Good day, and thank you for standing by, and welcome to the Rush Enterprises, Inc. Reports Third Quarter 2021 Earnings Results Call. [Operator Instructions] Please be advised that today's call is being recorded. [Operator Instructions]. I would now like to hand the conference over to Mr. Rusty Rush, Chairman, CEO and President. Thank you.

Well, good morning, and welcome to our third quarter 2021 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, 2020, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, in the third quarter, we achieved revenues of $1.27 billion and record-high net income of $69.4 million or $1.20 per diluted share. We are proud to declare a cash dividend of $0.19 per common share. We continue to see economic recovery and a strong freight environment throughout the country, which created a widespread demand for new and used trucks as well as aftermarket products and services. Our profitability was largely driven by our diligent expense management during the quarter. During 2020, we made it a priority to implement new processes and tools throughout our organization to control expenses throughout the truck cycle. We believe these processes will allow us to effectively control expenses that we -- as we continue to implement our strategic growth initiatives and will contribute and will continue to contribute to higher pretax profit margins than we have historically experienced. Looking ahead though, demand remains healthy for new trucks and aftermarket parts and services. Component supply chain issues continue to challenge the industry, pushing new truck deliveries into 2022 and impacting the availability of aftermarket parts. These supply constraints, coupled with normal seasonal aftermarket softness in the winter months and the fact that we have five fewer working days in the fourth quarter compared to the third quarter will negatively impact our earnings in the fourth quarter. However, we believe customer demand will remain robust and supply constraints will subside and that 2022 will be a strong year for the commercial vehicle industry in Rush. In the aftermarket, our parts, service and body shop revenues were $463 million, and our absorption ratio was 134% in the third quarter. Our aftermarket revenues increased 15.7% year-over-year, which is primarily the result of our continued focus on our strategic initiatives and the limited availability…

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

Sorry. Sorry, I was on mute. And good job on execution as usual. I guess, Rusty, the first question, you talked about Class 8 production ramping faster than 4 through 7. If you could just provide some color on that and how you think about production ramping in general in 2022? My second question is, can you sort of address the market's approach to pricing with the incremental costs? And then I guess, last, just any color you can provide on sort of the acquisitions in the JV that you announced a sort of incremental earnings accretion to 2022?

Okay, Jamie, I'll start at the half top. Well, when you compare Class 4 through 7 versus Class 8 and why did I say that perhaps 4 through 7 will ramp up slower, is the fact -- and it mainly is it there are two large manufacturers that you will probably see Class 8 because demand is extremely strong on the 8 side, right? And also, it is a more expensive larger product. And I think even for us, if you look historically, margins typically tend to be better on the 8 side. So when you're in a supply constraint, arena, which you are now, you have to pick and choose, right? Because there's a lot of same -- I have a lot of the same components, right? So obviously, the 8 demand, I think, is even stronger than 4 through 7 right now. And given the vehicles theirselves, you have to take and choose, you got to make decisions because of the supply constraints we've been dealing with. So I think tend to favor the Class 8 right now, given the demand and also the profitability of the product, if you want to hit real. Because it's cost twice as much, right? So obviously, so it only makes sense that margins tend to be better, but based on the revenue side, to begin with.

Do you -- before you go to the next part, do you see any evidence of [indiscernible] you worry about that, people are worried about double ordering and then some of these demands take?

No. I don't feel -- I don't feel that way about our order board. I don't -- I think -- look, in my mind, what's happened is demand. We -- look how things ramped up since July of last year. I mean, the Company blew up, right, from a freight perspective. Everybody had money, we were buying everything. And so demand was there. So we ended up when we ran into the supply storages, starting in really March, April. By the time the year's out, you asked me, we probably pushed 40,000 or more on the bottom side, 40,000 Class 8 units that should have been built this year that are not going to be built. Well, when you think about all you're doing is press that demand into '22. '22 is supposed to be a pretty good year. Then you run into '23, right? You're running to '23, you've got Carb and pre-buy in those states, those 15 states, if it all goes down and that fastener states, but for sure in California because the price of diesel engines is going through -- going way up. There's a lot of different numbers as to how much, but if they're going way up in '24. So I don't I don't see this thing slowing down until '24. Outside some big economic issue, okay? Because I don't see that we're going to catch up to demand right now. I mean, manufacturers are not meeting demand at the moment. And so it just keeps pushing it out and pushing it out. Unless there's some big economic downturn in the country. I don't see that demand going away because you're not really going to be -- you're just going to be running right replacement. I think replacements in the 220s now. And that's what -- this is U.S. retail. So I don't think -- and you look last year was under that, obviously, like 190 or something, 192 or something. So -- but then you had this huge increase backup in GDP and freight. And given what we see in '22 and '23, I don't see the double ordering. I mean, I'm not -- I don't know if we have it. I mean, I can -- let me give you some -- let me use some data points. When I talk about what I really care about is what's happened in '22 and '23. Our backlog a year ago at this time was about $1.1 billion, okay? Into Q3 -- excuse me, into Q2, it was $2.2, and it's $2.7 now. Could there be a little something in there? Of course, there can. Probably -- there's never an order board this perfectly clean. But I don't see any evidence based in there that even if there was a little bit, there's still backlog is big. So we've got to catch up with what we've missed. So I'll try to -- I'll leave that one alone. I mean reserve a little bit...

