Good day, and thank you for standing by. Welcome to the Rush Enterprises, Incorporated. Third Quarter 2023 Earnings Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Rusty Rush, Chairman, President and Chief Executive Officer. Please go ahead, sir.

Good morning, and welcome to our third quarter 2023 earnings release conference call. On the call are Mike McRoberts, Chief Operating Officer; Steve Keller, Chief Financial Officer; Jay Hazelwood, Vice President and Controller; and Michael Goldstone, Senior Vice President, General Counsel and Corporate Secretary. Now Steve will say a few words regarding forward-looking statements.

Certain statements we will make today are considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Because these statements include risks and uncertainties, our actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in our annual report on Form 10-K for the year ended December 31, 2022 and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved third quarter revenues of $2 billion and net income of $80.3 million or $0.96 per diluted share. We are proud to declare a cash dividend of $0.17 per common share. In the third quarter, we achieved strong financial results due to revenue growth from our expanded service technician workforce, our support of large national accounts and ongoing pent-up demand for new Class 8 and Class 4-7 trucks, following a limited new truck production in the past few years. Though our largest customer segment, the over-the-road customers, are being negatively affected by high interest rates, low freight rates and other economic factors, ongoing focus on our strategic initiatives helped us partially offset these challenges and achieved strong financial results in the third quarter. In the aftermarket, our parts, service and body shop revenues were $643.6 million, up 3.5% for our absorption rate was 132.8. Through our aftermarket revenue has slowed – growth has slowed compared to previous quarters. The diversity of our customer base, our technician workforce and focus on large national accounts fueled our strong aftermarket results this quarter. Looking ahead, we believe aftermarket growth will continue to moderate through the rest of this year, and we are closely monitoring consumer spending and other economic conditions, which could impact parts and service demand. In the fourth quarter, we believe customer demand for aftermarket services will remain steady and that our aftermarket results will be similar to the third quarter, with slight adjustments caused by normal seasonal softness and fewer working days in the quarter. Turning to truck sales. We sold 4,326 new Class 8 trucks in the quarter, guiding for 6.1% of the US market and 2.1% in the Canadian market. Low freight rates continue to affect smaller operators, but strong pent-up…

Thank you. [Operator Instructions] Our first question comes from the line of Andrew Obin with Bank of America. Your line is now open.

Hey Rusty, how are you? Rusty and Steve team, how are you?

Very good. Thank you, Andrew.

So first question is, I think Traton was saying today that they think they're starting to start sales of the new S13 engine and expect to ship on quarter Navistar units in '24. So does this have any impact on your sort of profitability in the Navistar franchise going forward? And can you also remind us how you're positioned on the Cummins engines outside of your vertically integrated model on PACCAR? Thank you.

You bet. Well, the S13, we're excited about it. We know that Volkswagen is excited about it and Navistar is excited about it. We're going to start a little slower than what we anticipated with the engine getting it here. We were hoping to get a few more this year than what we've gotten. But we're excited, and we'll be showing up in 2024. That said, when it comes to profitability. Remember, typically, the most important thing that you derive, we're excited with what we believe will be a great performance of it. It's the long-term parts profitability that goes with it because it makes -- parts become more [indiscernible] to that brand. So we would expect that over time to definitely have an effect in the profitability of the overall of the Navistar franchises. I'm thinking about trying to understand your Cummins question. Obviously…

Just what's happening with Cummins and what's your position? What's your relationship with Cummins comments, just remind us.

Sure. Well, our Cummins relationship is great. From an engine perspective, we're the largest distributor of Cummins engines, considering their two largest customers PACCAR and Navistar, were the largest dealer -- we're the largest Navistar dealer, right? So we're probably the largest retail dealer in the world, I would guess, when it comes to retail delivery. We also have a very strong relationship across the board. It's much deeper than just that. Remember, we've got our JV, our joint venture, which is -- we call it CCFT, Cummins Clean Fuel Technologies as with them on the natural gas fuel system side, because we both believe they bought 50% share in that here January 1 of 2022 and we have accelerated our investments is what we prepare for what we believe a big opportunity for that market share to increase from what it's always stayed around 2%. We think over the next two to three years that that share can increase 7% 8% 9% as the -- especially the truckload side the over-the-road long haul side has to wrestle with all the pressures -- the environmental pressures that we're dealing with. Right now fuel cell is still ways away. Hydrogens are ways away. And I don't believe electric is a ways away when it comes to meeting the needs of a 400 or 500-mile haul on a daily basis. None of those are set up for that right now. So we believe they're bringing over their new 15-liter engine. And we do believe that the other that partnership is going to be doing really well for us really as we get into 2025, 2026 starting to accelerate 2024 but in 2025, 2026 and getting to 2027, we believe we've got a lot of opportunity around that from a fuel system side. So as I said it's a very broad relationship with them. And we're excited to have that relationship and forward to continue to working with them like we have always.

