Good morning, ladies and gentlemen, and welcome to the Rush Enterprises, Inc. Reports First Quarter 2020 Earnings Conference Call. [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 first quarter 2020 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 Hazelwood, 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, 2019, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved quarterly revenues $1.3 billion and net income of $23.5 million or $0.62 per diluted share. We also declared a cash dividend of $0.13 per common share. In the aftermarket, our annual parts, service and body shop revenues were $428 million down 2.4% over 2019. Our absorption ratio was 114.3%. This decline in our aftermarket revenues can be attributed to softness in the market and the significant decline in the energy sector. Regarding truck sales, we sold 3,078 new Class 8 trucks, down 13.5% from the first quarter of 2019. Our truck sales accounted for 6.3% of the total U.S. Class 8 market. This is the result of an industry wide slowdown in Class 8 truck sales, although refuse, construction and stock truck sales remain relatively healthy. Our used truck sales decreased 15.3% year-over-year. Our results in January and February were down slightly from the same time in 2019 where we experienced a much more significant in used truck sales due to the COVID-19 pandemic in March. Medium-duty our Class 4-7 new truck sales were 3,264 units up 24.9% year-over-year and accounted for 6% of the U.S. market. These solid results were primarily the result of activity from grocery and food service customers, in addition to stock truck sales across the country. In most areas of our business the COVID-19 pandemic had a limited impact on our financial results in the first quarter. However, this does not reflect the significant impact we believe this pandemic will have on our company going forward. We are continuously monitoring the impacts of COVID-19 on the economy and our industry. And we are taking appropriate steps to preserve our financial stability during this pandemic. Rush Truck Center are classified as essential businesses, and remain fully operational across…

[Operator Instructions] Your first question comes from the line of Jamie Cook with Credit Suisse.

Good morning. And I hope you guys are wealthy - sorry well and healthy. It sounds like everyone is doing okay. I'm sorry about that. Anyway good to hear your voice, Rusty and Steve. I guess just my first question obviously COVID didn't really impact the March quarter. Can you talk about trends you're seeing in April both on the truck sales side, as well as the aftermarket side you know and how you think aftermarket will hold up this year you know just with COVID-19 in your strategy to increase your aftermarket business? And then I guess last question you know what do you think is a reasonable time for BOEs to get back up and running, in terms of production. I think PACCAR said they hope to be up and running by the end of the second quarter. I mean how do you think production ramps I guess in the second or third quarter if you have any insight? Thank you.

Sure. Well I’m going to take you in a reverse order real quick, Jamie. As far as you know from the manufacturer perspective is different for all of them right because I don't want to - I don't want to get into their plans exactly. That said I expect on the back yard side, I expect them to be up and running here in first part of May, and I think that's their intentions. A lot has to do with the supply chain. I'll be honest with you. I think both manufacturers are prepared to get up and running, but there's the sub suppliers and I think there are some issues across the border with Mexico and some other places that folks are working through. I think that's probably the biggest issues that they have right now, besides obviously smaller order boards, okay. So when they do come back, I would expect rates to be down - build rates to be down, but that's indicative, there’s no difference where we would expect normally in this type of time as part of the cycle. But I would say within the next week to two weeks, you know, you'll have them up and running and I believe and how that goes forward, I'm going to tell you, we saw where the orders were in March, and I don't anticipate much difference in April. So you know we'll - I think it's going to, it's going to be hand-to-hand, you know it's going to be hand-to-mouth or hand-to-hand how we want to look at it going forward. It's really hard to project. I mean, if you look at ACT’s numbers, I mean, yes $127,500 but that's $104,000 run rate in the last three months, okay. That's retail. So you know that's the lowest…

Your next question comes from the line of Justin Long with Stephens.

So, wanted to shift gears a little bit to G&A and I was wondering if you could provide an update on how you're thinking about the cuts we could see going forward. As you react to this downturn and maybe a little bit of color on when those cuts should start to kick-in?

