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Edited Transcript of RUSHA earnings conference call or presentation 14-Feb-19 3:00pm GMT

Q4 2018 Rush Enterprises Inc Earnings Call

NEW BRAUNFELS Feb 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Rush Enterprises Inc earnings conference call or presentation Thursday, February 14, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Steven L. Keller

Rush Enterprises, Inc. - CFO & Treasurer

* W. Marvin Rush

Rush Enterprises, Inc. - Chairman of the Board, CEO & President

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Conference Call Participants

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* Albert Brad Delco

Stephens Inc., Research Division - MD

* Faheem Farid Sabeiha

Longbow Research LLC - Research Analyst

* Jamie Lyn Cook

Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst

* Michael James Baudendistel

Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst

* Neil Andrew Frohnapple

The Buckingham Research Group Incorporated - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Rush Enterprises Fourth Quarter and Year-End 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's presentation, Mr. Rusty Rush, Chairman, CEO and President. Sir, please begin.

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [2]

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Good morning, everyone, and welcome to our Fourth Quarter Year-End 2018 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.

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Steven L. Keller, Rush Enterprises, Inc. - CFO & Treasurer [3]

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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, 2017, and in our other filings with the Securities and Exchange Commission.

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [4]

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As indicated in our news release, we achieved annual revenues of $5.5 billion and net income of $139 million, or $3.45 per diluted share. In the fourth quarter, net income was $47 million or $1.20 per diluted share on gross revenues of $1.5 billion. I am very proud of our team for their excellent work this year, and for remaining dedicated to our customers in our long-term strategy, which resulted in strong financial performance and record-high company revenues. Our results were positively impacted by our strategic initiatives along with strong freight demand and widespread industry activity driven by the robust economy. In the aftermarket, our annual parts, service and body shop revenues were $1.7 billion and our annual absorption ratio was 122%, a company record. Our annual aftermarket revenues increased by 13.5% compared to 2017. Approximately half of this increase was driven by our aftermarket growth initiatives, especially expanded All-Makes Parts, new parts and service locations, additional technicians in our network and increased hours of services. The other half resulted from solid demand for aftermarket services from the markets we support. Though we expect parts and service activity to remain strong in 2019, we anticipate that the pace of growth in the industry-wide parts and service market will slow slightly in 2019 compared to 2018. However, we expect our aftermarket strategic initiatives to enable us to continue to outpace the industry in 2019 as we continue to invest in people and technology and implement certain customer-facing software solutions that we plan to roll out this next year.

Turning now to truck sales. In 2018, we sold 14,666 new Class 8 trucks, up 12% from the previous year and 5.7% of the total U.S. market. Our truck sales were positively impacted by a healthy economy and activity throughout the country in all market segments. Our market share decreased somewhat from last year, due to the timing of purchases, we remain proud of our performance, especially in our fourth quarter, which is the strongest truck sales quarter in our company's history.

ACT Research currently forecasts U.S. Class 8 retail sales to be 259,500 in 2019. We believe truck sales in the first half of 2019 will maintain the pace of the second half of 2018. We will closely monitor cancellations and other market conditions, and we expect our Class 8 new truck sales will be on pace with the industry in 2019. Our used truck sales increased 13.6% year-over-year, resulting from solid freight rates and extended delivery times for new truck orders. We believe an increase in supply of used trucks and decreased freight rates or flat freight rates in the next year could put pressure on used truck values in 2019, but we will continue to monitor the market and believe our used truck inventory is positioned appropriately to support demand.

In medium-duty, our Class 4-7 new truck sales reached 12,949 units, up 18.2% year-over-year and accounted for 5% of the U.S. market. Our medium-duty sales performance significantly outpaced the market and was a company record this year due to our focus on meeting customer needs with our nationwide inventory of work-ready, medium-duty trucks.

ACT Research forecasts U.S. Class 4-7 retail sales to be 262,300 units this year, up 1.6% from 2018. We expect the medium-duty market will remain strong, and we believe our Class 4-7 results will be consistent with our 2018 sales due to the continued growth in the market and our ability to support customers across the country.

In the area of network growth, the company added 9 new Rush Truck Center locations since the beginning of 2018. We expect our general and administrative expenses to be sequentially higher in the first quarter of 2019 due to our normal seasonal increases and employee benefits and payroll tax. It is important that I recognize all our employees for their impressive work this last year. It is due to their [ongoing] dedication to our customers and our long-term strategic initiatives that we were able to achieve such strong financial results in 2018. With that, I'll take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question or comment comes from the line of Jamie Cook from Crédit Suisse.

