Good morning, ladies and gentlemen, and welcome to the Rush Enterprises, Inc. Fourth Quarter and Year End 2019 Earnings Results. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Rusty Rush, Chairman, CEO and President.

Good morning everyone and welcome to our fourth quarter year end 2019 earnings release conference call. On the call today are Mike McRoberts, Chief Operating Officer; Steve Keller, Chief Financial Officer; Derrek Weaver, Executive Vice President; Jay Haselwood, Vice President and Controller; and Michael Goldstone, Vice President, General Counsel and Corporate Secretary. Now, Steve will say a few words regarding forward-looking statements.

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, 2018 and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved annual revenues of $5.8 billion and net income of $141.6 million or $3.77 per diluted share. In the fourth quarter net income was $23.8 million or $0.64 per diluted share on revenues of $1.3 billion. We are proud of our team for their hard work this year, which resulted in our strong financial performance and the record high company revenues. Our results were largely driven by execution of our strategic initiatives, a strong economy and strong demand for most markets segments we support. In the aftermarket, our annual parts and service and collision center revenues were $1.8 billion and our annual absorption rate was 120.2%. Our annual aftermarket revenues increased 5.6% compared to 2018, nearly doubling the industry aftermarket growth rate in 2019. The growth was primarily driven by investments in internal and customer facing technologies, expanded all-makes parts offerings and growth in our aftermarket sales team. Fourth quarter aftermarket revenues were flat compared to the fourth quarter of 2018 and down more than anticipated, compared to the third quarter of 2019. In addition to the typical seasonal decline in aftermarket activity, we experienced decreased demand from energy, medium-duty leasing and over-the-road customers during the quarter. We expect industry-wide demand for aftermarket parts and services in 2020 to be flat compared to 2019. But with our continued focus on our aftermarket initiatives, particularly in an improved productivity through Express Services, we helped expedite repairs and reduced customer dwell time and the investments we've made in distribution technologies, we believe, our aftermarket growth will slightly outpace the industry in 2020. Turning now to truck sales. In 2019, we sold 14,986 new Class 8 drugs, up 2% over the previous year and accounted for 5.3% of the total Class 8 U.S. market. Our new…

[Operator Instructions] And your first question comes from Jamie Cook with Credit Suisse.

Hi, good morning. I guess a couple of questions - hi, Rusty and Steve. I guess a couple of questions. Rusty, the fourth quarter, while you don't give guidance, was short relative to what the street had thought. Was it in line with your expectations? I'm just trying to figure out if anything surprised you in the quarter. And then my follow-up question to that is just, given where the street is for 2020, should we think about the fourth quarter as sort of a good base to start to grow 2020? And then my last question, you talked about energy, aftermarket bottoming, just what provides confidence there and how would you characterize how much of this energy was in 2019 to your earnings as we think about those markets bottoming? Thank you.

Okay. All right. First of all, you asked, was it what I expected.

Yes.

It's not what I expected, Jamie going into - I could tell you back in September and August, it wasn't what I expected, August-September area. But as the quarter unfolded and we got through the end of really in the middle of November, it - December was a difficult month. It really was. I guess to add color, not that it helps, I've done a lot of checking around the country over the last month because I saw what was happening especially in December. And I don't think I was alone from that perspective. It was a little more, as I said, it was the parts and service. I mean, we had some timing issues on truck deliveries. I mean you saw how big Q3 was, right? Q3 was a big quarter, it was our biggest quarter of the year, I bet, biggest ever. And so - and then, to be honest with you, I'll talk about Q1 in a minute, but we had some timing of deliveries that came in a little quicker than we anticipated in Q3. So I mean we were under 3,000 units from a truck perspective. But it was - and so I knew we were going to be off and truck sale is not quite that much going in, but it was parts and service decline that got my attention really in December. And we always have some sense on decline. This was just exasperated a little more and especially in December. December was a very difficult month. I will say this, it's the trough. Okay. I'm confident in that, from that perspective, as we go forward. Sequentially, we're going to be up in parts and service. Now whether we're up at the same rate as we were in '19 Q1, you know, it's…

Okay. I appreciate the color, Rusty. Thank you.

You bet. You bet.

Your next question comes from Justin Long with Stephens.

Thanks and good morning. So maybe circling back to the energy commentary. Is there a way you could frame up what the energy related headwind in parts and service wise in 2019? And I know you exited the year with that business lower. So what you're assuming for that headwind to be in 2020 as well?