Well they are going to start kicking-in in this quarter okay without a doubt, but we're in the process still, of doing it. And so, as we were looking at them as I said that you know the business is - we had already made some prior as you know like in November. We done some stuff earlier, but that was preparing for a normal market not for this we're almost cyclical the cycle stuff that we deal with. We're in the midst of them right now. I've got some goals from G&A, I mean G&A was off about a point over last year in the first quarter okay. We saved you know that doesn't sound like a lot, but it's - we can consider the normal inflationary pieces that we had last year et cetera, et cetera. Our personnel base is down from where it was a year ago and it will continue probably to - we will probably have some more reductions around there just giving the overall market. To give you a little color. I'm hoping to arrange it $15 million and - $15 million maybe in Q2 out of G&A, but little less somewhere between let me range that and say $12 million to $15 million of G&A out of Q2 from Q1. And we will be [ph] attempting to do maybe a little bit more, but some of that's going to roll in when all be effective. It's started to get it all effective in Q2. But we will be extremely diligent in managing to the market as we always have and I'm comfortable we will manage this. We won't be able to make all the lost revenue up. There's no question about that, okay. I can't take all the meat off the bone. That being said, we've shown in past cycles that we do know how to manage through it. And even in 2008 and 2009 when I reflect back on that we managed through it remain profitable every quarter. And I'm hoping we're able to do something along those lines it just hit me telling you a number is very difficult in this environment. I’m just going our past performance and we will do everything reasonably right to manage to the market that we're dealt with, but - it's really moving guys. It moves, it moves as we measure it daily right. I just because I see a little stability for the first three days of this week does it mean that it's stabilized. One was just stable [ph] off the last week. So I'm open, but we'll just we'll keep managing and - but those numbers on your G&A comment I'm sure I was pretty comfortable with those and we'll attempt to get more.

Okay, that helps. And then maybe to follow-up on customer mix I know you've got a lot of vocational exposure on the new truck side. But how are you thinking about your exposure to small and medium sized fleets that are likely to be in some pretty significant financial distress in this downturn? Is there a way to help us think through that risk as it relates to both new truck sales and your parts and service business?

Yes I mean - that obviously those guys are going to get hurt worse right. They don't have the big contracts you know - the large contracts, the dedicated because many trucks who dedicated hauls things like that. And it's going to be more market segment driven. I think as much as anything you know, but over the road there's no question. Those guys are probably going to suffer here over the next quarter or so. We're still seeing business. I think one of the things I'm hoping, is that by the factories shutting down that our stock truck sales will you know feel some of that right. So we can use our inventories to fill in there. But there's no question the small guys going to get hurt worse than the big over the road guys. We check regularly across the board with every - and with our large customers and our small ones. I mean we're in contract on a weekly basis with, because we have a backlog, there’s not just all big fleets it is small unit - small customers too. And so far, with a few minor exceptions it seems to be holding together fairly well. Now that's the backlog. What - the intake is going to be the issue right now and I think everybody is - a little bit of a hold pattern from an intake perspective till they get their arms around - as everything starts opening back up and things start moving in a more normally pattern, more normal fashion. But there's no question the little guy will get hurt worse. I think unfortunately we do a lot of business with small customers, but we also have a lot of large customers. So, I'm hoping that that will help us. So because typically in a down market like this we take share I don’t think it will go back to 16, go back to 16, it can go back to anytime. We take share typically. Our market share as you can see was up in the first quarter and I would hope it continues to be up across the latter - the back half of this year. So I feel good about that. The parts and service business those - basically the same answer you know. Those guys are going to be the guys that take it harder. And you get people just people just spend what they need not what they want right now. And that's what we're seeing a lot of that going on. When you look at the average size of tickets et cetera, you look at how many tickets are done every day which you also look at the average size. And obviously we're seeing some impact from what people are buying. They're buying what they need not what they want.

Okay, that helps. And then maybe just the last one for Steve, obviously the energy market is just rolled over substantially recently. How much energy exposure is left in your parts and service business when you look at the first quarter?

Probably, certainly less than 5% probably 3% to 4% of the volumes from the energy segment.

Okay great. I’ll leave it at that I appreciate the time.