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [2]

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I guess, Rusty, just -- it would be helpful to understand like what your view is of the truck cycle, just given the concerns out there in the market? Whether we should expect it to deteriorate in the back half of '19 or thinking about 2020. And then just thinking about Rush specifically, assuming the downturn happens in 2020, I'm just trying to think about your earnings resilience. So how do we think about your ability to grow the parts business assuming a downturn? And then also is sort of SG&A structurally higher with some of the investments that you're making?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [3]

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Well, you got about 3 or 4 questions hidden in there, don't you? So let's start -- I guess I'll try to start in the beginning but if I miss one, come back to me here. For the truck market. Obviously, right now, as I said in the release, backlogs are pretty much full for the rest of the year. And that doesn't mean trucks aren't moving and in and out, you can't take orders at the back half of the year. But there -- you see some stuff moving in and out.

I believe everything in the first half of the year is pretty smooth and solid, right. As you look to the back half of the year, I believe it's still solid from my view right now. At the same time, given I've been doing this for about 35, 40 years, I'm always going to have an eye out watching a few key indicators, right. Let's see what everybody does when we get the new contract rates this year from a freight perspective. Let's watch used truck values. I was totally amazed and happy to be wrong last year. I thought we got to the third quarter and if you asked me a year ago from right now, and since third quarter, we are trying to look out for used truck values. They remain very resilient and very strong throughout the year. At the same time, I'm not going to fall asleep on the fact that history typically doesn't always change itself while timing could be different. You are getting more used trucks into the marketplace. You've got to believe that the used truck inventory will build, and when that happens, obviously, the law of supply and demand takes over from a valuation perspective. But I obviously missed it last year. This will make us stronger, but I do have to believe it sometime. I'm not saying this month, or I'm not saying the middle of summer now. I'm not going to give you time. We know eventually, that you will get -- that there will be an oversupply of used trucks. It just has to be when you're selling this many new. While there is growth inside of this, there's still a lot of replacements. So a lot of replacement going on at the same time. So just watching that out, and then watching cancellation rates too to make sure that everything is solid, that people have a double order and things like that. Because when you get to long extended lead times like what we had in the fall, you're clicking along at 50,000 units a month. You know those lead times were extended way out sometimes 9 to 12 months. So when you get into that time, you got to be cognizant and just watch to make sure that that was all solid. I have nothing to report at the moment, but I can say this is -- the trigger, it is not solid in that back half of the year. At the same time, we're going to be cognizant. We're going to watch, we're used now. We've been around a while and pay close attention to it. But right now, everything looks fine, but you know that eventually, you will trip over. And that's why I think when you look at the 2020 estimates that are out there, most people see it running through the year and 2020 being the one-off 25% if you listen to ACT and other folks, right. So that's my take on the market. I don't -- but I'll always be -- I'm always watching. I can tell you that. I'm always watching to make sure that we're on the top of it. But nothing at this moment to report. But those are indicators that you do have to be watching all the time. Secondly, how resilient are we? A heck a lot more resilient than we've ever been before, how's that? We continue to invest. We're extremely happy. I don't know it was 8 quarters in a row or whatever it is where we've had double-digit growth rates on our parts and service. Now while we've had to spend a little money to get there, we're still doing a heck of a job keeping a lot more because we're growing top line and you're seeing absorption of it at the same time because of the investments we're making. And I've got to tell you, from my perspective, we're just starting to scratch the surface when it comes to getting the results that I believe the investments we've made, the investments that we're putting in right now and the ones that we're spending on to put in later or bringing to the company from a results perspective. So I can -- we will continue to make investments, and obviously, if you look at the numbers, it's working for us. While I could keep a little more, yes, but there's a chicken and an egg. I'm keeping some. I'll eventually be able to keep more as they get further downstream with all these investments. But we're very, very pleased with where we're at and what we see from a growth perspective that we have driven with our initiatives, not just market revenue. Not just market revenue growth. Everybody drives market. The markets drive all to growth. I want to get -- I want to see this -- our investments and our focus and the work of our people, and I know it is, we can tell are working. And so we're excited about where that goes regardless of where the market grows. I feel good about what we're doing from a Rush perspective to go out and capture more market share.

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [4]

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Okay. So it sounds like you still think the parts business could grow in 2020 if I'm summarizing it -- sorry, last question. Just how are you thinking about energy in 2019, just the impact on you guys? Whether you're seeing any deterioration, and then I'll get back in queue.

