Good day, and thank you for standing by. Welcome to the Rush Enterprises First Quarter 2024 Earnings Results Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Rusty Rush, Chairman, CEO and President. Please go ahead.

Good morning, and welcome to our first quarter 2024 earnings release 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, 2023, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved first quarter revenues of $1.9 billion and net income of $71.6 million or $0.88 per diluted share. We are proud to declare a cash dividend of $0.17 per common share. Class 8 new truck production has caught up with market demand. And that, along with other economic factors led to a decline in our Class 8 new truck sales in the first quarter. The freight recession and elevated interest rates are negatively impacting over-the-road customers, both small carriers and large fleets. We are pleased to significantly outpace the industry in Class 4-7 truck sales, and we achieved year-over-year growth in used truck sales, which were the bright spots in a challenging quarter. In the aftermarket, our parts, service and body shop revenues were $649.2 million, flat compared to the first quarter of 2023 and our absorption ratio was 130.1%. Our results were consistent with the industry, which is experiencing slowing aftermarket demand driven by a depressed freight market. We did, however, see some healthy aftermarket demand from the public sector, refuse and medium-duty leasing customers that along with our commitment to support large national [ fleet lease ] and diversifying our customer base helped us to somewhat offset the challenging industry conditions we faced in the first quarter. As we look forward, we believe aftermarket demand in the second quarter will be fairly consistent with the first quarter, though we expect some seasonal uptick as we enter the summer months. We anticipate the current freight recession will continue to impact aftermarket demand, but we remain committed to executing on our strategic aftermarket initiatives. We believe that our second quarter aftermarket performance will align with our first quarter results. Turning to new truck sales. We sold 3,494 Class 8 trucks, accounting for 6%…

[Operator Instructions] Our first question comes from the line of Justin Long of Stephens.

Maybe I'll start with one on the expense side of the equation because, Rusty, I know you mentioned some cost initiatives that are going to be kicking in. Any sense you can give us for the timing and magnitude of those expense reductions and how we should think about those flowing through SG&A in the next 2, 3 quarters?

Well, the timing of -- they will happen and obviously, flow in through the second quarter, Justin. To take full effect, I would imagine by the time we get in the first part of -- when we get into Q3 and Q4. As I've said, we feel pretty good about where we're going into Q2 at. We expect better truck sales across the board, timing. But we do expect decreased truck sales right now in the second half. But as far as getting -- that's the one thing you can always tell by looking at our absorption rate, right, that gives you a good gauge of where you're at. As I said, when you look at Q1, we were off about 6 points compared to last year in absorption and that's with flat gross profit, right? So you can probably gauge that was caused by some expense creep that got a little out of line considering the gross profits from parts and service flattened out some, which we're not used to for a while, but we've been doing a heck of a job you asked me fighting it off. So that's the one good thing is, we have 2 levers, right? You got the gross profit in absorption and you got expenses. So we will manage the expenses to where we're at currently and where we believe that the gross profit side is going to go, is flattened out. So we'll try to get some of that back of that absorption rate. That's 6 points. So I'll try to get somewhere around half of that back, if you'll know the truth maybe a little more. We'll see how it all falls out. But it's just normal what you do. We're quite a cyclical business. This is nothing new or not something this company is not pretty experienced at managing. And the good part is, we run a whole lot our absorption rate through a whole lot more parts and service business than we ever have. So we feel good about being able to do the right proper thing and manage through. That's the good part of what we've done over the last decade is shifting the earnings of the company, where they used to be so reliant upon truck sales to the parts and service side where you can manage the expense side of it along with it, not necessarily dollar for dollar but because that's not the way it works, you still got inflation and things that you have to deal with. And you've got services that you have to provide for customers. So there's a balancing act in what you do, but it does give you a lever. And I think we've proven in the past. We know how to do that, and we'll do it prudently like we have done this and according to the market.

Got it. That all makes sense. And maybe to follow up on parts and service. So you talked about your expectations for the second quarter. But any updated thoughts on the back half of this year? Do you think it's possible for parts and service to start seeing a little bit of growth on a year-over-year basis? Or given the environment for truck sales, could that be a challenge?

Well, obviously, the environment for truck sales, really, it's not just truck sales, it's our customer base, right? When you look -- If you own us [indiscernible] extremely proud of and anybody that studied the organization that have been around in a while should be also, it's the fact that I haven't seen a 2-year freight recession that I can remember for decades, okay? And we truly are dealing with the 2-year freight recession. While we have a diversified earnings streams in parts and service, something we're very proud of, we talk about all of the different markets we manage, a dozen different market segments, and that's the good thing that if we were solely reliant on just the over-the-road business, the large customer and the small fleet, I mean our unassigned accounts, we call it, which is the small customer, they're down, again, continue to be down double digits from last year, 12% actually. But to answer your question, you better believe we can get some growth in the second half. Now from which sector, I'm not exactly sure. But the good thing is, we attack all different market segments, okay? That's how we go to market. We don't just go to market attacking one, just trucks, we look at each market segment, we have assigned -- from the top of the corporation to the store level, we have people assigned to different segments. So do I believe there's room for some low, low single to small mid-single-digit growth in the back half? Yes. We're not looking at any kind of double-digit growth this year, but I do believe, given our approach to the market that I'm telling you, is I would be more sophisticated than the most with our systems and such that we have the opportunity to…

Okay. That's good to hear. And I guess I'll just ask one more question. To your point about the freight down cycle lasting for 2 years now, I think it's lasted longer than everybody anticipated. Has that changed your view at all on the trough earnings and free cash flow potential of the business this year?