But then Rusty, with the $2.7 billion in backlog, can you just address how you're approaching sort of pricing then like with just material cost price era.

I'm being driven a lot but right. You're right. I'm being driven a lot by the OEMs, okay? We all know what costs have gone up. Everybody has been scrambling on the OEM side and the supplier side, and they're paying more. Obviously, prices of trucks are going up. Anybody can't see the inflationary pressures that are out there. Sometimes, I know people talk about them a little bit, I see them much larger sometimes just in -- in real-life and for sure see in our business. But they're out there. When you ask about pricing, you better believe pricing is up. So -- but, just trying to keep with -- just trying to keep up from the chain. It's not just the OEMs, they're getting hit for pricing, right? They're getting hit hard on a little -- not just supply, but if you can't get supply, well, they're getting hit on the pricing at the same time because it's the old supply and demand. It's been like that forever. And so that's really just feed for the bottom of the food chain up to the top. And I think that's what you're seeing out there right now. I don't have exact numbers, but obviously, that ends up getting passed on to the end-user, right? At the end of the day -- or it either comes out of margin or it gets passed off, one or the other. And so I would imagine sometimes on the front side because it accelerates so fast. It's hard to get it passed on. But this didn't just start yesterday. It started last year, nine months ago, ten months ago. So as it clear out, what you should be putting into your backlog in '22 should catch up with the pricing pressures that you had, because that's the way it's supposed to work and it will work. But you got a backlog. And so that makes it hard to work your way through commitments so both hopefully, most people do. And then get new -- price it out into the products that you're selling now for the future. The problem is you get so much it's pushed back, you got it? There's been no supply. I mean, look, we delivered only 2,500 something trucks, Class 8. And that's why I'm so proud of the quarter is because the core was -- you look at it from a whole, what everybody used to view our company. We have so many trucks, okay? And you look at the performance, it's just driving to the things we've talked about doing for a long time. And I think you're seeing the fruition of it and the results in these numbers. And you asked what was your third question, Jamie?

My third question was just I'm just trying to figure out all the M&A that you're doing like what's incremental?

I love to talk about M&A. It's been so long since I am able to talk about M&A. They're not talking about it and I am not kidding. Well, it gets hard out there, right, to find stuff. But a little deal, we just talked about it as a nice independent deal we closed. It's just an add-on. It's about Summit. The deal is hopefully in the Midwest and [indiscernible] as a single, but the Summit deal though on the other hand, represents quite a bit of growth for us. When you look at it, it's the second-largest international dealer. Okay. It fills in three states --we're in L.A. -- you're going to use some of Rusty's silliness here. But if you look at Kansas, you look at Missouri and you look at Arkansas, we don't have anything there and Memphis. And so -- you know, Rush, 17, 18 stores. And as I tell people, it's like you're making that puzzle. And the dog cooked a piece and chewed it up, you can't find it. Well, those three states plug right into our map. I'm looking at my map right next to me on the wall here, and it's a perfect fit. It would be hard for us to have found something that fits more perfectly from a geographic perspective. Now it's a good well-run group. We can run it even better. And the thing you know, we'll mold that group into our over time. We'll close it in the middle of December. We're excited about that. The Cummins JV, super excited about that. Momentum, we've been in that fuel system business since 1'4. If you remember, back in that day, natural gas is going to be 10% of the market by 2017, never got off of at 2%, okay. But Cummins must believe something about the future, and we do, too. We believe that RNG will be a bridge technology as we get deeper into this decade, okay? And so we're excited. And that's not something that's going to affect -- we finally got that. I finally get that business to break even on our own, okay? This last year or so, but there is going to be an opportunity in '25 or '26 or '27 for that to be a bridge technology. And we believe partnering with Cummins. I was looking at the other day, and I thought they had pretty good brand equity and make a great partner in the fuel system business. So they're the ones building natural gas engine. You may not have seen, but last week, they announced they're going to build a 15-liter natural gas engine, which is really going to open up the market, we believe for mid-decade, as I said. So we're pretty excited about that, too. So there you go. I guess, I'm trying to answer them as best I could.