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [5]

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Pretty flat right at the moment, to be honest with you. We didn't -- of all -- our sales and last year, there weren't -- it wasn't like the year before. We had a lot more energy sales in '17 from a truck perspective than we had in '18, okay. Pretty close. So when you look at '18, don't believe there was a lot of energy truck sales in there because there weren't. There were some, of course, but I would say it was half of what '17 was or something or maybe, and I don't know exactly what it was. It was substantially less than what was in '17 year guidance. From a parts and service perspective, being that we're fortunate to be in the areas of the country we are, we continue to have activity. We continue to support those customers where needed, and given our long reputation and history of being partnered with all the big guys for years and years, we're very blessed to be relied upon to be that strategic partner from a support perspective. So we expect to continue that. We don't see big downturns in it. Just pretty flat, and as we go right now, from that perspective. So I mean, I guess, it could change. But right now, we don't see huge downsize to it or anything like that. So -- for me to decide. So -- and I want to circle back to you. When you said, " you think you can grow your parts business? " Yes, ma'am. We do. It's just a matter of what's that growth rate, right. We've been lucky to keep double-digit growth rate for like 8 quarters. I don't want to shuffle in. I still believe we can get real close to it, if not right at double-digit growth rate, going through '19 regardless of [anything]. Maybe not be as quite as high as it was because of the borrowing. It may not be like a 17% or a 15% to 16% margin, but I still think we can keep low double or very, very high single growth rates into 2019.

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Operator [6]

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Our next question or comment comes from the line of Neil Frohnapple from Buckingham Research.

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Neil Andrew Frohnapple, The Buckingham Research Group Incorporated - Analyst [7]

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Rusty, you called out the 12.5% growth in service technicians in 2018. I think last quarter you mentioned that a lot of the technicians you have added are only level 1 and level 2 at this point. Will you start to experience higher productivity in your results from these hires in 2019, or is that more of a 2020 benefit you think?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [8]

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I think it's going -- here's the deal. We're still feeding the animal, okay, as I would say. We're not going to stop growing technicians, okay. I think the ones that we have put on, no question, productivity goes up. At the same time, we're still -- we've got bigger plans for 2019 when it comes to technician growth, to be honest with you. So we're going to be replacing those 1s and 2s last to 3s and 4s and head on to be 5s. We're going to be replacing those with more 1s and 2s, okay. So yes, productivity level for the ones we've been adding, no question, it should grow up with all the training and support we're providing. And that's a lot when we talk about G&A and stuff. I'm telling you, we're spending money on -- we're not getting the returns, again, just like on some of the initiatives on the parts side. And we believe we will get long term. We're sold on that. But yes, those guys will get better. Those folks will get better. But the ones who we'll add will have to go through the same learning curve as the others. Because just because we grew 12.5%, don't think that we're stopping at that. We've got many locations. We've got a lot of unbilled hours and unworked hours. There's 24 hours in a day, and we got a long way to go through that. And also with our continued growth in mobile technicians and our continued growth with embedded technicians inside customer shops, we need this continued growth. So I know, I'm telling you, yes, the ones we've added will get better. Higher productivity levels. At the same time, we're still going to be feeding the bottom too. So I don't know. There's a double-edged sword to it, right. But at the end of the day, the absolute dollars and the absolute returns will continue to grow up -- go up, excuse me.

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Neil Andrew Frohnapple, The Buckingham Research Group Incorporated - Analyst [9]

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Got it. All right. That's helpful. And then Rusty, are you still experiencing an increased aftermarket activity from the Navistar dealerships that you had over the last few quarters, and if so, is this due to some -- you starting to come out of the impact from the years when their market share was really low or is this that the All-Makes Parts initiatives is taking hold on that side of the house as well?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [10]

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I don't -- no, I think, we still got a drag from those years. You got to go back. It's just been -- what we are at -- what is this -- we're just -- we quit that 6 years ago now, right. So that's a prime spot. That there's a -- and we're still missing -- and then we went into low market share, right. Real low market share when we didn't point -- we started putting Cummins in 2013, if I remember correctly, in the first quarter of 2013. So we're 6 years past that. Then we had a little market share, which we took out all the 10s, 11s and 12s. So you really don't have your 6, 7-year-old trucks to work on and you got low market share. So there's still headwinds from that, but there's no question that the tailwinds are coming, okay. It's just a timing factor. So we're proud of the growth we've had on the Navistar side in spite of the headwinds, and we're extremely excited about the growth that Navistar had with their product lines. Both [OEMs] are doing an outstanding job. But they're coming from the bottoms, and they're going to slowly keep gaining some market share, we believe, which, as I've told you all for a long time, bodes extremely well for us from a return perspective long term. So yes, we're doing -- most of the growth we're getting, I'm going to tell you from a Navistar side, while it's still way less than what we get on the Peterbilt side is going through our own initiatives, okay. But we know their initiatives are going to push through because their market share is coming up. So that's a tailwind coming. But that take a little time in the marketplace to unfold because things are still under warranty, et cetera, et cetera for those first couple of years. You're not getting the same returns. You're getting through years 4, 5, 6, 7, that we typically get on a vehicle. So that part's still to come, and so we're excited about that as that unfolds. And as I said when we can get -- those growth rates we believe will continue to rise on that side and try to inch up towards the growth rates that we have on the other side of the house.