Thank you. And just a follow-up question on, your saying that Q4 is roughly going to be in line with Q3. And I hate to be asked a question about next year. But how sustainable is the quarterly pace? We know that you're sort of telegraphing that new unit sales are going to be down, but you have your own dynamic and then the aftermarket. How sustainable is the earnings power, I don't know let's call it around $0.90 going forward? Thank you.

Well, how about if I stay off of a number Andrew as always. I'm not going to change that. But let me talk a little more broadly, a little more in depth about what I see in the fourth quarter and how we view next year. As I said in the release in Q4, we expect it to be similar, very similar to Q3. When I say that there's going to be puts and takes, right? It's different. There's seasonality involved but there's puts and there's takes. We think when it all washes out from a return perspective, what you see it won't be exactly the same but the results should end up around the same based on what we've got falling into October. We know how October is running and fairly flat, but sequentially. So that gives you some outlook, what you should be delivering from a truck sales perspective. So we -- as I said we said in the release Q4 would be about the same, but there'll be some puts and takes. Looking into next year, well you got to remember that ACT has got the Class 8 market down 22%. Now we like to believe that we can probably do a little better than that. I'm not going to get into exacts in the way of EPS with you, but we like to believe we can do better than that. We do believe, we’ll be glad to say market for us we'll be down. We're hoping not that dramatically. But what you've got to understand is they just opened up order books in September. You saw the September number. It was like 37,000 units right? People go, oh my goodness, we've got this big order intake. Well, I think you've got to dive a little deeper…

So, the last question for me, and I think you set it up for me, and I bet you know the question I'm going to ask. You keep delivering earnings well ahead of consensus, even as things are slowing. I think if you look at the fourth quarter, your message seems you coming up -- coming out versus consensus, excellent SG&A control, you're doing everything you're supposed to do. You know that the next year is not going to be good, you also know what 2025 and 2026 is going to look like, you know what the company is going to deliver. What's the Board's thinking about sort of stepping up share buyback in this environment, particularly on a day like today when stock is down 8% on very solid numbers.

Good question, right? I just finished the Board meeting, yesterday afternoon in, fact, Andrew. We look at it as a great value. We would have been doing what we've been doing. We stepped it up 50% this year. We're going to return. We've got a pretty detail what we want to do and we would typically -- we've said and stated, we want to return 35% to 40% in shareholder return between a combination of dividend and stock buyback. That said -- free cash flow, excuse me. That said, we're going to return 55% this year, okay? I don't see us returning whatever that FCS is next year, I don't see us returning much more than 55%. I think you like to build in a cushion, I want to make sure I've got some money in case of M&A comes along. You know, I don't have any great M&A right now, but I have a feeling with the downturn typically, some M&A might show up, right? And so we want to be positioned to be able to do everything. We're not going backwards, okay. We're going to spend the whole $150 million this year, and I would anticipate us -- we'll make that decision. We have a call by the November the 28 board of call if you want to know the truth to make that determination as we're getting a little further on another few weeks never helps. He's trying to look into crystal ball. So we've got a board call set up yesterday afternoon when they left for November 28 announced for our December 1, because that's when we announced every year is December 1 is what our buyback will be. So stay tuned about that.

Well, you know what I feel about it. Great quarter, thanks a lot.

You bet. I know Andrew. There's a balancing act, as I said, possibly some M&A might show up and I want to make sure I'm prepared and I don't want to take debt. And we don't have to, we've got, but we just want to be able to take care of everything we need to while still we believe it is the best investment we can make. I'm totally in agreement with you.

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

Thanks, and good morning.

Well, good morning, Justin.

Good morning, Rusty. Well, I wanted to start with a question on customer mix, going back to some things you were saying earlier.

Sure.

Do you feel like the small customers that are unassigned, do you feel like the activity there has bottomed it, down 10% this quarter? And then can you share on the other side of the coin how your national accounts are performing right now just so we understand the relative trends?

