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Edited Transcript of RUSHA earnings conference call or presentation 25-Jul-18 2:00pm GMT

Q2 2018 Rush Enterprises Inc Earnings Call

NEW BRAUNFELS Jul 25, 2018 (Thomson StreetEvents) -- Edited Transcript of Rush Enterprises Inc earnings conference call or presentation Wednesday, July 25, 2018 at 2:00:00pm 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, CEO & President

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Conference Call Participants

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* Albert Brad Delco

Stephens Inc., Research Division - MD

* Andrew Burris Obin

BofA Merrill Lynch, Research Division - MD

* David Mack

J. Goldman & Co., L.P. - Portfolio Manager and Analyst

* Elliott Marshall Simon

BMO Capital Markets Equity Research - Associate

* 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

* Michael Shlisky

Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen and welcome to the Rush Enterprise, Inc. Second Quarter 2018 Earning Results Conference Call. (Operator Instructions). And as a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Mr. Rusty Rush, Chairman, CEO and President. Please go ahead, sir.

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

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Good morning, everyone, and welcome to our second quarter 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 risk 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 our other filings with the Securities and Exchange Commission.

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

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As indicated in our news release, we achieved second quarter revenues of a [billion] $350 [million], net income of $29 million or $0.72 per diluted share. Excluding the $10.7 million charge related to our ERP platform, we achieved net income of $37.2 million, or $0.92 per diluted share. I am very proud of our Company's outstanding financial results on the second quarter and equally proud to announce our first ever cash dividend. We have confidence in the direction we are heading. We remain focused on executing our strategic initiatives which continue to have a positive impact on our financial results. Our robust economy and strong activity throughout the commercial vehicle market, also positively impacted our results in the second quarter. Our decision to initiate a quarterly dividend is driven by the Company's ability to consistently generate positive free cash flow combined with our capital-like growth strategy, we believe we can continue to invest in our strategic initiatives while paying a quarterly dividend and maintaining our share repurchase program.

In the aftermarket, our annual parts, service and auto shop revenues in the second quarter were $423 million and our servicing ratio was 122.8%. Our aftermarket revenues increased by 15% in the second quarter compared to the same time period in 2017. Half of this growth was driven by our aftermarket initiatives and the other half by widespread activity in the commercial vehicle market. We continue to see headwinds from fewer international trucks in operation but we are encouraged by the improvement we saw in parts and service activity in that sector in the second quarter. Due to the continued focus and progress on our aftermarket sales strategy and strength in the overall economy, we believe our aftermarket results will remain strong throughout the second half of the year.

Turning to truck sales. We sold 3,218 new Class 8 trucks in the second quarter accounting for 5.3% of the total U.S. Class 8 market. While here was healthy activity and demand in nearly all customer segments, our results were somewhat constrained due to the truck and component manufacture production capacity. That said, we are still having a strong year, up 8% over the first half of 2017. Our used truck sales were up in the second quarter and the market is strong in part due to longer lead times for new Class 8 truck deliveries. We will continue to monitor the market and we believe our used truck inventory is well positioned to support market needs.

ACT Research forecasts U.S. Class 8 retail sales to be 251,700 units in 2018; an increase of 28% over 2017. Though manufacturer constraints could push some Class 8 deliveries into early 2019, we believe that the pace of our new Class 8 truck sales will increase in the second half of the year. In medium duty, our Class 4-7 new truck sales reached 3,474 units; up 13% compared to the second quarter of 2017 and accounting for 5.3% of the U.S. market. Our medium duty sales outpaced the market due to activity from our construction and leasing rental customers and our ability to provide ready-to-roll medium duty trucks across the country.

ACT Research forecasts U.S. Class 4-7 retail sales to be 251,100 units this year; up 4% from 2017. We expect our Class 4-7 truck sales to remain solid through the remainder of the year. It is important that I take a moment to thank our employees for their dedication to our long-term goals and to providing our customers with superior service, each and every day.

As always, their impressive work is the key to our success this quarter. 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 comes from the line of Jamie Cook with Credit 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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Nice quarter, I guess 2 questions. One, Rusty, could you just elaborate on some of the constraints you noted in the quarter which hurt your Class 8 truck sales, how pervasive they were across the [OEs] and how much that impacted the quarter and what's embedded in the back half? I guess that's my first question. And then my second question, you noted that Class 8 truck sales will accelerate in the back half of the year, it sounds like the parts aftermarket should continue to grow. So, either for you or Steve, I'm trying to think about that and the implications for earnings in the back half of the year, is the $0.90 sort of run rate the way to start to think about earnings for Rush in the back half of the year?