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Neil Andrew Frohnapple, The Buckingham Research Group Incorporated - Analyst [11]

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Okay. That's helpful. And then just last one, the new and used truck gross margin was above average in 2018. Just so everyone's on the same page, can you talk a little bit about expectations for '19? Not asking to give guidance, but I mean, is it safe to assume we'll see some moderation as used trucks likely won't be as strong. I mean, is there anything else to keep in mind from a mix standpoint, Rusty?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [12]

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Sure. Well, that's not guidance asking. I don't know what it is. But anyway, Neil, I don't mind.

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Neil Andrew Frohnapple, The Buckingham Research Group Incorporated - Analyst [13]

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I thought I would try.

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [14]

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Okay. I don't mind talking about it. You know me. I would tell you -- I don't know how you maintain the used -- let's start with used and work backward. I don't know how you maintain used margins like we had. That's probably the best we've ever had in the history of the company. So that being said, I would expect used margins. For the time being, we're still okay and good, or good. But somewhere down the line, they've got to get compressed little bit, okay. That's just the facts of life, okay. I'm not going to -- I think I said earlier in my statements earlier, I'm not going to sit here and let (inaudible) tell you what exact month or anything else it is out there, but I would tell you that's just part of the normal used truck cycle, that they will be compressed down the road. But hey, right now, we're still good at the time being. But we know they got to come down somewhat sometime. Just when, I'm not exactly sure. And the market will dictate that, but I promise you, we will be prepared for it. From a new truck perspective, I've got to believe that we'll probably have -- margins should come down a little bit. I think we've got -- I don't expect -- not pragmatically, but we had a strong year because of strong demand. And I think it would be the back half of the year that we would be looking towards. Not saying and not guaranteeing it goes down some. Just not knowing, right. Not totally comp sure about the back half of the year margins. First half of the year probably be pretty decent. The back half will continue to unfold while there's a lot of stuff that's booked, I said earlier, we'll continue to watch, and we feel confident at the moment. But we'll continue to watch all the factors that I mentioned earlier to hold this thing together through all 2019. And I don't think anybody is really going out and talking about 2020 a lot right now as we -- let's just work our way through this and see where we come out. But I -- for the whole year, I would say margins slightly down, if you're asking me, okay. But volumes -- I don't look for volumes to be down as I said. If you read my release, I didn't say -- Q4 was a record quarter for us. I'm going to go ahead and jump to that from a vehicle perspective. I mean, we delivered 4,800 Class 8s, okay. But as I said, I don't have the breakout to say, but I believe the first half of the year will be a lot like the last half of the year. Now the fourth quarter only multiplied by about 2, but the last half of the year probably broke it out differently from a delivery perspective. When it comes to units, I expect right now, looking out in the next 4 or 5 months, 4 months or so, 4.5 months of what we've got left from Valentine's Day. Looking forward with -- we've got about the same amount of deliveries over the first half as we had in the back half. There you go. It won't be -- I don't expect it to be as dramatic difference, but like between Q3 and Q4, a little more flat probably.

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Operator [15]

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Our next question or comment comes from the line of Brad Delco from Stephens.

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Albert Brad Delco, Stephens Inc., Research Division - MD [16]

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Can you talk about the recent acquisition, I think Tallman Group, and what you think -- I think it's probably obvious, what you could probably bring to another truck organization with some of the investments you've been making and the success on the aftermarket side. But is there anything you think you can leverage from that group in your U.S. Navistar franchise?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [17]

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From them to us, or me to them? Well, let's -- first off, let me tell you, it's not an acquisition. It's an investment, okay, at this time. At this time, it's an investment, right, with them. They are a strong Navistar group, okay. Very big. Top 5. Fourth big largest Navistar group out there. And we were very impressed with them. At the same time, they have got a strong management team, and it was very key to me to maintain that management team while bringing some of the benefits that possibly we can bring to the part where it comes to the equation. But that will be happening all the time. It's not -- because it is not an acquisition per se, it is an investment, we -- over time, we will probably trying to be bringing some of our best practices obviously to them. But that's not our light switch where we turn it on day one. At the same time, I'm sure that a lot of our customers and a lot of their customers, there'll be some crossovers. They have customers that come into this country, and we have obviously given our customer base, which is extremely large. I'm sure many of them go up there. And we will work through all of that as we go forward. We're excited about it. But it's not on the typical trail of an acquisition where I immediately flip a light switch, put management in and do this. The whole management team knows that they are all staying forward because we believe in them. And over time, we will roll out some of our strategic stuff into there. There's no question about that. But that will be over the next year or 2. It's not immediately or something like that. So hey, we're excited about it. It's the largest Canadian Navistar dealer there is in the group in the Toronto area. They've proven to be an outstanding organization. And as they roll in with Rush, I can only see good things for both sides of this as we go forward, okay.