You did. And I’ll let someone else ask the question.

And our next question comes from Justin Long from Stephens.

Congrats on the quarter. So maybe to just put a bow on the fourth quarter. I know typically, you see a seasonal decline. Rusty, you called out five fewer working days, but is there any way you can help us think about the magnitude of the impact from five fewer working days in the fourth quarter?

Sure. It's two things. Look, these are just a little bump. We know about the supply chain issues. We're dealing with them right now. The -- let me answer your first question, and I'll add to it, and we'll get past this. Fourth quarter, we're going to have a good fourth quarter. Point being, though, the way it falls out, we've got five less working days. Typically, the fourth quarter is about three, but the way the holidays have work this year. And we're pulling a holiday out of '22 and sticking it back in '21 because that's January 1, and we're giving off December 31, is just the right thing to do on a Friday. So impactfully, without getting into all that mess, we do -- say we did $2.6 million of gross profit a day in parts and service. So you can do the math, that's about 13. I think trucks gross might be down some, just given a lot of supply chain issues. But as I said, I'm not worried -- it's going to be a good quarter but it won't be in the third quarter, but will be a great quarter, really good quarter. But the good part is '22 and '23. So you're talking about maybe $20 million of gross profit or so. But at the same time, you can just extrapolate it from there. Other than that, everything should be running smooth and good. And we just want to a better fourth quarter than last year. And -- but third quarter is always typically our best quarter. If you go back historically, not every time. But historically, the third quarter is always our best quarter. So -- but listen, '22 and '23 are set up, when you look at the growth we've had in parts and service and look for the backlog I talked about a minute ago. So I'm very -- and these acquisitions that we're plugging in as we get them implemented and integrated into the organization, things look great. So from that perspective.

Well, and that's where I wanted to go with my next question as we kind of zoom out and look at the next couple of years. You talked earlier about the truck cycle being extended through 2023. But could you maybe expand a little bit more on the parts and service business? How you see that growing in the next couple of years? And then incremental margins as well because I think when you put together the truck cycle with parts and service recovering and incremental margins, that implies that EPS can still grow nicely in the next couple of years, but would love to get your thoughts around all of that.

Sure. No, I would agree with that. And you have one piece out, and that's M&A, right? I never really gave an answer because I'm going to integrate it, but I can tell you this, it's accretive, okay? We're not doing it to be un-accretive. I could promise you. So we'll sort out exactly what the M&A brings to the organization, but it will be nice. From a margin perspective, we have super our margin is always core. But I see nothing that's going to stay in the way of us continuing on the parts and service side to continue to grow. Now I can't -- for now 15% growth rates quarter-over-quarter. Remember, last year, we were coming out of COVID, et cetera. So your baseline was there. But it is -- we are targeting high single, 8%, 9% growth rates next year, which I do believe in parts and service are doable and very achievable. And I'm not going to count -- I'm not going to talk about any more than that. But I do believe that we will continue to see those type of growth rates in the first half and into next year. I think we can do that. If you look at all the initiatives over the last two years, if you look at some of the other things we're doing now that I don't want to talk about, but some of the things we're doing to go to market. And that's the piece of the business. I mean, we ran 134% absorption. That's a record for us. It's just an operating metric, but it's something that we've key on pretty quite heavily. So from a parts and service perspective, it's there. You heard me talk about the backlog from a truck sales perspective. It's there.…

And our next question comes from Andrew Obin from Bank of America.

So just go back to this comment on expanding margin and expense management, you sort of highlighted expense management statement early on in your prepared remarks. I think this is sort of a new focus. Can you just expand, it does seem that your approach to cost in this cycle, a little bit different? Because I think historically, when things went up, right, you were very good at sort of keeping cost in control early on in the cycle. But as the cycle sort of got going, cost came back. Can you just go more in-depth just to talk about what are you guys doing? What initiatives do you have internally to sort of change your approach to costs this time around? Because execution seems to be superb.