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

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Jamie, I never [talk] EPS, but we'll get to that first...

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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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You can talk directionally.

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

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Okay I would -- yes, directionally, we'll start -- we'll take it from the latter and we'll go back up -- we'll move forward and go backwards here. Directionally, yes, you have to look at it that way I would say. It would be hard for me to say the things I said in the release and tell you anything different, right? I mean, we you expect truck sales to accelerate and we expect to maintain. I don?t know that we're going to maintain 15% because our comps get tougher but I do expect to continue to be able to maintain double digits anyway. The strategies we put in place from a parts and service perspective continue to take hold. And in fact, I'm sure I'll get the question here in a minute, when you look at it, from -- I expect us to get widening margin. I mean, I expect -- we got -- you saw widening margins in the quarter but I expect a lot of the investments we made should start to -- some of the expense [side] should start to slow down a little and we should widen, widen the gap between the -- We saw that sequentially from Q1 to Q2 already when you look at it. Year-over-year, we had -- you could look at it and say well you spent a lot of that extra gross profit, and we did, but we're sequentially seeing what we expected to see. They're starting to take hold; all of the investments that we put in. So those are important things to note and from a truck sales delivery, it was amazing. I talked to a lot of the OEM's that we represent and there has been constraints and it comes from all of the small suppliers. Now that being said, I know PACCAR was up in their production 20% or whatever yesterday. At the same time, we have just had a bottleneck but a lot of that I think is going to -- is being pushed through right now. I think the bottlenecks are widening, should I say, so I don't -- there may be some constraints but I don't think they'll be as much as we saw in May and really in May and early June. We saw -- there was a lot of constraints. There was a lot of trucks that were being built that were short a few parts here and there but they have -- are catching up, I believe with that piece, from what I've been talking to the factory. So that's why we talk about accelerating deliveries in the back half of the year.

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [6]

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Okay, and then just a follow-up, I mean, even PACCAR noted yesterday, visibility into 2019 is better than how they were sitting last year. So in terms of your customer conversations, I'm just wondering how you're thinking about 2019 and do you have what your customers are saying, I would say, both on the vocational as well as line haul side.

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [7]

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Yes, both -- right now, activity -- we believe we'll remain strong. In the year similar to 20 -- that we're seeing here in 2018, we believe 2019 just as ACT does, because we're already into 2019, right? There's -- when I look at our backlog, it's not going to get delivered all here in 2018, there's just no way. People have to remember, just because it gets produced doesn't mean it gets delivered to the end user, right? Typic -- a lot of times, especially in the vocational side, it can take us 60 to 90 days to get that in the hands of the customer. So, some of the trucks that we'll build in October will flow in and the manufacturer will bill, will bill me for, will flow into the first quarter of next year. So, even more than the OEM, I think you have to look at it, we're filling up 2019 faster than the OEM is, okay, because of the lag time, because we are the last -- we're the last person in the food chain because we deliver the truck to the end user. So we are feeling better and better all of the time about 2019 and I see nothing and there's been no commentary, I mean, and I seen -- haven't seen any commentary from any customer in any of the businesses or markets that we delve into, they've been negative. And so, it's hard for me to sit here and paint, folks can paint what they want but I can tell you from a Street level, we're not seeing anybody that's negative about it or down on the future in 2019. I'm not going to go out further than 2019 but I'll say, I do feel very confident in 2019 when I look at it from a truck delivery perspective and obviously, we've spoken about our strategic [additions] and we think we're going to continue to see those. We have more coming down the pipe and we'll continue to see those take hold and continue to drive our parts and service operations.

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Operator [8]

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Our next question comes from Mike Shlisky with Seaport Global.

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [9]

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Hello, Mike. Well...

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Operator [10]

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If your line is on mute, can you please unmute your line?

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Michael Shlisky, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [11]

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Quick question on the dividend, I won't put any words in your mouth here but is it fair to say that when you start a dividend now, that's really a way of saying if the Class 8 market does eventually turn downward, let's say in 2020, your earnings and cash flow is not all that connected to the new Class 8 truck market and you aren't at a peak in your earnings this year or next year, and it's really all about parts which has a much longer tail. Is that a fair message you're trying to send?

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

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Mike, you said it wonderfully, how's that? Obviously, we continue to shift our earnings more towards the parts and service side of the business, which as everyone knows is the more stable piece of the business, right. We believe, as we've cash flow modeled out the next 5 years, regardless whether mark -- and by the way, if and when, the truck market will go down someday, we all know that. And I think that's the reason behind the shift in the organization over the last few years, our gross profit that we're focused so heavily on the back end of the business because that is the more stable piece. So, as we model, we see nothing that's going to interfere with us to be able to continue both the share repurchase program and obviously continue the dividend program. It's here to stay.