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Albert Brad Delco, Stephens Inc., Research Division - MD [18]

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That's helpful. And then I want to touch on the parts and service side again. You talk a lot about the investment and sort of building momentum in that business, and so I think what would be helpful is the investments you've made -- how much of your outperformance in '19 -- how do you sort of describe that momentum meaning what's been invested and what's sort of left to come and where are you seeing some of that greatest momentum on the investments? I know it's a vague question. I'm really just trying to understand.

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [19]

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That's a very -- well, I expect our service -- I mean, where do I expect to see it come in? It's just -- it's an ongoing wave, right. It's building and continues to build. I mean, I don't -- Brad, I'm excited, and am I still spending money, I mean, I mentioned in the release that -- and I talked about, we're continuing the stuff that we invested in, in the back half the year and just rolling out. It's coming out, and there's more things where we still got some more stuff that we'll be introducing here to, so main commerce stuff and things like that. And going forward, I don't want to get ahead of myself. I'm not supposed to until I roll some of this stuff out, but it's going to come out later here in the spring, okay. It's some certain -- there's some timing things coming on in just 60 days that we'll be announcing outside of some other things we've done. So I think…

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Albert Brad Delco, Stephens Inc., Research Division - MD [20]

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But Rusty, let's look at the numbers...

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [21]

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Look, I'm seeing good numbers. If we look at the first 45 days of this year, I've been pleased with the numbers we're seeing so far. It ...

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Albert Brad Delco, Stephens Inc., Research Division - MD [22]

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Let me ask you this way. So I think it's the first time we've seen a reference to you increasing your hours of service. So is there a way that you could say, "Well that added a point or 2 in '18, and we're not going to lap that until later in the year, so we at least have sort of that momentum to carry through, or we added X number of independent stores, and that's driven X amount of growth, and we should see that continue to give us some momentum going." Is there any way to break it down that way is kind of what I'm asking?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [23]

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Well, when it comes to hours of service, while we extended some of them during '18, a lot didn't happen till 1st of January, okay. A lot of stores didn't click in until the 1st of January, and they had a winner. I can tell you we're just -- we've talked about All Makes and All Makes and All Makes, right. Our people are just becoming truly All Makes guys, okay. This is a -- it's a metamorphosis of being just a typical dealer and selling proprietary parts and taking orders and stuff. And we've been after it for 2 years and 3 years. And we're just really getting better at it, okay. We're starting to see folks understand. Because you don't go out and just change all your people because they've been doing it the same way for 20 years. You come in and train your people. You just need to go ahead and tell them what they're going to do. They've been doing it one way for 20 years, it takes a little work. It takes them understanding and saying, "Hey, these guys are right, and they're giving me the tools, and they're giving me the data." As I tell everyone -- I go back. Let's go back, and we put SAP in folks. And that was -- now it's what, it was supposed to be 3 years and $15 million. It was 8 and [$50 million]. I probably should've been fired, okay. I may have missed the mark a little on the number. At the same time, we've got data that we believe is above anybody else's when it comes to customers and understanding -- truly understanding. It's our propriety system, which we're very happy and proud of. Now we've just been harnessing that over the last 2 or 3 years, okay. The data is not worth anything unless you use it. And then you got to get the people to buy it and all this other -- I mean, it's a process. So where -- I can't answer exactly one thing -- there’s one way when doing this. I can tell you that -- like the technicians we talked -- I talked about a minute ago with Neil, the 1s and 2s may, guess what, they're going to turn to 3s and 4s. Of course, there's going to be some attrition along the way, but they're going to turn into 3s and 4s. The ASRs that we've added, which are outside sales representative on both parts and services, and consolidating -- and they're just not parts sales guys. They're service parts and service sales guys. These are all things -- all these things have just been implemented pretty rapidly over the last 2 years. So were there legs on each and every one of these strategic initiatives I'm talking about, you better believe we believe there are. Maybe we're wrong. I kind of doubt it. At the same time, it's just like row -- it's just like raising a child. I know that we're going to get there because they're going to become adults, and then all these different initiatives will come to fruition. I have all the confidence in the world as we go forward. And as I said, we've got other stuff in the pipeline when it comes to customer-facing technologies. And I know I'm not giving you exact numbers and things like that, but we believe that what we're doing is working. It's showing in the numbers. Forget the market. The market's the market. We believe regardless of what the market does, we're going to outpace the market. We're going to continue to outpace the parts and service market. I don't care if it goes backward, stays flat, goes up, what it does, we're going to do better than it, which means over time, you're going to get more share, okay. And that is our goal is to get more share. So I know I'm not going you an exact here or there, but we're -- I think you can hear my passion and what I believe and be proud of, and as I roll into the first 45 days of this year, this is good January and 45 days of February that I've seen. Now that being said, before you guys jump way out, remember, it's always a high expense quarter for me, especially given the performance of the organization and the benefit packages and stuff. They go out in the first quarter where last year if you go back and look sequentially, I know I'm making my own questions up and answering myself, but here we go. I'm pretty good at that. You don't know me, okay. I think if you sequentially look back the last couple of years, we're typically up about $10 million in G&A. I expect that to probably be $12 million or $14 million here. But that's okay from Q4 to Q1. That's part of growth, man. That's how it works. But we're going to continue. As I said, if the revenues and the gross profits are moving forward and the customer -- we're getting more customers and getting more customers, then it's working, man.