Sure. No, you bet I'll get the numbers like I said down 10%. I don't have that answer, but if the comps are going to get easier, so I got to tell you, if you're going to year-over-year comp, yes, they're probably right there, okay? Sequentially, I don't know if there might be another couple three points left in there, buddy. I don't know that we -- the market's not totally been cleansed yet, okay? There's still folks out there that are hauling freight for basically barely break even and can pay my fuel, okay? I mean, I heard some numbers that people were all afraid for last week when I was up there. I met with a lot of customers at ATA, and I heard some of the slashing that was going on out there. So it's liable to continue for another six months here, okay? So that means you're going to keep flushing some out. But I would expect the year-over-year comps with that market to be around the same, sequentially it may have a little bit more knowing that it wasn't as bad at Q1 and Q2 last year, right? Okay. So it depends on how you want me to talk about it. But I would suggest that it'll stay similar on a year-over-year basis, I guess, would be what I would tell you, because it got worse as the year went along. When it comes to the national account business, we're really proud of the efforts because we put in a lot of dedicated people and spent some money on that. That's all inside our G&A and focused on it because our ability to grow that piece of our business is directly tied with the second most valuable piece of this company. My people are always…

Got it. That's helpful and you mentioned earlier the ACT numbers for next year have continued to trend lower and now they're expecting a 22% decline in Class A truck sales. If that plays out, if reality is pretty close to that, how should we think about your ability to grow parts and service? Do you feel like you can still grow it? And if so, any thoughts on the order of magnitude?

Sure. You know, I think -- our year-over-year comps will start to get a little better because when we get into Q2 and Q3, because it's flattened out some this year, right? Remember, when I was speaking earlier, that shift in the small guy who's got more margin in him towards that national account? Yeah. That made it a little tougher. You can see it -- you can see it in the numbers and parts of service profit. We expected that we do expect it to be a little better next quarter. We think Q3 was like a trough, we hope. But I would tell you it would have some effect. There's no question, but we think we can overcome that or at least maintain. We're not going to have like, first quarter of this year we had 17% growth rate. We're not going to do that next year. We were 3.5 in Q3 and we're probably going to bobble around that in Q4. And I would expect that probably to continue in Q1 with the same dynamics that we're dealing right now. Q3 will probably have the same type of dynamics. I do not see, I'm hoping I do not have my brain, I'm not -- I can't guarantee the future because it's a pretty volatile at times out there, but I don't see as any big huge market decline based on what I'm watching right now. We think we can overcome what obstacles are out there with a less truck sales, get a little less internal work got it. But we really believe in our growth strategy around our service arena and around our dedication to the larger – larger customers. Will it have an effect? Yes, we think we could keep where we've got it by picking up in other areas that are available to us I think. So I mean is it somewhat of a headwind? Of course it is. I can't say [indiscernible] not, it’s great, we're going to sell less trucks, because we do a lot of internal work to – on trucks getting it ready. But we believe that probably I think in Q3 was indicative outside of truck sales, but I'm thinking that parts and service side we'll keep pounding it out even if we're having a shift in a little – some up, some down puts and takes. But giving – remember, our diversification is not just the over-the-road I talk about. Remember, we're so embedded in so many other market segments that we're committed to and that's – if we were just – I'd be getting crushed like a lot of my customers are if I was just in the over-the-road business. And we were just tied to that. We'd look just like this when it comes to comps year-over-year from 2022 to 2023 but we're not and our numbers speak for themselves. We are diversified into so many other market segments.

Got it. And last question for me is on the used truck market. You talked about that a little bit earlier. But I was wondering if you could give a little bit more color in terms of what you're expecting for the trend in used truck pricing as we move into year-end and early 2024?

Sure. Well, we'd probably come down same like-for-like four, five year-old trucks year-over-year, September, October let's say around that time frame 35% in value. There may be another 10% to take out or so I'm guessing? I don't – it'd be hard for me to see it go much more because what happens is that spread between new and used gets real – I guess too large as all of a sudden you can go by three late model trucks for the price of one new. So that eventually when I say that it yes, but whatever that spread creates a value proposition on use when it gets so low. The problem is that the used truck buyers typically the small person, right? Well they're getting crushed. So you got to have demand too, okay? You can take price as cheap as you want. Now that’s truck that’s spread looks really enticing. But if you don't have demand because you don't have any market to go lease a truck on some place, it makes it difficult. So eventually, it just takes time. So right now we're – it's a little bit higher. Like I said, depreciation is accelerating not as dramatically as it was but it's still over what I would call typical depreciation by percentage on a monthly basis. So, typically you don't see it like historically, we're not there yet. It's still a little accelerated. It's that demand piece that we're going to have to get back. So I just – I don't see anything changing around that until we get maybe – that we saw out in the spring. And hopefully, we'll do it seasonally, we always do a little better than once we get through winter time. So that's -- I would hope that we would…

Make sense. I’ll leave it there. Thanks for the time.

Thank you for your questions. I would now like to turn the conference back to Mr. Rush for closing remarks.

Folks we appreciate it. Thank you very much. I'd like to wish everyone a very happy holidays, and we will speak to you early to mid-February with our Q4 results. So again thank you very much.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.