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Michael Shlisky, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [13]

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Got it. I also wanted to get, secondly, a sense of the balance in the used truck market now and over the next couple of quarters. It sounds like in the quarter your used sales and units were up nicely, I think it's 18% in the press release.

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

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That is correct.

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Michael Shlisky, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [15]

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Is that correct? Yes, so...

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [16]

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A lot of really -- margins were very high too so...

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Michael Shlisky, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [17]

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So then is it fair that your inventories then were down, you got to reduce them in the quarter and can you maybe share any initiatives that you are taking to keep those inventories under control and perhaps how you feel about where the inventories will be a year from now with so many trucks probably, I would assume, being traded in between now and then?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [18]

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Right, well as you can go back to the last couple of calls, I've been concerned about where we would be here later in the summer from a used truck inventory perspective. But what has happened is because of the long lead times, as I touched on in the release, the long lead times from new trucks and the activity that's out there for customers, they're not wanting to wait 6 months. So the market for a late-model used truck, that's typically turned in by the first guy, the first carrier, a 400,000-, 500,000-mile truck has been extremely active. That market has been extremely active. So it has picked up the slack for what I thought would be a large -- it's picked up the supply. There's no question the supply growth was coming at us and will continue to come. But for now, obviously the market is taking care of it itself and you can tell that by our activity and our inventory levels, you touched on that, are pretty flat from where they were in Q1. So we're comfortable with that. Used trucks is a profit center too, right? Properly run, used trucks are a very good profit center for you, not just a hindrance. And so obviously you look back in the last couple of years, you can see they've been a pretty nice profit center or us and they're as good as they've been right now. So we realize that eventually that will probably, I look forward for a year, I don't know if this continues a year from now but at this moment we're taking advantage of it and it's getting us a jumpstart on all of these used trucks that are coming back. So they're not going to start piling up, if you understand what I'm saying, they should have already started -- when I say that, you won't be building inventory. We should have already started building used truck inventories if used trucks sales were typically where they were a year ago from now. But we are maintaining and not building so that's a good thing when you look at it from a long-term perspective from me.

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Operator [19]

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Our next question comes from Brad Delco with Stephens Inc.

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

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You provided us a lot of good color already but maybe on the -- kind of your outlook for trucks in the back half of the year relative to what we've seen the first half. I know the strength in your business is broad-based but can you give us a little bit more detail on how much of this is kind of construction, how much is energy, how much is over-the-road? That typically impacts price per truck and margins as well so some color there would be helpful.

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

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Well, we -- obviously, you can tell by margins, we pretty much maintained, right, here -- from where we've been and I always am a little more conservative when I talk to you guys and we keep -- I think, a better job than I anticipate so I'll take it coming out that way. I do expect the back half to be a little bit more freight, over the road mixed business, but I also expect it to be up, right? So the accelerated -- I really don't want to tell you a number, I've got a number in my head, but when I look at what I think we'll deliver by year-end, again, because there's a few constraints out there but it was -- it's going to be up and the truck that we are up, most likely will be the over-the-road business, okay, from what I can tell by looking at the backlog. But we're still strong in all sectors. The one -- the -- we don't -- we're not -- this year we're not -- even though energy is still solid, we're not -- we're delivering less energy trucks than we did last year because we had a couple of big deals. Now we're still doing deals, we had a couple of very large deals in 2017 and our largest just over-the-road customer, even though they're both -- the 2 large deals that we're not having any deals that size, we had in 2017, we don't have in 2018. Both customers are buying trucks, don't get that wrong, but they loaded up in 2017, right? At the same time, it's much more broad-based. We're going to deliver more trucks. I mean, we may not be at 25%, I told everybody that. We ought to be half of that by year-end up here at Rush because we had a couple of large deals last year that, I don't have any 1500 truck deals this year. I've got hundreds of trucks deals but not 1500, I had a couple last year that were like that. So -- but so that means, so we're up. If you look at it like that it's -- for me that's better because it's broader-based across all markets and I mean, it's hard for me to say one is better than the other but I will say the pickup in the back half will be the over-the-road business. What -- because the others have been strong really started in 2017. Construction continues to be strong and we'll sell as many mixture trucks as we have in ten years this year. Energy, as I said, won't be as many; we had a large deal the year before but we're still selling into it more broad-based. Refuse, still very strong across the board. So it's just -- I mean, I know I'm rambling on here a little bit but it's hard for me to find a negative, okay?

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

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So like it will stay broad-based just a little bit more component of freight or over-the-road versus what you saw in the first half of the year?

