Rush Enterprises, Inc. (NASDAQ:RUSHA) Q4 2023 Earnings Call Transcript

Rush Enterprises, Inc. (NASDAQ:RUSHA) Q4 2023 Earnings Call Transcript February 14, 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: Hello, and thank you for standing by. Welcome to Rush Enterprises, Inc. Reports Fourth Quarter 2023 Earnings Results. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] 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: Well, good morning, and welcome to our fourth quarter and year-end 2023 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, 2022, and in our other filings with the Securities and Exchange Commission.

Rusty Rush: 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 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 4-7 commercial vehicles, demand remained solid. The manufacturers we represent were able to increase production throughout the year, which led us to significantly – I believe, this is significantly outpacing the industry with respect to new Class 4-7 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 a 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 in a certain 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 Xpress services, contract maintenance, and mobile service offerings. We also experienced healthy part 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 the 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 from the Class 8 market has been satisfied. ACT Research forecast 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 will 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 4-7 new truck sales reached 13,624 units in 2023, or 5.1% of the U.S. market and 2.9% of the Canadian market. In addition to pent-up demand due to limited new medium-duty 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 4-7 retail sales to be 254,250 units in 2024, up slightly from 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. In both of these things occur, we believe our Class 4-7 commercial vehicle sales will remain strong in 2024. Our used truck sales reached 7,117 units in 2023, relatively flat compared to 2022. Through the 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 the rate at which used trucks are depreciating will continue to decrease, and the 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. Looking ahead, we expect demand for Class 8 trucks to be soft, while demand for Class 4-7 commercial vehicles remains healthy. It should be noted that delays from body companies may continue to impact deliveries of new Class 4-7 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 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 question.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Justin Long with Stephens. Your line is open.

Justin Long: Thanks, and good morning.

Rusty Rush: Good morning, Justin.

Justin Long: Good morning, Rusty. So, 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 level of confidence on a net basis that the parts and service business is bottomed.

Rusty Rush: 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 of parts and service in 2024. As I said, if it works, 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 – as I was loved it, it was taken into parts and pieces, right? At the end of the day, you look at the small accounts, right? We talked about this before, well, that’s for 6 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% to 6% – it was 7% to 8% in Q1 and ramped up throughout the year.

So I’ve got to believe that Q4 was probably down somewhere the 13% or 14% range. And when we call those are unassigned accounts. But what you don’t realize that sometimes those accounts still make up 32% of our business. So you look at what we did, and you talk about being down like that, really continuing to decline over the year, you got to feel good about where you’re at. Like I’ve said before, maybe our margins where I hear softer, because some of the shift, what were the business we are doing over the more national accounts, which obviously, demand a better pricing along with this, whether national accounts, right? So we were able to make up that’s 32% [a third] [ph] of our business was down, probably like I said, I don’t have that in 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, also I got to believe it’s in the 14% to 15% range in the Q4, right? So, 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 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, assigning people at the highest corporate level through the mid-level to assign, we have over 300-plus outside parts and service sales people. And while they focus on some of their local mid-sized accounts, we have really put the push on to the national accounts. And when you do that, you have to form relationships at both the high end of a corporation, all the way down to the street level on the individual areas that they have terminals or they have shops or whatever they have, whatever business they’re in across the network.

So, with that, that allowed us to achieve an 8% growth rate with it being that 12% [a third] [ph] of your business. So you can see, you can extrapolate, well, what that meant to the company, right? That’s why it was a little softer, because the other side accounts or your small accounts, and their little higher margin accounts, right? But we were able to overcome them with – I’d like to say over a couple of third of your business being off 12% by the focus that we had. So we don’t see that changing. So when the small guy does come back, you got to feel really good about what you can, where you’re going to be, when that does, and when it pivots back the other direction which you’ve got to believe, we’ve been in a freight recession for 1.5 years, 2 years almost it seems like while the country has been doing decently well, the freight market is huge, all you got to do is read all the reports.

It’s been under a lot of stress here this last year.

Justin Long: 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: Yeah, they were up in the high-teens around 20, somewhere between 18 and 20. Again, I don’t have the total number, which the stores were talking about. But they were up somewhere in that and I can really break it into so many different segments, too. Because we still got a lot of mid-sized customers, too. National accounts, well, the largest growing thing we have going on. We still have a lot of mid-sized customers. 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’ve got national accounts, okay, of our business. So the other 40% is really that middle bucket, which is the largest bucket we touch, right? So that diversity of customers is really what’s allowed us to navigate 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 oil and gas being up, and our wholesale business still being up, and municipal being up, all these other areas are up. Okay. And regardless of whether their 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 with 32% of your customers or up 12% and still post on a positive year.