Good morning, ladies and gentlemen, and welcome to Rush Enterprises Incorporated Results Third Quarter 2020 Earnings Results Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to your host today, Mr. Rusty Rush; Chairman, CEO, and President. Sir, the floor is yours.

Good morning and welcome to our third 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 our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved quarterly revenues of $1.18 billion and net income of $34 million or $0.60 per diluted share. We delivered a cash dividend of $0.14 per common share. And as previously announced, we declared a three for two stock split over in the quarter. The COVID-19 pandemic along with the previous anticipated industry downturn continued to have a direct result in our financial results in the third quarter. However, when compared to the second quarter 2020, we experienced a notable increase in revenues, primarily from increase in truck sales and increased profitability with our previously implemented expense reduction measures. We remain focused on monitoring COVID-19 and its effect on the economy and our industry. And we are cautiously optimistic that we are not only rightsized to support our customers but that the economic recovery, though gradual, will continue. Turning to our operations. In the aftermarket, our annual parts, service, and body shop revenues were $400 million. Our absorption ratio was 119.4%, while our revenues declined year-over-year they did improve 6% when compared to the second quarter of 2020. This was due to increased aftermarket activity in August and September, especially from refuse, construction, and over-the-road customers. Looking ahead, uncertainties remain about the pandemic and overall strength of the economy, and the energy sector is still much slower than normal. And likely, will not improve significantly for some time. That said though, we expect some typical seasonal decline through the winter, we believe that the gradual recovery of the aftermarket business will continue. In truck sales, we sold 2,584 Class 8 new trucks, which accounted for 5% of the total US Class 8 market. During the pandemic and an industrywide downturn and slowdown in Class 8 truck sales, our results were down significantly year-over-year as…

[Operator Instructions] We have our first question is from the line of Mr. Justin Long from Stephens. Your line is open.

So, maybe to start with G&A. Continue to see some pretty positive trends on that front, in the third quarter. How should we be thinking about G&A in the fourth quarter? And then looking into next year, assuming that ACT number is right on truck sales, what kind of G&A would we see in that environment?

All right, G&A. One thing I'm very proud of is the reduction in G&A that we've been able to accomplish so far this year. And of course, that's always the question, right? What does it look like going forward? From a Q4 perspective, I'm going to tell you, we're going to be relatively flat. We have to eat into some holidays, which have a few less - which have a few less working days that offset that. So, I would tell you probably relatively flat with Q3. We are seeing some gradual increases in some of the expenses as our parts and service business has picked up. As I've told you, we've got some goals going forward and how much we're going to retain as gross profit continues to grow. We will - we'll try to spend less than what we have historically. And I'm very confident that we're going to be able to do that, as discussed in conference with all our folks. And I think everybody has got their heads wrapped around it pretty good as we come out of this, where we've been with what looks like a pretty good run going ahead of this year. We believe, once we get through this pandemic and all the things settle down, that from an industry perspective, that we're going to do a better job of managing these expenses and have that from where we've taken them down to as we go forward. Understanding though, that it does take a little extra expense and more gross profit, right? We sell parts, we turn rich, as we do all of these things for a living, and that's how we make money. But, looking out into next year, I would tell you, our goal is to be somewhere in that 35,…

It does. Thanks. And with parts and service, it sounds like things really picked up in August and September. Have you seen that strength continue into October and any thoughts on parts and service, top-line performance in the fourth quarter versus what you just saw in the third?

Well, yes. I don't know that we're going to increase a lot. You look at it - we look at is the working days a lot. And the fourth quarter, it's the shortage working-day-quarter of the year, right? You've got really three less. Now we work on Saturdays and stuff, and we measure it by how many Mondays and Fridays you've got. You've got three less working days in Q4, so I'm going to believe that we will be slightly off because three less working - 62 days versus 65 days. So I'm going to believe we'll be slightly off, but I do expect to maintain at least the average per day where we're at. It's always a little bit - wintertime is always - November, December, January, and February are not always my favorite months from a parts and service perspective. Holidays are nice, but they're not exactly good sometimes for our business. So but that said, I do believe we'll maintain. Years, we go backwards a little bit in pro - in gross profit per day average, but I don't expect that to happen. But you just have less working days, so slightly down from the gross profit perspective, but not dramatically. We picked up - we really - it was interesting that we went from like April, May, June, July, we're all very similar. We so - we dropped obviously, as I told you all in our last call. March was - it's a 13-month year, there were two Marches. But once we dropped into April and stay flat, but we started to see the increases come back in August, and parts more dramatically, some in service, to be honest. But I think it's sustainable. And I think once we get through the wintertime, I think you'll see us start growing it again, okay. I really believe that.

We have our next question from the line of Jamie Cook from Credit Suisse. Your line is open.