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

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The upside will be the over-the-road business and you'll find that at the OEMs, that's why they're building a much larger percentage of sleeper trucks this year, right? Where last year was more vocational last year. No there's -- if you walk through the factories you will see a larger -- a lot more sleeper trucks being built than you did, and hey, that's one of the reasons, if you go historically, some of the big, big guys who do these huge deals, we participate with some but we don't participate with as many of those and those are -- that's when a lot of that is going on. That's the big upside. The other is maintaining it very healthy, it was healthy in 2017 and all of the other segments are healthy in 2018 and we anticipate talking to customers, [they] will be healthy in 2019 too. When you look at housing starts and things like that, we don't see anything slowing down in 2019 to be honest with you, buddy.

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

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Yes, and the second question, I think you kind of alluded to it with the question earlier and then in the release as well, I think you've hired 300 techs, I think you've hired what, a hundred part salesman. So that's a margin investment, right? Can you...

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [25]

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Better believe it.

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Albert Brad Delco, Stephens Inc., Research Division - MD [26]

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Put into context what kind of margin drag that may be and what it would look like once these guys matured?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [27]

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Right, we're not going to say it's dragging margin percentage but what it is dragging is absorption a little bit. Absorption is not rising as fast as you would expect given the growth and gross profit and part in revenue. But when you hire those 300 technicians, we rate technicians Level 1 to Level 5, 5 being the best, right? They don't show up as 5s, okay, so you've got to train those people. Our training bill is through the roof this year, okay. And things like that, but they're not fully -- they're not fully bringing all of the hours or producing the hours that they will as they get more experienced and get the level and their skill sets go up, right? So you're spending money there. You hire an extra hundred plus, by the way, [ASRs] as we call them, parts and service salespeople. Well, you're not going to get your full bang for your buck for 12 months or more. So those -- we haven't made -- if you're going to look at it, they're not making money, they're growing every month because their mark -- their gross profits and they're getting more share and growing and growing their clientele but they don't just walk in. They get new special accounts and they go after them and they have to build those relationships and they -- and it grows. And I guess the best way to put it -- if you look -- Q2 over Q2 of last year, we have had -- normally if you remember what I've always told you, I said, when we -- gross profit in parts and service. We're going to spend money. You don't just pick up parts and deliver parts and sell parts and turn wrenches without investment, okay? It's not -- this isn't Star Trek and beam me up, Scotty. Okay, this is more like -- you've got to hire people to do things. So, but our typical goal over the cycle is to keep 50% of the gross profit we produce in parts and service and we have to spend 50%. If you look at Q2 over Q2 of last year, we have only kept 22% and spent 78%. But the compelling part when you look at it, when you think -- we are starting going in the right direction. As you look at Q1 versus Q2, we have kept 51% and spent 49%. That is more in line with what we're looking for. So -- but those investments had to be made to get you to get the revenue growth and the gross profit growth and now you start widening -- you start widening and getting back what you keep because you just don't show up and you're running -- and you're not running, 9 flat, 100 meters to begin with. You just don't -- it takes investment and time and money. But we are -- the great part, as I said going into this year, [really] like last year is we're seeing it. We're seeing it and we can measure it and we can tell that about half of it comes from our initiative so -- and we're not through with initiatives and we'll tell you that right now. We've got a lot of stuff on the plate...

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Albert Brad Delco, Stephens Inc., Research Division - MD [28]

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Just so -- clear though, your point about 50%, I think incremental margins, that's the change in your parts and service gross profit versus EBIT change or what's -- what are you quoting in terms of your 50% flow through number?

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Steven L. Keller, Rush Enterprises, Inc. - CFO & Treasurer [29]

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Brad, it's the G&A expense change versus the change in gross profit from one period to the next. We try to keep $0.50 of that, spend $0.50. What Rusty is saying is Q2 2017 versus 2018, we spent $0.78 because of all that investment and those people that you mentioned on your question, but in Q2 -- sequentially Q2 to Q1 we are back to that ratio that we intend. So that kind of tells you those guys are starting to produce more gross profit and the expense was already in the -- already layered in. So it's head the right direction.

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

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Yes, the expense starts Day 1, the gross profit doesn't show up Day 1. It's an investment and that was your point, your question to begin with, and so we feel good about what we saw from Q1 to Q2 and we expect to be able to maintain that and we'll keep making other investments but I think those people investments are just starting to pay off right now even though...

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Steven L. Keller, Rush Enterprises, Inc. - CFO & Treasurer [31]

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And one more point, we really started making investments in those people during Q3 and Q4 of 2017 and that's when we started bringing on those net adds of techs and [ASRs], so they were not in the expense run rate in Q2 2017 and they are fully loaded in Q2 2018.