Well, 2020 won't be as bad as 2019. How about that? The closer you get that. So I don't - it's hard to get a feel. The one thing about the oil business, when it turns on you don't need much, it does not give you much advance warning and a lot of times where it turns down, it doesn't give you much advance warning either. That being said, I don't look for any big pickups, you know, there inside of it. I'm going to try to get you Steve working on right here give you a little bit guidance from an EPS perspective what it was last year. It's just - it's - right now, I believe is trough. So Q4, I will look at as trough when it's down 65%. So it's a big quarter. As far as guidance to what it cost us last year, nothing like it used to, but probably somewhere between $0.40 and $0.50 last year compared to '18. Okay? Probably cost us somewhere $0.40 and $0.50 last year and as we go forward, probably half of that, you know, but that will all be directed up early in the year mostly. So you know as we look back on last year that $0.20, $0.25 will be spread over the first two - really first - some in Q3 too, but really, Q1, Q2 are a little more heavily weighted, probably 75% and the rest goes into Q3, I guess, when you look at that - when I say that $0.20, $0.25. So that's the best I can give you right there on that. Now and that's just what we believe, right? It's got to come to pass. But I don't look for any big explosion in it, and at least in this rest of this year. If it does - if something does happen, good. That's great. Now that doesn't mean we can't do better in other areas, from a parts and service perspective, but that's the reason why I called for flat, right, early on. It's because we thought it will become those headwinds here in Q1 and Q2. But I think we're capable of it with the stuff that we've done. I believe we're capable of it. That didn't leave as much room for growth, though, year-over-year. I do believe we can get some growth in the back half of the year when those headwinds subside from a parts and service perspective because I do believe most of all of our other markets have stabilized and we'll go out there and take some share in some of those.

That helps. And just from a top-line perspective in parts and service, you were up about 5.5% in 2019. If you took out, energy, would you say that you were probably closer to the double-digit? I just wanted to get a sense for, looking at the underlying market what the trend was.

It may not be quite there, but really close, okay?

Okay.

High, high singles, somewhere in there, okay? Remember, this is not clear times. I mean I'm going across thousands and thousands of customers and sometimes trying to bucket them all is not easy as you think. But we have pretty good intelligence on how to do it. So - but - so I would say somewhere very close to up there, okay? Very high to the dining table, okay?

Okay, that's helpful. And then, you mentioned the G&A cuts earlier. So just wanted to get an update on where you are in that process. And any updated thoughts on the savings you expect in 2020.

Well, as we go into the year, remember I mentioned, let me - I'll get to G&A in a second. Remember, Q1 is heavily weighted every year for the last 20 years with benefits and taxes. There is always some headwind there that comes shows up in Q1 that declines throughout the rest of the year. Once we get through March. And that's just the way it gets all expensed to the balance sheet - to the P&L. So if you - we're going to have those headwinds, but outside of those headwinds, from an operating perspective, I expect to be - we got pretty high in Q3 and Q2 too. Q4, we always have a pretty good quarter. I expect it to be very similar to last year's Q1 and then so it will be brought back quite a bit from where our Q2 and Q3 were. And G&A - SG&A will probably come down in total but G&A itself will probably be fairly flat to last Q1, so those cuts went into effect, some of them now because of what they were, roll in throughout this year. They all weren't immediate inside, because there were some semi-fixed and some contractual stuff, there's also personnel. It's a mix of stuff. So while we got benefit of some others, in Q4 we didn't get it all, so some of it will roll into this year. It's hard for me to really define exactly what. And we are still monitoring the business and the expenses on a daily basis. And I'll just leave it at that. We're not just about where we are weekly but we're paying attention closely to where we're at and we'll stay on top of that as we go forward.

Fair enough. I'll leave it there. Thanks for the time guys.

Yes. I mean, if I'm going to - one last thing, I would, for sure, believe we're going to be down on an annualized basis, okay? But we're spreading each quarter. I'm sure I've got confidence in Q2 and Q3, being less than last year, I really do, from a G&A perspective. If everything takes effect against Q1 down flat with last year because we had increases in two and three, we don't look for that to happen again this year.

Okay, great. That's helpful. I appreciate the time.

You bet.

Your next question comes from Joel Tiss with BMO.

Yes, I had like 24 questions, but you talked so much, now I only have two. How is it going?

Perfect. Absolutely perfect, Joel.

Can you talk a little bit about trade and like what is trade in Navistar mean for you guys and any - like any sort of preliminary thinking around maybe parts or just how you go to market?

Well, I think - look, as you know, it's not a light switch. Those deals are light switches, right? It's not add water and stir, right? So those things evolve over time, but I can tell you this, if you look at it, it's going to be long term more proprietary parts, okay, which obviously would help parts margins, okay. I don't think - now, I'm not going to get into the details, what -predominantly, where, what, when and how, but you know, given knowing that Volkswagen and most European ownership groups and how they work, they're driven towards proprietary. So I would expect over time, that time though it takes engineering and it takes -and they're already, obviously they've already been collaborating on stuff, right, for the last couple of years. But I would imagine there's improvements in purchasing, there's improvements and there will be proprietary stuff that continue to be built in to the product, which will help long term goal, from a parts perspective. From a truck perspective, you know they're going to have a stronger, I would say, way stronger balance sheet. And I would expect that they'll be able to - the ability to invest will be greater than it has been in the past. So I mean, there's nothing I can tell you that is going to happen right now, Joel. I can sit there, but again that continues to fortify the belief that there are tailwinds now started distributorship, we still haven't got. I mean if you really want to look, right - you didn't ask the questions, [indiscernible] talk about where we're at there, we've got headwinds in parts and service right now but that comes from not having hardly any engine sold from 2010 to 2013, 2014, right? Those are - those are the products we ought to do more parts and service business of. So what was sold was, it's gone out of the marketplace from the - perspective and then you have a glove [ph] market share for a while, so we're facing those headwinds parts and service wise right now and those stores really have to go out aggressively and go after different stuff than you normally would, if you were just running down a path, what usually happens with most OEMs in this country. At the same time, on your question, yes, it's good for the long term viability of that division for us and I still believe those are tailwinds in the organization. Can't tell you when they'll all come to pass. But we have seen it on the truck sales side are working better last year. We believe it will continue to help on the truck sales side this year, and you know for a smaller market but hopefully we'll do it. We'll do well with it.