And I hope you guys are well. Nice quarter. I guess, just first question, Rusty, the margins on the truck side, were fairly good in the quarter, up from where you were in the second quarter. So can you just talk broadly about trends? How you expect that to progress in trends you're seeing in terms of ordering from the big fleet guys versus more of the vocational markets where potentially people are slightly more concerned about going forward, just as there is concerns on like stating budgets and stuff like that? And then, I just guess my second question, if you could just - just say from/or within your parts and service business, the margins were a little lower this quarter relative to where they've been trending. Any view on that or just color on what you're seeing parts versus service with - in terms of mix within that segment? Thank you.

You bet. Around truck sales, I would tell you that used - new truck sales, Class 8 were slightly up. I think used margins were dramatically up, even though they make up a lot less sales, the used margins were almost - they were in the sixes last quarter and they were 12, okay? And that was indicative - okay. That's what really had - has some effect on it. We were up slightly, I think five, 10s in new, from the Q2, but in Class 8 new. But really, used truck margins were up because - you got to remember, the used truck market took the hit right in March, boom, you lose 10% to 12% on everything, right? So you rightsized your inventory, as we always do if you finished Q2, and then you roll into Q3, and here comes the market, right? So, market picks back up, values go up, and fortunately, we captured some of it, right? You're marking to market on used all the time because that's a moving target. So we got the good side of it this time, where the 6% in the Q2 was down from our typical 8% to 10% because you had the COVID hit and the way it was blinding everything for a while, then when everything picked back up because it's when inventories started to move, both on the stock in inventories on the new side and on the used side. So that was - that helped truck margins right there. From a parts and service perspective, we - parts more than doubled the growth of service, okay, in the quarter. So, and remember parts were a lot less margin than service, parts run, say in the 28% range, just varying exist balances, but service is typically 65%. So it's sort of a mix issue right there. I would expect that what you saw, I think it's going to be trough for a combined fee in parts and service margins. I don't - because I think service is going to start accelerating back up, keep more in line with the parts growth as we go forward like I said earlier to Justin. I'm not sure that we'll pick up a lot per day here in Q4, but staying where we're at and maybe picking up slightly on a per-day basis is better than we usually do in November, December, January, and February. It's just the way it works. So the reason for the overall margins being - blended margins being - that was basically a mix issue, to be honest, with parts growing at a much higher rate than service in the quarter.

And then just to follow up, you talked about why the margins were better on the truck side but - how concerned are you about sort of what you're seeing specifically on vocational trends and just concerns out there with the state municipal budgets, I'm just trying to understand your viewpoint on that?

Yes, I guess, I don't tie vocational totally to government, okay. I look at it in a broader perspective. When you still see residential construction is still strong, okay, at least, in a lot of areas we're at, I can tell you. It took me - I just barely got here for the call since - so I had to go over eight - three different ways this morning to get here, that'd be three, you couldn't believe how many trucks I had try to get around all in aggregate this stuff, this morning. But, no, you see, we still believe that the vocational side we'll - outside of oil and gas, okay. And I understand where commercial buildings at, but residential construction in a lot of areas we're at is still pretty strong. And we're still - when it comes to customers that are in that type of construction, housing construction, road construction, stuff like that, we are still seeing - there's still been a lot of money spent around those areas. Now, sustainability folks, I'm not - I don't know what I can date out as sustainable. I got a six-month window. It's hard for me right now in this environment. I challenge anyone. I mean everybody puts stuff out there, but to give you a 12-month to 18-month outlook with all the uncertainties we've got right now. But, I feel decently blessed. The margins you saw in the quarter, other than used, I don't think that's 12 sustainable, and still be solid, not six, more in line with our typical eight to 10. I would look at the truck margins to remain where they are at, to be honest.

And we have our next question from Andrew Obin from Bank of America. Your line is open.

So a couple of questions. So how should we think about Rush in an upturn, because you do have specific brands, Peterbilt and Navistar the big ones, I guess, international. And Peterbilt behaves in terms of market share, right? It sort of does not behave like the rest of the market and then you have your own very industry-specific exposure relative to the industry. So how should we think about your market share relative to the industry in an upturn over the next, let's say, 12 months to 24 months? Are there going to be any big differences?