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

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Brad, you can have all the time you want.

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Albert Brad Delco, Stephens Inc., Research Division - MD [33]

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You're a good man, sir.

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

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Say it like you mean it. Okay.

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Operator [35]

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Our next question comes from Faheem Sabeiha with Longbow Research.

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

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I think somebody's got it on mute again.

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Faheem Farid Sabeiha, Longbow Research LLC - Research Analyst [37]

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Can you hear me now?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [38]

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Yes, here we are.

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Faheem Farid Sabeiha, Longbow Research LLC - Research Analyst [39]

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So I was just wondering if you could provide a little more detail around the incremental used truck demand. Is that showing up across the board in sleepers, [day caps] and vocational trucks? Are fleets of all sizes opting for late model trucks instead of new? And just any other color around the amount of substation that you're seeing right now?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [40]

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Yes, well I wouldn't say fleets are all opting. That's a little broad. That's a little too inclusive, but yes, it's broad-based. I mean, first off, the non-sleeper market has been hot anyway. I mean construction activities have been extremely strong, oilfield activities, especially in the regions that we're in, the Permian basin, et cetera, have been extremely strong. So that's been already going on. The over-the-road sleeper business is the one that we've seen affected where folks it may take 6 months to get a truck and they've got business to do, they're not waiting 6 months it maybe -- it's that second tier guy mostly and they're not taking away that much, I don't think, from the new trucks but -- because when you look at the volumes but they are increasing the demand for used because they've got a contract out there and they can't wait 6 months, right? They see the opportunity and with the quality of -- the quality of the truck that goes into that second tier buyer is immensely greater than it was ten, 15 years ago. So the truck can get the job done and folks just, they want to get on the road and start making money, right? So a lot of -- it was already there in the non-sleeper stuff but you've seen it in these sleeper stuff is what you've seen that increase in.

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Faheem Farid Sabeiha, Longbow Research LLC - Research Analyst [41]

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Okay, and can you talk about the benefit that higher used sales will have on your aftermarket business in the near term?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [42]

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Well, I -- that used -- I don't know if there's a benefit. The used -- I mean, it's going to get into the market one way or another. Sure it's going to help because it's out on the road running but those are -- they're always going to have a second life it's just -- I don't know if there's a -- it just gets back on the road quicker, right? We're turning them faster. So, our turns are quicker so I guess you can look at it that way and say, hey, you're going to get the opportunity faster, you're not holding it 90 days, you're holding them 60 days or less. We typically -- used truck inventories we typically try to turn less than 90 days because they don't -- they're not like fine wine, they don't get any better with age. So you've got to get them turned. I prefer 60 but we always manage and so I guess the faster you get it on the road, the faster it might need parts and service work done on it, you can look at it like that.

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Operator [43]

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Our next question comes from the line of Andrew Obin with Bank of America.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [44]

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Just a question about all of the folks you guys hired. So you did say that it's going to take 12 months for them to sort of earn their keep. But look, the market is sort of telling us that the truck cycle is over, the economy is rolling over. Let me ask you this question, if your new truck deliveries for some reason are down next year, do you think you can still utilize these folks and do you think you can still grow parts and service business given the initiatives that you have?