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Albert Brad Delco, Stephens Inc., Research Division - MD [24]

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And just to bring Steve in real quick, if I could. Can you give us the truck margins? And then just your thoughts on sort of the cadence of free cash flow in 2019, or was there anything you need to '18 and anything you need to '19 that you'll be thinking about?

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Steven L. Keller, Rush Enterprises, Inc. - CFO & Treasurer [25]

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Okay. I'll answer your margin question first, Brad. In the quarter, heavy-duty margins were 7.5%. Medium-duty were 5.9%, light-duty was 5%. And used was 11.8%. In terms of cash flow, no, there was nothing unusual in Q -- I mean, in 2018. A lot of people give us questions about tax reform, but our cash paid for taxes because of our deferred tax liabilities related to some of our bonus depreciation in the leased fleet and things we do. It didn't really change all that much with tax reform. It did help EPS, and it helped the bottom line. But from a cash flow perspective, there was no windfall in '18. So '19 should be a pretty good replica of '18. Now Q1 is a tough cash flow quarter for us for a few reasons. We -- if you saw in the release, we really amped up the repurchase in Q4, and that continued in Q1. And we have the acquisition we just released, and it's the quarter we pay bonuses. So that is -- that's going to put some stress on the cash number. You saw it fall pretty precipitously in Q1 versus Q4. But we're fine. We have plenty of cash to run the day-to-day business. We have a line we've never tapped. And when the dust settles on 2019, you should see a pretty strong free cash flow year for Rush.

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Operator [26]

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Our next question or comment comes from the line of Faheem Sabeiha from Longbow Research.

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Faheem Farid Sabeiha, Longbow Research LLC - Research Analyst [27]

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I'm assuming if I can start with the classic sales for '19. I know you said that first half sales are going to be, I guess, on par with the second half sales. But looking at the outlook for 2019, I mean, does that imply that second half sales are going to be falling off significantly year-over-year?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [28]

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Well, as of right now I'm not going to say that. We feel -- remember, while backlogs are strong, they're not -- as I always tell folks, and I'll just say it here, you're a solid 90 to 120 days out. I would always know that people can just walk over and say i do not want the truck and cancel it, 90 or 120 days out. I don't see that at this moment. But we are cognizant of historical things that it happened, okay. When you know -- as I mentioned, we're going to be watching many indicators. I'm not here to say that's going to happen by any stretch. But I am here to say that there's always -- eventually, you know these truck cycles do in. That's why we focus so hard on parts and service. So eventually they do in. I don't see it currently. Everything is strong. Manufacturers are building at record levels, and we will continue to rise there, right. But we'll be cognizant of what's happening on the marketplace as I went through earlier. Cancellations, used truck buyers, contractual new rates. Spot markets are down again. So those are -- that's an indicator, and we have got to watch. I know I'm not here to predict that the second half will be any different than the first half, and currently if I was to say it, close to the same.

But I am cognizant of Q4 more than anything. Let's get closer to it, okay. And then I'll give you -- may be on the next call, I'll be able to give you more solid about the whole year. Not that I don't believe it's going to be, but I don't see it. But there are always -- there are circumstances out there that can mitigate or can change what people's perception of their business is now, and what it will be -- what their business will be this Q4. But we just keep working through it. So right now, I'm solid with everything. But I will be very calm. I will be watching given 35, 40 years of doing this. That's all. That's all I'm saying, really. So I mean, I feel good about it, and we'll be watching. That's all.

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Faheem Farid Sabeiha, Longbow Research LLC - Research Analyst [29]

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Okay. And just given your history in the industry regarding your comments on used truck values seeing pressure this year, I guess, if that were to happen, what is the magnitude of the client that you're anticipating given your backlog, and I guess, what is your view of how much of a decline in prices can the industry absorb for used truck values to become headwind to sales?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [30]

