Q4 2023 Rush Enterprises Inc Earnings Call
Participants
Rusty Rush; Chairman of the Board, CEO & President; Rush Enterprises, Inc.
Steve Keller; CFO & Treasurer; Rush Enterprises, Inc.
Justin Long; Analyst; Stephens, Inc.
Andrew Obin; Analyst; Bank of America Corporation
Presentation
Operator
Hello, and thank you for standing by, and welcome to Rush Enterprises Inc. Reports Fourth Quarter 2023 earnings results. (Operator Instructions)
I would now like to hand the conference over to Rusty Rush, President, CEO and Chairman of the Board. Sir, you may begin.
Rusty Rush
Well, good morning, and welcome to our Fourth Quarter Year End 2023 Earnings Release Call on the golf, Mike Mike Roberts, Chief Operating Officer, Steve Keller, Chief Financial Officer, Jay Hazelwood, Vice President and Controller, and Michael Goldstone, Senior Vice President, General Counsel and Corporate Secretary.
Now Steve will say a few words regarding forward-looking statements.
Steve Keller
Certain statements being made 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 and for 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 31st, 2022, and in our other filings with the Securities and Exchange Commission.
Rusty Rush
As indicated in our news release, we achieved annual revenues of $7.9 billion and net income was $347 million or $4.15 per diluted share. In the fourth quarter, we achieved revenues of $2 billion and net income of $78 million or $0.95 per diluted share. In addition, we are pleased to declare a cash dividend of $0.17 per common share. Throughout 2023, there was pent-up demand for new commercial vehicles new limited drug production over the past few years with respect to new Class eight trucks, that pent-up demand was largely fulfilled by the end of 2023.
With respect to the Class four through seven commercial vehicles. Demand remains solid. The manufacturers we represent revenue increased production throughout the year, which led us to significant or believe is significantly outpacing the industry with respect to new Class four through seven commercial vehicle sales despite a challenging operating environment in 2023 caused by low freight rates and high interest rates, which led to grip general softness in parts and service sales industry-wide. We were able to achieve a healthy growth for the aftermarket revenues.
Growth was due primarily to our ability to support large leads and strong demand from the diverse range of market segments we support, including our revenues, public sector, wholesale and energy customers. In addition, our aftermarket revenues also increased due to the addition of 215 service technicians to our network. Expanding our service technician workforce is a key aspect in certain of our strategic initiatives.
Overall, we are very proud of both our operational and financial performance in 2023. In the aftermarket, our annual parts service and body shop revenues were $2.6 billion, up 8% over 2022 to have the positive results and our annual absorption rate was 135.3%.
As I previously mentioned, we added 215 in service to technicians to our network last year, which enhanced our ability to execute on certain of our strategic initiatives, including express services, contract maintenance and mobile service offerings. We also also experienced healthy parts sales growth from our energy revenues and leasing.
Just looking ahead, we expect the challenging rate conditions and high interest rates will continue to impact our customers and that aftermarket demand in the first half of 2024 will be similar to the second half of 2023. However, we are cautiously optimistic that the current freight recession may begin to ease in summer. In addition, we believe that our diverse customer base, our ability to support large national fleets and our ongoing focus on our strategic aftermarket initiatives will allow us to outpace the aftermarket industry and to achieve flat to modest aftermarket growth in 2024.
Turning to truck sales. We sold 17,457 new class-A trucks in 2023 accounting for 6.2% of the total US Class eighth market and 2% of the Class A market again. As previously stated, we experienced healthy demand from a variety of market segments. However, the pent-up demand in the Class A. market has been satisfied. Act Research forecasts Class eight retail sales to be 214,300 units in 2024, down roughly 22% from 2023.
Though the industry is expecting new Class eight truck sales to be down significantly in 2024 due to challenging economic and industry conditions, we are confident that we'll be able to navigate a down year and outpace the industry in 2024 due to our strategic decisions we made in prior years to diversify our customer base and focus on vocational customers. Our Class four through seven new truck sales reached 13,644 units in 2023 or 5.1% of the US market and 2.9% of the Canadian market.
In addition to pent-up demand due to limited new medium-duty commercial vehicle production over the last few years, the manufacturers that we represent were able to increase production throughout the year. Those factors, along with our ongoing efforts to diversify our customer base and support large national accounts allowed us to significantly outperform the industry in 2023. We are still experiencing delays from truck body companies, and these delays impacted dealer deliveries during the fourth quarter, which limited our growth somewhat.
Act Research forecasts Class four to seven retail sales to be 254,250 units in 2023, up slightly from 202 one 22. As we look to execute in 2023. As we look ahead, we expect they will continue to see improvements in the medium duty commercial vehicle production for the manufacturers we represent and we expect customer demand to remain strong in both of these things occur. We believe our Class four to seven commercial vehicle sales remain strong in 2024.