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

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The answer is yes sir. There's no question in my mind that we can't. I'm not going to sit here and guarantee 15% all the time, but our initiatives are not tied to new truck sales. I think people get confused, it drives me -- I sit here and watch how everything is reacting this morning and yesterday I'm going, are you kidding me? I don't think people get that -- first off the truck cycle I think you're going to see truck sales run through next year, I believe that personally. But that has no real effect on our strategic initiatives with parts and service. We're going after share folks. Okay, we're going after share, we're going after it hard and fast. We're not -- that's what we -- we've set down this path a couple 3 years ago, and we're starting to see -- we've got a great market, but I think we've seen the uptick even without a great truck market. I mean, last year was a 200,000 market or around that number, a little less, and we saw that start ticking off in Q2 of last year. Go back and look at the growth rates in 2017 over 2016, it wasn't because they were building so many more trucks, okay, it was because our initiatives were taking hold and I still believe that we'll continue to grow our parts and service business. Can we do a -- look, I can't wait to show you all when the truck market is up 25% we make more money, how about that? Because our initiatives work. I'd love to do that one day. We'll see if we can do it, but it will be interesting. I'm putting the heat on the guys sitting around the table right now but, we'll see if we can do it. We're pretty confident in what we're trying to achieve and, we'll just have -- we'll have to work our way through the truck market but I'm -- I don't think -- I just don't think that our growth is going to stop. Look, as I mentioned, take for example the Navistar piece, okay, no disrespect, they've got good products now, they've got great stuff going on, all wonderful, but we're still feeling the pain, okay, of MAXXFORCE, okay, I don't even want to say the word. I haven't said it -- I only -- Used to, I had to say it ten times a day. I don't have to say that word anymore but we're still feeling the pain. Remember on that side of the house, that's what they built in 2010, 2011 and 2012. So if you look back, our sweet spot for parts and service is that 5 -- 4- to 5-year-old to 8- to 9-year-old truck. Well, all of those trucks mostly, there's a few left out there that are running. A lot of them got shipped overseas, some of them are -- they're just -- they're gone so we're missing -- and also we have had issues with the medium duty side also back then, right? So we're missing that piece. When you look at those growth rates, those growth rates are parts and service and I believe our international stores are better than what the overall international dealer parts and service are up but we're up a little under 5%. I've told folks, if I can keep that -- I'd like to get it up high single digits, close to ten, if we can do that facing those headwinds, mixed in with 18%, 19%, 20% growth on the other side, and that's what we're doing right now, I'd feel real good about it. So, if that starts picking back up, that's a tailwind, right? So I look at that as we go into the future as a tailwind and we've been able to fight our way through that because of the strength of our people and because we think we're on the right path with some of the stuff that we're investing in.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [46]

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Just a follow-up question on that, just you've been sort of upgrading your ERP system, I've also noticed that your parts and service margin was a little bit higher than where we're modeling, can you just talk about your experience? What tangible benefits do you have from the ERP system upgrade in your operations and is there a possibility that there is some margin runway for your parts and services going forward?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [47]

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We had a pretty good margin quarter. Now I will tell you that the margin and the quarter was a mixed, we had a service mix in there, it was -- because remembers, that's a parts and service and parts margins are X and service margins are a lot higher in the 60s -- mid-60s, and parts margins are in the mid-20s. So we had -- the service mix was a little more than parts mix so that's one of the reasons it was up. The platform that we replaced, our DBM, our dealer business modules is what we really replaced, and it went extremely -- knock on wood, that it was the smoothest transition that we ever had but we didn't do it until the end of May and Memorial Day weekend, right? So we have seen probably a little bit of performance pickup in the system yet some of the initiatives that we're investing in, which is outside that, okay, these are the initiatives and I'm not going to get into them here because it's proprietary information but some of the initiatives that we're investing in are still coming down the pipe. So is it possible? Yes, it's possible Andrew, but I'm not going to sit here and sit here and for sure say that, that we're going to grow margins. But I sure don't expect margins to go backwards. You've got to remember, what we've gotten out of the system, we believe that our business system is the most data-rich system that's out there and we're harnessing that data. It's been a long, painful 10, 11, 12 years with this thing, okay, but I know that our system provides more data. Now how we leverage that data, that's what we're doing, okay, we're leveraging data that we've had and I have more confidence that our system has gotten more than any of our competition and now we're learning how to leverage that data and take it and use it, right? And take it and push it in through the financial numbers. So -- and we're -- as I said, we -- I think the results of the last, since 5 quarters in a row now, show that and we just -- we feel good about taking it going forward too. That's all I can tell you and continuing to learn and leverage it more and more and more and allow us to understand our customers, understand the business, understand more key metrics that we believe will continue to help us show the results that we're showing on that side of the business.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [48]

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That's hope the markets are efficient long term. Good luck.

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [49]

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No kidding, look, I get -- I've got to say something, this truck cycle thing is about to drive me nuts. Look at the performance, that's all I can tell you and where the growth really is for us. That's all I can say.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [50]

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That's what we've been saying, hopefully the market will agree with us. Thanks Rusty.

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [51]

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I hope so. Thank you Andrew, I would hope so. It's a little frustrating at times I can tell you.

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Operator [52]

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Our next question comes from the line of Mike Baudenistel with Stifel.