Thank you, Andrew. I appreciate that. Well, about getting -- I won't give as much detail as I can. Training, I think our managers, we have put in some new processes and new controls that as we grow back, we're only going to spend so much money of where we grow. If our gross profit goes up x, we're going to spend x, right? And that's what we're going to spend. And we're going to stick to it. We almost -- internally, we call it a salary cap. It's like in sports sometimes, right? It doesn't mean you can't grow because remember, we're not -- I don't loan money. I don't do this. I work on trucks. I work on parts. I can live. We sell parts. We deliver them. We do this. It takes people, but we want to make sure we are staffed. Remember, 2/3 of our cost are people at the end of the day. So we're to make sure that we don't get out ahead of our skis and overstaff. It doesn't mean we don't grow, we don't add people, but we do it with some tools that everyone is pretty dialed into it, took a lot of work this year. Now we've got to continue that in the future. But we're pretty dialed in to -- we're only going to spend x of every dollar we get in to gross spot. So we're not going to get way out over it. And these two as this is salary cap has this -- we can call it there's other tools and the other names we can give to it. But the guys have been very, very focused and all the managers have been very diligent. I'm proud of them. And the team is now too. And this is in spite of just these last few months were tough from a COVID perspective. But I had the second and fourth worst month in the third quarter that I've ever had with people out dealing with. So these controls are not leaving the organization, and we're still going to continue to invest. On the corporate side. We're going to continue to invest. But just at a proper pace. Hopefully, you learn something, you get a little bit older. It's not that difficult. I say that. But sometimes, everybody just caught up. We are running and things are growing, and you're just not as diligent as you should be. I think there are some of the lessons that we have learned in the last 2 years are just going to continue to bode well, and we're focused on it. We will -- expenses will grow with the roll in relation to our gross profits grow, and we'll end up keeping more of it than we historically have, and I'm very confident in our ability to do that.

And just to follow-up the question. You guys have very good systems. Just a usual question for me. Could you just walk us through what you're seeing by key industry verticals, residential, nonresidential, oil and gas, the corporate customers' waste, maybe what you're seeing across the country in terms of macro because you do have very unique footprint.

You bet. And I don't want to say everything is good, but because oil and gas is still oil and gas. I don't expect to see the capex spend in it. But we've seen a slight pickup here recently and the services that are being asked for. We sure have as you've seen the price of oil obviously has gone up. We've seen a slight figure, but I don't think people -- I don't expect companies to be as undisciplined as they were historically or money to flow like it did historically, but I do think there's some upside still there as it's gradually been picking up from its trough. Other industries, the over and the road business, I mean is great, right? I mean, it's really good because remember, if we're 40,000 trucks short of what demand was, that means people are running their trucks longer, right? So when you look at the TL side, the LTL side, extremely strong for those customers, customers we have. We've got a couple of three or four big LTL carriers. And our business with them is good. When you look at housing and construction, still strong. We demand for mix of trucks, demand for garbage trucks. In the Refuse side, very strong. Parts and service, strong in those sectors. I mean, I sound like a broken record, repeating myself, but that's what we are truly -- rental and leasing customers. They're -- look at -- well, I need to point out, our leasing division has had the most outstanding year they've ever had. I mean, it's just been over the top. If you look at our leasing margins and rental margins, I mean, they're just -- they're above and beyond what I would thought we could have been able to do. And…

No slowdown on Rusty, as far as I know, because in like commercial ones...

We haven't seen it yet. We haven't seen it yet because there's still -- I believe there's something out there lurking, but we have not seen it in some of our areas, especially here in Texas and whatever, I mean, they're putting up. So it's everywhere around here. The state -- we typically -- some of the states we're in, like Florida, and here, they're still growing, okay? So I mean, I'm sure I could pick a residential pocket in some area, but I'm not out of to date to pick it by state. But I can tell you here in Florida and a couple of other states, it's still going up pretty good.

Well, right. And you as see that the market today is rewarding your team for the hard work they’ve done this quarter.

[Operator Instructions] And our next question comes from Joel Tiss from BMO.

All right. Can you talk a little bit about -- can you talk a little about where your parts and service mix might be three years from now, like just sort of the flow of what you're looking at and what you've announced in terms of acquisitions and the growth rates and all that? Just trying to give us a little bit of a guidepost?

