin (Managing Director and Equity Research Analyst)
Yeah.
Rusty Rush (President, CEO, and Chairman of the Board)
Other markets, you know, breaking it out into the good market. You know, construction is better. You know, that's what we hope will help keep the aftermarket better with the—you know, the hits that we're seeing on the road business, both for the large customer and for the small person, which, you know, are pretty much out right now, out of our mix. But, you know, refuse is really going strong. Construction is doing extremely well. Municipal business is holding in strong, you know, moderate growth rates, as I said earlier, and we expect that to continue. You know, it's like I said, the hardest thing we've got going is the small customer, right?
That's why when the small customer does come back in the over-the-road business, we're gonna be in really good shape, because we're having to overcome that one-third of our business being off double digits. So, you know, that's, that will bring back, and I don't, I expect vocational to continue to be strong, given, you know, the government monies that are out there that are being spent right now. So, you know, look, 2024 is not gonna be what 2023 was, but at the same time, it's gonna be... I'll, I'll stick to my guns, as I was asked earlier by, by Justin, about what I've said in the past, is to we'll still execute. You know, I, the truck market, I can't make the truck market, but I doggone sure can take share and grow in the aftermarket, and that's the goal of the organization.
That's the highest profit, but most profitable business we do.
Andrew Obin (Managing Director and Equity Research Analyst)
So if I were to summarize it, truck market is bottoming, economy is solid, Rush Enterprises is executing. Is that a fair summary?
Rusty Rush (President, CEO, and Chairman of the Board)
That's what we like to think. You know, I guess the proof of it's been in the numbers, but, you know, I think we've had a, you know, even going back to COVID year, right, in 2020, and what we did in 2021, and what we did in 2022, what we did in 2023, we're gonna execute really well, I believe, inside of what the 2024 market, with a 20%+ Class 8 decline. Maybe not by us, though. You know, maybe we're better than that. I don't want to guarantee anything, but I'd like to see us only be half of that. But I can't guarantee that because I still can build you something, you know, it's still a moving target, right? We're back to normalized times. We gotta get out of this allocation world we lived in.
So, you know, everybody's got to sharpen up their tools and go to work and get out there and take some shares because the company, you know, needs a little more competitive environment. But, you know, we've always been able to do that.
Andrew Obin (Managing Director and Equity Research Analyst)
Well, you know, my view, you guys have built a high-quality organization. Thanks a lot.
Rusty Rush (President, CEO, and Chairman of the Board)
Thank you, Andrew. I appreciate that, buddy.
Operator (participant)
Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Rusty for closing remarks.
Rusty Rush (President, CEO, and Chairman of the Board)
Yes, I want to thank everybody for joining us this morning, and we will see you in mid-April. You and your loved ones, have a happy Valentine's Day. Thank you very much.
Operator (participant)
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.