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Michael James Baudendistel, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [53]

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Great, thank you. Hey Rusty, I just wanted to ask you, is there any update to your comment, I think you said once that 80% of your gross profit comes from the Peterbilt dealers, has that changed at all recently?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [54]

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Oh, I don't know that -- well, I don't think -- 80%? Well, no, I think when you talk about -- it was more of about a return from a net profit perspective is what I used to talk about and, it's moving -- I don't know if it's changed a whole lot but I see the changes of it changing, how is that? We're working towards it. Those headwinds that I talked about were -- and by the way, you wrote a very nice note that feel right in line with what I just said a minute ago, so I appreciate that. At the same time, we're still -- yes, there's no question that the hidden diamond for me in the organization is the Navistar division, okay? It really is because as they're getting their feet back on the ground and with Volkswagen coming in, we -- who knows if they're going to buy a larger piece. Everyone thinks they will. I think those are all great things and we're working our way through the headwinds as I spoke about a minute ago and then every day that goes by we get a little further past it, right? So and those were all -- but you've also got to remember, those were a lot of acquisitions done in a time of distress, okay? So, those organizations took a pounding. It was hard to get people to work on international stores back in 2014 and 2015 and stuff. No disrespect but we were going through a lot of heartaches with the MAXXFORCE not because of what's going on now, just heartaches at that time. So we're building back our (inaudible) strength there also but we're doing a good job of it, it's just -- again, it's not an add water to stir deal, right? And it's not a light switch but you've got to keep investing it. We're investing and I do believe, again, that that is the hidden diamond inside the organization is the level of performance continues to rise on that side of the house and it is, for a fact. Not maybe the rate that we've got going on on the other side right now given the headwinds but that's still out there to catch. That rabbit is still out there to get so we'll keep pressing forward, that organization is getting stronger by the day.

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Michael James Baudendistel, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [55]

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Got it. I also just wanted to ask you, I mean, it sounds like the demand has been pretty broad-based from a wide range of customer types. I mean, can you talk a little bit about, is the energy customers -- are the energy customers having a disproportionately positive impact on the company this year and can that be sustainable if so?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [56]

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No, I would not say that. I would say as we look at our parts and service sales, let's break it in 2 sectors: trucks and parts and services. I know we're going to deliver less trucks to the sector because I -- a couple of (inaudible) transactions in last year. So we're going to deliver less trucks to the energy sector and our parts and service business was flat year-over-year more or less, okay? When you look at what we were doing in Q2 of last year and what we did in Q2 of this year. So the contribution was not up, it's good, okay, let's don't question that, it's a good contribution but it wasn't up year-over-year. Now when I -- you can't -- there's not much you can attribute to these results to energy being what rose the performance of the organization. It's more broad-based across other segments and really across our strategic initiatives. As I said in my -- said a minute ago, we believe that about 50% is the -- and this isn't a science. We've got the best measuring tools we've got but from a parts and service perspective but we believe that about 50% of it came from our initiatives and I've watched it go up -- you go back a year ago, I'd say, well, we're getting traction and I'd say, well, 20%, 25%, then 30%, 35%, and we said 40%, 45% and right now it's 45% to 50%; I'm saying half but it's right at that number. The best we can tell is coming from -- we expect that to continue but no, energy, to answer your question, did not drive the higher performance this quarter. It was a good parts and service quarter just like it was last year but truck sales were down in the energy sector this year.

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Michael James Baudendistel, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [57]

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Got it, that makes sense. And just also want to ask you on the -- in this -- hiring the 300 techs, I mean, it sounds like you hired the techs who did not have previous experience doing what they're doing and you're training them yourselves and how long does that take for someone like that to be productive and what's a typical retention rate and can you put that 300 in the context of how many techs you have in total?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [58]

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Sure, you bet. The 300 is a net add, unfortunately, in our industry the technician position tends to be the highest turnover position just like the truck driver position does for the over-the-road customers. It depends, I would tell you, some of the ones that we're getting, that's a net add right? So, that's going to be after what you've lost, right? So after the folks that have left you during that period. So we feel really good about that. So -- but the majority of them, we're having a lot of good stuff working with the OEMs and their tech schools and stuff like that. They're coming out pretty solid but they do take training. They're not -- they're not coming in at like ground -- maybe they're a Level 2. Remember I went through that Level 1 to Level 5. They may be closer to Level 2. But take the technician up to a Level 5, that can be what, 3 to 5 years I'm guessing. 5 years probably, I'm looking at the guys around the table really 5 years to get him all of the way up to a Level 5 technician, it just takes experience. Sort of like going to college, right, or going to school, it just takes more -- you learn, you learn and your prosper, and you grow and you grow and you build up -- it builds upon itself, right, knowledge base continues to build. So they're going to continue to get better and trust me, that's -- that?s what I said earlier, we've spent a lot of money on training. I was looking at some of the expenses and then you've got to make sure as their -- they may not be able to produce a full 40 plus hours to begin with, so you have to supplement that. You've got -- because you're training these folks so they may only produce you X amount of hours and they produce 25, 30 hours. I can't pay them 25 or 30 hours, they're for sure going to leave. But what I can do is supplement that along the way and as you go forward, that expense, that net expense, piece where you're supplementing decreases right? So you a get higher production then that decreases. So it's process -- it's a process when you say it by -- sometimes, we hire technicians, well great. I think the -- what's our number right now, 2600 or so I'm guessing? Yes, about 2600, we started at around 2300. So -- and of those 300, a hundred are mobile. So, we're not just hiring in our shops, we're seeing an increasing, increasing demand and broad-based demand for mobile given the congestion in metro areas and things like that and the price of labor and just everything across the board for people for up-time, folks will pay for it because they've learned how to totally understand the costs of -- [get] taking a truck, taking it to the shop, dropping it off and doing all of this, right? There's a cost involved there. So, we're -- again, we're seeing broad-based growth across our technician base and we're excited about it, we're excited about it because we do believe that return is only going to continue to grow as we go forward and get these guys straightened up. And by the way, we're not done adding, let's get that straight right now. We're not through adding folks, there's demand.