No, I don't believe so, Andrew, I mean, when you look back, I would tell you this, I would hope that our market share from Class 8 troughed in Q3, that - that 5% is the bottom. We have historically been, high-fives still to low-sixes, in that range, depending on what the volume is. And I would anticipate that - I would anticipate that we will - I don't think Peterbilt's market share is going to fall off. I look back at what they were in 2019, a big year and it was solid, was solid on historical terms. And Navistar's market share, I believe, will continue to grow as they go forward. So I feel pretty good about where my Class 8 OEMs are. And I would look for us to maintain where we historically have been. Probably the biggest headwind for us, to be honest with you, I think we're capturing new customers, but folks, we used to sell oil and gas trucks. I feel like that we're - that's one of the reasons I'm so proud of the print, and the prints we've been having is because we've done that without O&G, and we couldn't have done that four years, five years ago. So the organization has done a very nice job of - when you look at our exposure, Oklahoma, Texas, Colorado, New Mexico, lots of oil and gas places, right? And we had to do all this with huge declines in those areas and sort of reinvent ourselves around it. And I'll let the results speak for themselves.

I guess, what I was - what I was referring to, maybe we can take it offline, but I always thought you have more exposure to vocational, and so, the peak of the cycle when large fleets come in, that's when you sort of lose some market share, is - just structurally and particularly Peterbilt would, but that's what I was referring to specifically. If you think…

I think if you look historically, you could have been right, Andrew, back years ago. But if you look at the last uptick, no disrespect, in '18 and '19, they grew market share. Okay. And those were big market, go over-the-road years too. So they broadened their customer base, and from our perspective, Navistar's back in the game, okay. So we feel very good. I'm not worried about the size of the market that's getting our share, just to answer. I wish I had oil and gas, and I'd do a whole lot better than what you're seeing, but I don't, but we're picking up more over-the-road business than we historically have.

So I can model you in line with ACT forecast, effectively?

That would be correct. I'm buying into their numbers right now. I mean, like I said, it's hard to look out 18 months or 15 months to me, but I feel pretty solid about activity that we're seeing right now. And stuff that we're booking, much - much better than we've seen over the - obviously during the pandemic, but even right prior to the pandemic. We were not - didn't seem to be getting the order intake that I've seen over the last 45 days to 60 days.

And just a follow-up question, Rusty. You've done it in the past, but could you just walk us through some of your key geographies in terms of - and just walk us through what are you seeing in terms of economic activity by key geography? Thank you.

Sure. Look at the coast. Let's start on the ends, both ends. Both are strong. Surprisingly California, as with everything going on, California has been pretty strong, especially from a parts and service perspective. From an over-the-road in Florida, Florida while it took a dip - we're going to - we have a lot of Orlando stores right with Mickey World - Mickey Mouse closed for a while and all the other stuff there. But it is with the growth in Florida driven by growth in population and construction, it has been good. And also, Florida has always been a lot of car haulers, when you see what their automotive business has done, right? So, they've had varying factors has picked Florida. As I work my way around the country, you know we've hit - we've hit some from a truck sales - it's different, right, in my viewing from a truck sales or parts and service perspective, pretty solid, Virginia, North Carolina, pretty solid. Ohio, truck orders, intake was good. Illinois coming around. If you look for negatives, we're still suffering, say in some of those areas. Arizona is strong too by the way - because I would tell you, Arizona, California, and Florida being the strongest, but we're still suffering in some areas, they are oil and gas related. We're not doing as well as we would like out in West Texas. Into New Mexico and Colorado, so-so. Picking up, better than what we were last year from a return perspective, up in the Mountain West in Utah, and in Idaho. So, I mean, I was just running around the Map here. I'm looking at the map over here, at my side. And I will say, it is broad-based. But those would be the ones that stand out.

[Operator Instructions] Your next question comes from the line of Joel Tiss from BMO. Your line is open.

Mr. Tiss?

Take it off mute, Joel.

Mr. Joel continue, your line is open. I think we have to move on. We have two more questions. We have a question from the line of Shawn Kim from Gabelli Funds. Your line is open.

Good morning, guys. I'm not Joel, but hopefully, I suffice here. Just had a quick question for you guys -- had a quick question for you guys. Wanted to follow up on the big news from Friday. Obviously, you guys have neared the payment but, Rusty, wanted to get your thoughts on the Navistar trade announcement. When you think the final documents would be signed? Anything else that can shed some light on that combination and how that impacts you guys long-term?