Well, you would reflect on something I threw out there a couple of years ago, that would be trough earnings, and the answer is no way, okay? That's not happening. Okay, I'm more confident in that than I ever have been when I look at the organization right now and how we're going to market. So I put that out there a couple of years ago, but no, I'm extremely confident in that statement, more confident now than when I made it then. And also what I think peak will be. If things fall out the way everybody believes it will in 2026, that should be the big earnings of the organization based upon projections now, everything can change. The economy, can move and change. But based upon all the information we have with all the new EPA guidelines coming into [ first of ] '27, et cetera, we're very confident in both the trough, which -- look, '24 is nothing more than what I've told you the last couple of years, okay? I've told you '24 was going to be, you had a great '22 and '23 and a good '24 but off. I mean, I still think we're going to be, what's it, 13% off on truck sales so far, but 20% in the month of March, okay. But first quarter was all 13%. I know ACT is at 16%. This one time I'm going to say it's probably going to be a little more off than that. But I do believe there's going to be a large prebuy in '25 and '26. It's just difficult for folks. Go look at all the public earnings, all the over-the-road truckload now. LTLs, obviously, are still doing extremely well with what happened with Yellow last year and the way the dynamics are in the distribution business. But look at what's going on out there. Everybody is suffering. So that's why I'm extremely proud of what we've done. I'm more confident than ever that we will handle both that and the free cash flow side will still be extremely strong this year without question in my mind. Not as strong as last year, but it will be extremely strong when you look at historicals for sure.

Okay. That's a great way to wrap it up.

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

This CARB law thing is confusing, Rusty, sorry. So a question, can you talk about your confidence, given the weakness in over-the-road freight, what's your confidence of actually sort of being able to manage your inventory into the second quarter? You said that you sort of have confidence in your used truck, but maybe a little bit granularity of why you're so confident given the weakness in the market?

You bet. Well, it goes back to -- first off, we -- I must take them in inverted order here, Andrew. I'm going to go to used first. Why? We took down our used inventory we traditionally carry by 40% over a year ago. We took it down that much. We traditionally probably had closer to 2,500 units. We carry somewhere around 1,500 units. Because when you got into this very accelerated declining environment that used was in over the last 2 years, you had to be turning fast. So your turns had to accelerate from what maybe they had been historically. So by doing that, we've been able to really mitigate any losses that we might be -- had been taking in some of our used truck inventory because our turns were accelerating. And with that, what it has allowed us to do is take advantage of opportunities that are out there, right? So we've been able to take advantage of other opportunities because we don't have an inflated used truck inventory. We keep it at a level and we turn it fast. And so our used is -- good used quarters, we probably, not I'm going to say we've ever had, but we had extremely strong used quarter, which is quite unusual, not necessarily volume or but just turning it fast has allowed us to maintain a higher margin. So because we're not getting caught with used trucks that are decelerating valuations quicker than what historical norms are. When it comes to medium duty, I mean, medium duty, I can look at the order board, I feel good about it. I mean it's solid. I'm not going to say we're all sold out. But unlike the heavy side, we're way further along to selling out because in some…

Sure. And just looking at the ACT forecast, which you referenced, what are you seeing the puts and takes for the ACT forecast? What do you think is potential upside to the numbers? And what do you think is potential source of the downside to the numbers?

Well, I don't see any upside this year, okay I mean, if you take the U.S. first quarter retail, multiply it by 4, you're going to get the 228 number that got out here, okay? So I don't see. A lot if I see anything, I see a little bit of downside in this year. But I do believe that there will be upside in '25 and '26. I just believe, especially as people when it comes into focus what this really is. Remember, CARB already -- implementation of CARB in California already happened in January 1 of this year. But the effects of it have not been seen because we're still delivering stuff that was bought in late '23. And everybody really accelerated their purchases. So you really won't see the real effect of that until you get to the last part of this year, I think. And as people see that. I think they're going to get really nervous around the rest of the country as to what these new EPA laws are going to mean from a cost perspective. I have concerns, no disrespect to anybody, but about performance and the after-treatment side of it, and I've watched this deal with after-treatment issues in the last decades. Every time we roll out something new, we do have issues. And I think people will be concerned about performance around that. So I don't see -- for us, it's diversification. That's why I'm confident that we'll end up the year in a better shape than what the overall Class 8 sales are just because of the diversification of our customer base. And I believe, '25 and '26 are still going to be great years as people get their heads around what the true costs are going to be. When you get to '27 -- I think we'll be back -- I do believe we'll be back on allocation sometime later in '25 probably. All right. Operator? Well, I guess I'll be the operator too today. Do we have any more questions? I see no more questions on the board. So I get a second job for the day. With that, I look forward to speaking to everybody sometime in the late -- mid-late July with our second quarter results. Everyone, have a great day. Thank you.