And then for Steve, can you give us a little bit of help of SG&A as a percent of sales, maybe like first half, second half, just kind of ballpark, like how do you think it's going to flow. Thank you.

So for the year, obviously when truck sales go down since truckers - such high individual dollar items in our revenue will go down considerably. Our SG&A, even though we're doing expense cuts will increase as a percentage of overall revenue. So for the year, it will probably be in that 13.5% to 14% range versus where it was last year. And you know the spread of that by quarter is going to depend on the flow of truck sales. We expect the first half of truck sales to be better than our Q4 run rate. So it will be on probably closer to the 13.5% in that first half of the year and we're going to have to wait and see how truck sales unfold in the second half of the year. So hopefully, that gives you enough to model it out.

Okay, thank you very much.

[Operator Instructions] And your next question comes from Chris Armes with Buckingham Research.

Hey, good morning gentlemen. Just to continue in the talking about cost here. So you called out company-wide expense reductions in the fourth quarter. Can you just provide a little bit more color on those actions and were those kind of deferred or permanent or how to think about that?

Well, I think I mentioned a minute ago somehow, obviously there were some personnel reduction, outside of technicians, there was probably a 5% personnel reduction inside the organization. I don't count technicians because there are the mechanics and technicians, outside of that was probably a 5% personnel reduction across the entire network. And all expenses were looked at in other areas and are continuing to be looked at from a semi-fixed expenses and sometimes those roll in a little later. So - because you're on contracts and things like that. You'll say, well, I'm not going to renew it for this much, I'm going to cut it to this, or I'm going to cut it out entirely. So - but those things don't all evolve. I can't break contracts, right? So you have to allow some of those things to happen. Again, as I said earlier, we will continue to monitor, my call out for flat in the first quarter from outside of the seasonal stuff that shows up in the first quarter. There is always a seasonal plug that shows up there with, especially deployed employee benefits, equity things like that would get expensed hard in the first quarter every year of this company. So - but I do believe we will be down in Q2 and Q3. Year-over-year, pretty good while flattened more as some of the stuff continues to roll-in. So that's really where I am at, without me- - you can look back at last year - that's only G&A. On an SG&A perspective, it's going to go down. Because as you sell those trucks, the S part is directly tied to the sale of trucks. So you know that's what I believe and we believe and we will continue to monitor and if there more measures that need to be taken, we will take it. As I said, I believe Q4 was a trough from a parts and service perspective, slightly up in January. We'd look to continue that message sequentially now going to the back quarter sequentially. We believe that's happening in February and we'll continue to work this way through March. That will continue to sequentially be up in Q1 over Q4. That was the trough, working on expenses at the same time. I haven't said it, but Class 8 truck sale is going to be better in Q1 than they were in Q4, not dramatically, but they're going to. There was some timing and some stuff, they are filling in this year. So you know that's where I'm at.

Got it. And then secondly, if I could just ask about M&A, what the pipeline looks like and kind of how you guys are approaching that as we enter a kind of a downcycle in heavy-duty truck?

Well, you know, it really hasn't taken off. The downturn hasn't really taken it back. I mean, we didn't have the quarter we wanted. But it wasn't like it was a disaster. I mean it was to me, but given back what we've been on, if I would call that the trough, I feel pretty good, if I look back five, 10 years ago at the company. The M&A opportunities are - haven't really shown yet. Will they show? You better believe it. They always do. Everybody is still counting their pennies from last year. But don't feel the real heat, they may not have felt as much as we did in Q4. They had a good year. As the year unfolds, I'm sure that there will be opportunities arise. Do I have any right now? If I did, I wouldn't tell you anyway. So it's just as simple as that.

That's fair. Thanks for the color, Rusty.

You're welcome.

I'm showing no further questions at this time, I would now like to hand the conference back to Mr. Rusty Rush.

Well, folks, obviously we won't be long till we talk to you again. We'll be talking to you in April. Obviously, I've got a little comment here of my own before I just go off the cup. While the fourth quarter wasn't what we wanted, I can promise that we are laser-focused. I feel a lot better than I did three, four weeks ago. Again my window is a little bit short, but I feel very good with the efforts that we've got going on throughout the organization on all sides, whether it be on the sales side, on the focus on expenses, just really laser focused that Q4 was in a lot of ways a trough and whether it's dramatic or not, it was going forward, That was the trough and we will produce reports that you'd like. You can count on that. Thank you all very much and we'll speak to you in April.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.