Real quick. One of the things that's good about that if you remember the company four years ago. We had like 15% growth okay. So even the results we posted in the first quarter it's got 3% or 4% of energy. So, I'm proud of the organization for the ship and that you know and how we’ve diversified our customer base across where we used to be three or four years ago.

Your next question comes from the line of Joel Tiss from BMO.

Yes exactly. So I wonder if there's any way to kind of characterize your customers you know none of your customers that the truck manufacturers their rush to get back up and running really just to fill the backlogs that are already out there versus production rates as we go into the second half like you know adjusting production for what the future order run rate is going to be, but you know what I mean?

Well I mean I know they'll do what they always do, they’ll make those adjustments as they go forward. I mean it was almost you know 7,000 units in April Class A it is like April wasn't there and medium wasn't anything either. So and now excuse me I mean March I mean April I mean by March, but now we're in April. I know you know not much has changed when it comes to from an order intake perspective where as you know it's way off. So I'm sure when they come back to work there's no question the bill rates will be down. I’m not going to get into what their bill rates will be that's their business, okay. I mean I may know - I know what their goals are but that’s for them to talk about not for me to talk about, because that’s internal information of theirs. So it will be - its down I have to believe given the size of the market - most people are going to be down from their peaks. I mean got to be down 50% or something I would believe, you got some backlog, but I'm not - but again that’s going to be theirs to give. I mean I would expect you know from peak bills to be significant. I think when you look at what retail sales are going to be and you quantify that to what they were building back when retail sales were 277 or whatever they were last year, you can probably back into the number.

Okay because it seems a little curious why they are in such a rush to get back to work. And then Steve can you talk a little bit about if there's any balance sheet impact of being more aggressive on the truck - on used truck write-downs?

I mean balance sheet impact not necessarily what we're trying to do is kind of stay ahead of this. We’re already in a tough used truck market and with what’s going on we expect volumes to be soft in Q2. And these things - they certainly don't appreciate. So try to strike that balance between what was already a tough market and - not give it away, but when the market picks up having price at the right point to move them. So we felt it was necessary to you know we always have reserves that’s a continuous process here and the margins we report to you have those reserves inside of them. And what we are communicating is that we went over and above our normal reserve matrix and policies because of the situation we're in. So, we hope that we can get back to our normal 8% to 10% margins, but we can't tell you that definitively right now. We may have a couple more quarters in this - lower than average run rate. They were 5.7%.

Correct.

In Q1 which we tell you historically the issue price at 10% on used truck margins and you know that’s going to hold us next - as we see what happens in the next few quarters. But we’re trying to avoid and stay ahead of the curve on that and we could have some more mid single-digit margins - used truck margin quarters as this year unfolds, but there is no real balance sheet intact.

No.

Okay, thank you. Okay, I got it.

But our balance sheet as Steve mentioned we feel good about - we're double reserved how about that given the environment, okay.

[Operator Instructions] Your next question comes from the line of Andrew Obin with Bank of America.

I may tell Joel why some people might want to go to work, but maybe it's a different discussion.

So question…

There is an inch out there. There is some to do - it’s a balancing act, right.

So just a question just want to clarify for part and services the way you report them. You did say that oil and gas is now 3% to 4%?

Right.

Yes, is it the same for parts and services as well? Is parts and services still more overweight to oil and gas?

I think - you mean to say truck sales? Because you said parts and service both times I thought, but anyway truck sales.

No, no I did say - yes, the service business which is more profitable that's what I’m trying to figure out.

Okay the service business well, it’s typically we’re weighted both sides, it’s balanced between parts and service, but right now at 3% to 4%. I mean, I don’t look at it going up. The good thing is, it’s like sleeping on the floor, when you're that low, it's hard to fall out of bed and hurt yourself. So when you had only three to four so, you cannot fall to zero that’s what I'm saying. So I think you know Andrew rather than to tell you it’s that low, and you know you also [ph] I can't think it declined as far as it could for the last four quarters And it just, it declined more and more, and we've got a little bit of activity, but again that's in three to four and that was in the first quarter. I'm not sure where it is in this quarter, it could be two to three for all I know this quarter, probably closer to two I would guess, given that I made a lot of money the other day when he paid me take a bunch of barrels of oil. So, I just don't see much of downside to it and where we're at right now to be honest with you.