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Well, used truck values, when they turn, they turn quickly, okay. I will tell you that. When they turn, it's one of those tails -- they don't turn over a typically a long time when you hit that inflection point when you've been on a high like we've been. It'll be -- it will continue gradually down, but that quick -- that first step out of the box is a big step. You can have a 10% step in 1 month. It can happen. I've seen it in the past. Doesn't mean it'll happen this time that way. But it can happen that way. I've seen it historically happen that way. So -- and then it will slightly turn down. That is the law of supply and demand. And that will dictate what that hit it, right. And it depends on the supply and demand will drive what the decrease in used truck values are. Again, it's been pretty good so far the first 45 days of the year, but again, the very high out there watching, given I've done this in a while. I don't have anything bad to say at the moment, but you do have to believe supply is going up. That I'm confident to tell you. There's going to be more used truck supply, okay, in the marketplace. We review our inventories on a -- not a quarterly, not a monthly, on a weekly if not daily basis around here, okay, watching our inventory levels. They're up somewhat from what they were, say, 12 months ago, not dramatically, but somewhat up because of the certain type of deals you do. You got some deals that have trades and some don't. Well we got a couple more deals ahead, more bigger packages than the trades on them. Now we're moving them right now. We're moving them where I'm comfortable with, and that's really the key indicators to watch out how you're turning your inventory because you need to be turning your used truck inventory 3 months really about where you need to turn it. Or if not, you're going to hit, you're going to have valuation degradation inside it. But we review that monthly -- weekly, daily, and we adjust our inventory on a quarterly basis, okay. You already know that, but inside of our inventories -- we look at our inventories very closely on a quarterly basis and make sure that they're mark-to-market, to be honest with you.

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Faheem Farid Sabeiha, Longbow Research LLC - Research Analyst [31]

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Okay. And in regards to your parts and service outlook high single-digits to low double-digits this year. I mean, is it fair to say that there's ...

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [32]

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Can you speak up just a little bit? I'm having a hard time hearing you.

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Faheem Farid Sabeiha, Longbow Research LLC - Research Analyst [33]

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I'm sorry. Can you hear me better?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [34]

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Yes. There you go. Yes, sir.

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Faheem Farid Sabeiha, Longbow Research LLC - Research Analyst [35]

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Yes. So in regards to your parts and service outlook of high single-digits to low double-digits this year, I mean, is it fair to say that your outgrowth is increasing versus 2018, just given that the market growth outlook is coming down?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [36]

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Would our spread be more, I think, is what I heard you ask me over the market. We looked at markets last year, I don't know, it was 6% to 7% the overall market. And we were up 13.5%, pretty much doubling it. Yes, I think it'd be somewhere around the same. So if the market's up 4% to 5%, and we're up 10% to 11%. We're going to start off strong. My comps kick up in the year, I'd expect a pretty big first quarter, to be honest with you. And growth rates, we'll just have to -- so again, sort of like the truck market, I'll watch and see if those -- if we continued and our initiatives continue to roll in. I have -- there's no question in my mind that we're going to be double digits first quarter. It's hard for me to see out into the third and fourth quarter with it. But I would hope we could continue whatever the market is when you double, you're growing less if it goes down. But I would hope that we're going to continue to be something like that. If market's up 5%, then I'm hoping we're up 10% to 12% this year, okay, somewhere in that range because our comps get -- continue to get tougher, they have the last 2 years. And my people continue to surprise and amaze, and I respect them for what they're producing out there right now. They're taking to all the investments we've made, and they're taking advantage of them. And they're taking advantage of their growth as people and the training that we provided for them. And they're going out and getting more share, and I look forward to continuing where we've been down that same path. I really -- to answer your question, I don't see us slowing down, for us, at least. When it comes to the market, I can't make a change to the market. But we're going to continue to get share. That is our goal.

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Operator [37]

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Our next question or comment comes from the line of Mike Baudendistel from Stifel.

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Michael James Baudendistel, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [38]

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Just wanted to ask you, you talked about the market share declining in Class 8 truck sales in 2018. I think we all get why with the higher fleet sales. Are you expecting a rebound in 2019?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [39]

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Well, if I have -- I expect the first half, I'm going to watch the second half, how is that? Because I had a larger share in the first half, second half of last year. If you remember, we delivered around 8,000 units. Of what we sold last year, we sold about 8,000 in the first -- second half of the year -- 8,100, if I'm not mistaken. And if I anticipate that being what we do in the first half of the year, then I would tell you we would get a little bit better share in the first half of the year, okay. The second half of the year will continue to unfold. I'm hoping -- yes, I'm hoping to get a better share, how's that? It may not be dramatic, but I'm planning on and hoping to get a better share than the -- what was it, the 5%, 7% or whatever we had last year. I would hope to get closer to that 6% number, overall.

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Michael James Baudendistel, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [40]

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Just wanted to ask you on the investments in Canada. You also -- you always talked about the Navistar locations being a lower profitability level than the Peterbilt locations. Can you sort of compare the profitability of those locations in Canada with your existing Navistar locations? And is that investment part of the larger strategy in Canada?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [41]