Well, the growth rates I gave you was on current same-store bases, right? I've got to bring these other stores in to our organization. I think there's some upside. The -- look, it's a well-run company, no question. But I think with some of our systems and some of our stuff, I think there's some upside on the acquisition, especially from a technician perspective. When you look out there and I got 500 mobile trucks. They got a couple. I mean, things like that. There'll be some of the things we do, and then some of our initiatives, which that's one of our big initiatives in the next couple of years, is to increase our mobile fleet a lot. Like I said, at the high single digits for same-store growth, parts and service, parts, growth, service growth will probably be more steady and gradual. I don't mind looking back three years ago, we added all those technicians. We did real good at the first year. In the second year, we just added technicians, but they really weren't good technicians. So we had deferred some, which we have, which gets our proficiency back up. Now we're actually adding back much more strategically, much more gradual, and our returns are way higher, and we're going to keep it at that pace. We'd like to add a couple of hundred technicians over this year to our same-store growth next year, not 500, like we wanted to. A few years ago, it's -- I don't think it's possible to do that and do it right with the right proficient technicians because you can't add skilled ones all the time. You're not going to take one a level 1s or 2s and train them up and it's just you're overburdening and you have to carry,…

And any unusual opportunities from all these trucking businesses being separated from their kind of conglomerate parents?

Trucking businesses -- I'm trying to follow you.

So like IVECO getting spun out and the freight liner business, selling out of Daimler...

I don't see anything for us right now. I don't see any -- look, my 2 Class 8 OEMs are pretty set, okay? I've got two. I'm not going to be able to be with the others, okay? They're not going to allow me. Okay. Remember, their state laws and things and franchise things inside of the agreements. I'm going to -- I'm a part car Peterbilt built and an Avista when it comes to Class 8 person. There could be, I think there might be other opportunities. Now my OEMs with new technologies coming, it's going to breathe a little confusion in the marketplace. Not yet, everybody talks about it all right now. Just wait for a couple of three years and see. And I believe our OEMs will be leading the back in that. But there are other independent people out there. Well, the technologies that is going to be interesting to watch and we'll have our eyes out there. But I do believe in our OEMs and their capabilities to meet the changing technologies that are going to be demanded by the governments. I don't believe we might be pushing it a little too far. I think that some of the demands, when we talk about electric and hydrogen and fuel cell and all the other good stuff. The government is better be careful pressing it too hard because we got to catch up to what we want. I know we've got to clean things up. Those types of things will be where opportunities might come that I can't see right now. But I'm very comfortable with the OEMS. I have, participating in that transition. This is a transitionary decade like never seen. Transition creates a little bit of confusion, which creates opportunity. Trust me, we're poised.

And just last and maybe you kind of already answered it, that is too far away. But any -- do you feel any need to get into like EV charging business or anything like that, like things that you're thinking about kind of a couple of years out? Or it's just waiting really.

No, I know it's not like too early. We're looking at a lot of stuff. By this time, next year, every store in California will be solar and have all their charging stuff in, okay? Obviously, we've got to meet the needs of -- California is the leader in it, right? So we'll be there a year from now. That will be where we're learning, right? We're learning with customers. We have trucks we sold. We have electric trucks we have sold in different marketplaces. I'm not going to get into specifics. And we look forward to doing more around that space. But again, I believe -- I'm not here all is in me talk, I probably already heard it enough, but I believe it's going to be market segment driven as to what technologies went out. We got a lot of -- obviously, in Class 6, 7, the time we get to the end of this decade, I'm not sure it will be 50% or more. No electric. It's not going to be that way, I'm heavy. You're going to see that on the TL side. You'll get it in certain applications in certain market segments. But that's not going to, I believe, work for just pure TL over-the-road, at least not now. It could be in '20 years or so. But I don't think we're there with that. But you've got folks that -- I know hybrid. Some people won't know something go, ‘Oh, yes’ There's a lot of things going on, and that's what's going to create some confusion as things transition over the next decade, driven by -- we all had to deal with ESG, and it's real. The environmental piece. And -- but I think, as I said, technologies will be driven just by market segments we'll adapt to whatever makes sense. Diesel is not -- diesel will be phased out over time. It needs to be, but it's not going away right now, okay? We're going to be multipronged and looking -- working with whatever technology is out there, but always trying to be on the leading, not bleeding edge.

That's awesome.

Thank you, Joe. See you soon.

I would now like to turn the call back to Mr. Rusty Rush, Chairman President for closing remarks.

Thank you. Well, I appreciate everybody’s time. Obviously, it will be a little longer time period until we talk in February. So I want to wish everyone happy holidays. And you can really enjoy your families and enjoy the time that you get to spend with them. And we will talk to you in February. Thank you very much.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.