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Operator [59]

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

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Elliott Marshall Simon, BMO Capital Markets Equity Research - Associate [60]

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Guys, this is Elliott Simon on for Joel. I know you guys forecast a drop but...

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [61]

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That's an upgrade.

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Elliott Marshall Simon, BMO Capital Markets Equity Research - Associate [62]

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What's that?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [63]

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I said it's an upgrade. You're...

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Elliott Marshall Simon, BMO Capital Markets Equity Research - Associate [64]

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No, no, no there's no one better than Joel. I know you guys forecast a drop but the market share in Class 8 truck sales flipped to 5.3% this quarter. How do you guys kind of think about that, do you think it will kind of flatten out from here or more (inaudible) over-the-road fleet to make up a great percentage versus...

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [65]

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Yes, whenever you have the big, big carriers, over-the-road business gets really high, it's when you get the big numbers. We typically don't run as high a market share because we have a more broad-based business. That doesn't mean I'm not going to rattle names but there are many over-the-road carriers that we sell but when your super large ones buy thousands and thousands we may not be participating as much in that. So our share will go down. I would -- as I look out to the rest of the year, our market -- our share shouldn't decrease any more. It might go up a couple of picks but the deliveries will go up. The biggest -- the 251,000, where are we at so far Steve, 112? So that means you've got to deliver another 138,000 or so versus a 112,000. We should maintain or grow it slightly? I know it's not our 6% like we're usually typically getting but on a 200,000 market -- [it's] broad-based, we're going to get our 6%-plus, when it gets to this 250 or plus range, we're going to deliver more units but we're not going to be able to keep pace typically because of those big deals, right, those large, large deals. But we're going to be up for the year, I expect us to be up -- we were up what 7% or 8% so far this year? I'm hoping we're up 10%, 12% before the year is done. So we'll maintain, we're not going to go any lower from a market share perspective and hopefully pick up -- because our deliveries are going to pick up. I'm not giving you a percentage but I expect them to pick up X. I expect our deliveries to pick up in line or better with 138,000 as projected for the back half of the year, if that makes any sense?

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Operator [66]

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Our next question comes from the line of David Mack with J. Goldman.

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David Mack, J. Goldman & Co., L.P. - Portfolio Manager and Analyst [67]

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I was going to ask about the share as well and -- because I know that Joel was curious about that. So I'm going to move on to a capital allocation question. I know the stock is not the most active trader, should I take anything from the dividend announcement that you don't plan on being as opportunistic with the stock or do you still see a path for buybacks as well?

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [68]

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No sir. Don't -- no, no, no -- we are -- as I said earlier, we will continue both. I still have, as you may know since the first of December we allotted $40 million, spent that, put another $35 million [of] new repurchase and we are still spending that money as we speak. We're just -- we're spending it wisely. We might -- if the market continues to do what it's doing to my stock, I might accelerate that but yes, we're going to continue to repurchase, we're not stopping. We can support the cash flow, free cash flow in the organization. First and foremost, let's get this right, let's see if I can get this straight, the first thing we're going to do is invest in our company and grow it. It's going to be the first and number one thing we're going to do. Second, we're going to do a dividend and third we're going to repurchase and we have enough free cash flow to do that and still build cash. So as we project out, we believe we're in good shape to handle all 3 of those objectives. So I wouldn't worry any about -- we're not stopping the repurchase program sir.

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Operator [69]

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We have no further questions at this time. I would now like to turn the call back over to Mr. Rusty Rush for any further remarks.

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W. Marvin Rush, Rush Enterprises, Inc. - Chairman, CEO & President [70]

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Well, I appreciate your time this morning, ladies and gentlemen, and we will be talking again in October. Thank you all very much.

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Operator [71]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.