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Well, I'm not going to get -- I'm not going to really take the back half of your question and talk about growth up there. That will just -- that will evolve as we go forward, how's that? I haven't closed the deal yet. So let's -- we don't -- we got 2 weeks, a week and a half where I wire money. So let's do that once we have actually done it. Secondly, I would tell you to answer the first half of your question, similar to ours and growing, okay. Just like ours is growing in 2018, I think theirs is -- their returns are growing in '18, and we expect both of them to continue to grow going forward, given the tough times of '14, '15, '16, '17 that we went through with the product and the brand and the investments they've made and where it's headed. So very similar to ours. Growing, and we expect to continue to grow. Again, out-advance the market if that makes, because the market's going to have a lot to do with everybody, right. And at the same time, coming from their share levels, they should continue to grow share, which means they're gaining more customers, which means we should be doing the same thing. So we will outpace the market in all aspects in my mind, right. Even though you ve been way under, that's the runway, I've always told people about that that's the -- sometimes been the hidden thing inside the organization. And it's nice to see it starting to gain some strength, and we saw the numbers in '18 outside of just market numbers and above-market growth. And we expect to see theirs and ours be above-market growth rate on all sides of the business. Now parts and service is still lagging, growing, but that's -- in the next couple of years, you should start seeing the benefits of better market share, right. So they've got the new CV product coming out, right. Excited about that a little late, but we're getting it out. And honestly, it will have some effect on this year, but it really should kick into gear, especially given where I believe the medium-duty business and last mile and all that's going. I think that product's going to fit nicely in that segment. And we will continue to invest in all brands whether it be the Peterbilt side, the Hino, the Isuzu, the Ford, the Navistar side. We continue to really look forward to what I see as much more stable growth in that 4-7 business. And I think people need to pay attention to that too. When you look, we're pretty big share in that 4-7 business, and we're going to continue to try to grow that share of that business as we go forward. And I think our brands show well in that going forward.

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Michael James Baudendistel, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [42]

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Got it. That makes a lot of sense. Also just wanted to ask you another one on the parts and services part of the business. I mean, it strikes me that the revenue grew at a very similar rate to the number of people you added in 2018, and you did a great job there. And just wanted to sort of -- can you contextualize sort of how much more work can be done? I mean, how much stronger is the demand versus the people that you have? I mean, is that really sort of the main constraint? Is adding people -- or how much runway is there if you were to continue to add people at a double-digit pace?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [43]

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Hey, we believe there is plenty of runway. When we started this project, we said we were less than 4% versus on the parts market, of the 4% of the parts market. Our goal is to get over 6%. So we're nowhere near that. So we've got plenty of runway, we believe to go out and gain share in the All-Makes Business and in the service business across the board. We're -- again, we feel there's still plenty of runway and -- to do that, but we're going to have to add technicians, yes, and we're probably going to continue to work towards adding sales representatives where required, yes. Because our goal is to also continue to get better throughput through those sales representatives, right. Become -- get better returns, not just sell the normal average, but continue to drive that up. How? With customer-facing technology. With understanding our numbers and those are the investments I talked about we've made, and we'll continue to invest. Hey, look, if I spend a little bit more than I would normally, and I was running this normal status quo, I would want to keep 50% for my growth, but I'm having to spend more. But you know what, we're growing top line at the same time. Maybe going upslope a little slower than I'd like but that's because we keep investing. But we're still growing so the absolute dollars and the returns, you can see them in the numbers. And so we'll -- but right now, I don't anticipate that flattening out and super widening at the moment, but it's still growing. If we can grow that top line and continue to slightly grow our absorption rate, I think you can all do math what that does for the absolute dollars that we put out. But because we're constantly chasing -- and to do that, we've got to get to that 6% and to add 70% technicians or so over 5 years. That's a big -- you can't stop. There's no stopping right now no matter what the market does. So I hope I'm somewhat answering your question. I feel like sometimes I'm a little repetitive with stuff here. But we're going to continue down the path we've been on. And we'll continue to making investments. And regardless of what markets do on the parts and service side, yes, it gets weighed out when it's slowdown a little bit, but we're not going to stop. We're not going to stop investing until we see that we've reached the maximum. And we're nowhere near believing that we're getting maximum return out of our network. Remember, we've got the biggest network out there and growing it still. So that network and that customer touch is key. And that's a leverage piece. You're leveraging. You're pushing more, revenue, parts and services. Yes, you're growing your network slightly. But really and truly, you're leveraging, guys. You're -- most of our growth is going through existing stores. And so we continue to leverage. Yes, we have to spend a little money, but we're keeping some along the way. So -- and we're going to continue to try and drive those proficiencies and efficiencies as we go forward. But that's a balancing act between growth. And so we're not going to stop the growth pace at the moment. I can tell you that. And by the way, I'm sorry -- you always have your conference right when I do my fourth quarter earnings call, so I never get to go to it. So I apologize for that.

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Michael James Baudendistel, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [44]

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I understand. Hopefully, you can make it some time. But that's fine. We understand.

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman of the Board, CEO & President [45]

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I want to speak at your conference right now. But it always seems to lap over with my Q4 earnings call.

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Operator [46]

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(Operator Instructions) Our next question or comment comes from the line of Joel Tiss from BMO Capital Markets.

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