That makes a lot of sense. Could you just maybe give us color, because - you are the largest truck distributor in the country, you're touching a lot of geographies. You're touching a lot of industries, could you just take us around the country and give us what differences you see around the country and also what industries stand out to you both in terms of positive and negative? Thank you very much.

Okay, well, that's a big question. Thank you around the country I guess we’ll start East and go West that’s where the sun comes up. Florida been decent, okay and wouldn’t call it - I'm just going to rank them in area and just tell you - roughly Florida's been, if you look at compared to everywhere else, it's been holding - his holding his own fairly well. There was a lot of infrastructure building, a lot of stuff going on in Florida prior to all of this. So you know with everything was going with the increase in you know how many people were moving actually from your state down to Florida right. That was a lot of that going on. So there was a lot of building and construction going on.

Maybe they like to work and they don’t like paying taxes?

Yes that's - well come onto Texas to - we will be - this way we run the state. But it’s pretty good there. As you move up into I don't want to call and they say in Atlanta a little tougher in the big city there just a little tougher big medium duty town, okay. So a lot of stuff you know not moving with all these everything is shut down, you’re going up in the North Carolina and stuff decent you know not I would say Atlanta more - hit harder than North Carolina, Ohio pretty tough, pretty tough up in Ohio right now. Indiana holding in decent, Indianapolis holding pretty decent, Chicago area pretty hard hit. But maybe not as you know I'm going to - it’s not like Atlanta and I am always giving you broad description if you’re asking me. Texas, depends on where you’re at you know in the Houston area we're holding in okay, Dallas holding in okay. I mean we're off but relatively to everybody else not all maybe this is other. Obviously West Texas, the Permian Basin, South Texas hit pretty hard no traffic going to Mexico, no oil. So you know hit a little bit more difficult there. Colorado decent but I would put it in and not hit the hardest. It's not hit as hard as say West Texas or South Texas and California holding pretty - holding fairly well in spite of everything. I'll be honest with you. I mean - we’ve seen the hits out there, but it held on a little longer before even with the ports, even with those issues. Our business is really well - and very diversified out there. It really is so and Arizona not as bad as say, in Atlanta, Phoenix is as bad as staying in Atlanta or Chicago area or something like that. So there you go. What was the rest of your question?

Just the same, no this is fantastic and it's very valuable to get a real-time because I know you guys have some of the best systems in the industry. Just the same thing, but maybe which industries stand out in terms of strengths and weakness as you see them for end markets? Yes.

A lot of what we're delivering from a truck perspective construction is held in there. I'm concerned about it because it’s projects that were already left, right. Refuse is held in there. There's a lot of garbage, a lot of people staying at home. So there's a lot of garbage being made out there right now. When you look at municipal, we're in the bus business when that will start well - we also have some mover stuff and say in Texas, bus business - yes its school bus business [indiscernible] got it right hit extremely hard schools aren’t - they’re not in. Municipal, all the cities are shutdown. Other than road contracts and things like that, you don't have much going on municipality why because the sales tax revenues are bad and that's what they depend upon. So municipal then - hit really hard for and obviously, I don't want to go to oil and gas you understand that. So the construction markets held in. I'm concerned about it because it’s projects that were already on the board. And I do believe that pipeline is shrinking up some. I know it is. You can outline the stats on it. So that's why we're all anxious once we’ve got - as healthy as we can be and just start easing ourselves back - easing ourselves back to - planning to get back to some normalcy, but that’s what I want Andrew.

I am showing no further questions at this time. I would now like to turn the conference back to Rusty Rush.

Well folks we appreciate your participation this morning. We look forward to talking to everybody in July. I wish everybody the best of health as we all - do the right things, I mean I'm big on the right thing. We've been doing the right things here at Rush as best we can while providing an essential business. Basically as I tell my people we are the backbone of this economy in the drug business and we're doing our best, while maintaining all the proper - doing all the proper things, but we're there for you I can promise that doing our job. Thank you very much and we’ll see - and talk to you in July. Bye-bye.

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