Well, as far as the closure of the deal, I'm not totally in the middle of all that. I would expect - I would imagine that they've already done - been pretty far along the path from a due diligence perspective. They'd bounced that prior, remember? So I would expect that they'll get the documents signed here - out in maybe the next month or so? And then, I would imagine, working through the SEC and things like that, sometimes closed, sometimes plan, I would think, late, late winter, springtime would be my guess. But that's something they would have to tell you, I'm just - a little conjecture on my part. What do I think about it? I think it's great - I think it's great, long-term. It brings a global - a strong, global partner. When you talk about [indiscernible] you have what's going in, as being a partner to leverage off of. From a new product perspective going forward, especially with the amount of money it's going to take with all this new technology, with the greenway, the new technology over the next decade or plus as we transition - that transition is going to happen. Sometimes, I tell you, it's not going to be as fast as people say, but that transition will happen. And that takes a lot of money, so they have the ability to leverage off the global efforts of [indiscernible] not just a standalone. So from our perspective, that's a win-win big for both organizations. Obviously, most likely, when the trades up, [technical difficulty] Northern American brand [technical difficulty] just don't come into this country and start from scratch. It just didn't work that way in the commercial truck business. So, I feel good about it. I really do. I'm excited about it. I think it's needed to happen. No disrespect to the old Navistar but from long-term [technical difficulty] organization and growth of the organization, it's a product range. That's great, it's great. I look forward to it. That's not something that's adding water to stir, but remember they've already been - they've already had the LTAs and agreements, good costs, and things like that already, as joint forces over the last so. I think that unlike a normal acquisition, they're well on the [technical difficulty] then start it prior to this, I mean, this is just the conclusion of donations of what - the way it was supposed to work when - when [indiscernible] bought a piece out, three years, four years ago.

Thank you. I think we have the line of Joel Tiss from BMO. Your line is open.

Okay. Can you hear me now?

Okay. Making sure you're awake, Joel. That's all. I was worried, you've fallen asleep…

Okay. Well, the first question is the most important one. Rusty, how did you manage with a 25% salary cut? I think everybody knows you're kind of paycheck to paycheck?

Yeah. Well, actually I'm still, I'm still - I'm still given, I still haven't taken mine. We did bring back, by the way, that was the question, we did bring back all by October. We started bringing back, some of it was in Q3, and that's part of we'll have a little bit of expense creep as we reinstate. The only thing we haven't reinstated is my paycheck, and our 401K, but they're all the normal reduction things that we did. Those things will be reinstated as we - I - my plan is, as we continue to get more clarity, I'd be able, one day, maybe to get my money back. Not back, just get started back because my creditors are seriously after me, Joel. You're right.

Joel, we're making sure you have enough money for [technical difficulty] tequila and food.

That's all I get - I get a tequila and food allowance. That's it.

That's good. And everyone's kind of dancing around and I just wondered, do you think like on a three-year to five-year basis that your Navistar dealerships are going to be a lot more profitable with what's going on with trading, or it's too early to tell? Or it's not going to matter?

No it - you better believe it matters because I still the returns are not anywhere where I'd like them, right? I don't have to go back to the history of the last decade. So those returns have not gotten there. Are they getting better? You better believe it, okay, for two reasons, one, this - with the growth of the order to Navistar's getting back on solid footing, forgetting freight on. And, our internal trough's taken after we got through all the max force, and then our internal from a personnel perspective and for many other perspectives, just getting our arms rounded. So when you add that together and link it to freight arm in the mix, you better believe that's still what I believe is one of the biggest growth pieces of the organization, right? I believe it's - we don't have the 55 years of being a Peterbilt dealer like we do with Navistar. So that's only going to get better with great time units, that's only going to help. I guess that they can stay in the ballgame from - with all this new technology stuff, not be having to worry about CapEx budgets quite as tight as they probably had to, have been. So the investments that will be made in product, and people, and the whole thing gross the Board can be nothing but a win and we're still - look, we're still in the third inning of running these things. And we're getting better, in a few months to about where we were from now and where we were a few years ago. So, yes. That's got a lot of runway on it in my mind. You better believe it.

And then with all the disruption in the market - that's the last one for me, all the disruption in the market are you finding more acquisitions or is that something you're likely to get back into that or there is too much work to do internally to drive profitability?

I'd like to find some but unlike me, they're all spelled PPP, okay? So that propped up everybody, and then the market's come back strong. Remember it was such a sharp, steep decline and then rose back up with what happened with the freight markets, and as freight just rocketed back up because everybody was buying whole goods with all the money they got. So everybody's - you didn't see - if you'd told me what was - I didn't really foresee exactly that happening back in say May and June, but that's exactly what happened. It was such a steep drop and then a comeback from a transportation perspective because you had to fill the shelves back up virtually and feel the inventories beginning to fill the shelves back up. So, you're seeing what freight's been doing in whatever ways the miles being run. So, I, unfortunately, I have - there hasn't been much M&A, but don't think we're not always looking, something will show up somewhere, I'm sure, somewhere down the line.

[Operator Instructions] Speakers, I'm not showing any further questions at this time. I would like to turn the conference back to Mr. Rusty Rush; Chairman, CEO, and President.

Well, this will be the last time I speak with everyone once we get through the election, and then the holidays and everything else. And I'm not going to worry about the first week of the election, but from a holiday perspective, I wish each and every one of you all, all the best and with your families, it's been a long year for everyone. So please make sure to enjoy and savor the moments with your families throughout the holidays. Other than that, we will see you and talk to you again in February. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.