Our used truck sales reached 7,117 units in 2023, relatively flat compared to 2022. Due to high interest rates and saw freight rates. Demand for used trucks was weak and used truck values declined throughout 2023. In 2024, we expect that demand for used trucks will remain flat, but that was the rate at which use gross depreciating will continue to decrease and that used truck values will stabilize somewhat over the course of the year. We are confident our diverse product mix and ability to move inventory throughout our network will help us to continue continue to effectively navigate the used truck market in 2024, assuming Looking ahead, we expect demand for Class eight trucks to be soft, while demand for Class four through seven commercial vehicles remains healthy.
It should be noted that delays from body companies may continue to impact deliveries of new Class four through seven commercial unit. We will continue to monitor freight rates, interest rates, consumer spending and other economic factors that impact both commercial vehicle sales and aftermarket demand in our industry. Despite challenging market conditions, we are confident that the strategic decisions we've made in the past several years to diversify our customer base on supporting large national accounts and to add technicians to our workforce has us well positioned to perform in 2024. As always, it is important that I take a moment to thank our employees for their incredible work during 2023 and providing world-class service to our customers while staying focused on our company's long-term goals.
With that, I have two questions thank you.
Question and Answer Session
Operator
(Operator Instructions) Justin Long, Stephens.
Justin Long
So I guess to start with the parts and service business, you've talked about the divergence in the trends between national accounts and the smaller customers. I'm curious how those two buckets performed in the fourth quarter and just your general level of confidence on a net basis parts and service businesses bottomed?
Rusty Rush
Well, a pretty good job. As I said in my notes, we expect to remain at least as good as where we are. I want to I didn't want to push it up. I think I think there's room for growth in parts and service in 2024. As I said at the worst, we would just be pacing along where we were in the second half of the year in 2023. When you look at butane as well, we'd love to do is take it into parts and pieces, right. At the end of the day, you look at the small accounts, right? We talked about this before last six months. Last couple of calls.
The fact that for the year and they were down almost 12%. Now, quarter was, I don't have that in front of me, but I know it started only off about 8%, 6% -- so 7% to 8% in Q1 and ramped up throughout the year. So I've got to believe that Q4 was probably down somewhere in the 13% to 14% range. And what we call those are unassigned accounts. But what you don't realize sometimes those are those accounts still make up 32% of our business.
So when you look at what we did when you talk about being down like that really continued to decline over the year, you got to feel good about where you're at. Like I said before, you know, maybe our margins were under sulfur because some of the shift, what were the business we are doing over to more national accounts, which obviously no demand better pricing along with this, whether they're national accounts, right? So we were able to make up, but that's starting to do. A third of our business was down probably, I guess, and I don't have them in Q4 right firmly believe is pushing 12% for the year. And I know it could decline more as the year went up. So I got to believe it's in the 14% to 15% range in Q4, right?
So it's you got to feel good about where we're at the focus that we've had and it's not just over the road customers, right. When I talk about the diversity of our customer base. I'm very proud of what we've done by putting a focus individually on each of these sectors. You know, assigning people at the highest corporate level from the mid-level. To aside, we have over 300 plus outside parts and service salespeople. And while they focus on some of their local midsize accounts, we have really put a push on to the national accounts.
And when you do that, you've got to you have to form relationships at both the high end of the corporation, all the way down to the street level on the in the individual areas that they have terminals or they have shopped or whatever they have, whatever business they're in across the network. So with that read allowed us to achieve an 8% growth rate would have been up 12% on a third of your business.
So you can see you're going to hit you can extrapolate what how good how what that meant to the company, right, while we were in what was a little softer because the unassigned accounts or your small accounts. And then a little higher margin accounts, right, but we were able to overcome them with that. I'd like to say percentage over a third of your business being up 12% by the focus that we had so fail and we don't see that changing.
So when the small guy does come back, you know, you got to feel real good about what you can what are you going to be what that does when that when that deal when it pivots back the other direction, which you've got to believe we've been in a freight recession for what a year and a half, two years, almost the same like of all got breached been doing decently well, the freight market is you'd argue there's read all the reports have been under a lot of stress here this last year.
Justin Long
On the national accounts, do you have a number on how much they were up for the full year, just to compare that to what you're seeing with the unassigned accounts?
Rusty Rush
Yes, they were up in the high teens to around 20, somewhere between 18 and 20. I don't again -- I don't have a total number of stores we're talking about, but they were up somewhere in that. And I could we break it into so many different segments to because we've still got a lot of midsized customers too. International again, Alistair, while there's a high the largest growing thing we have going on, we still have a lot of mid global midsize customers. We forget about the of their piece of it also sorry, you've got roughly what, 32% in the small you've got about 28% we've got national accounts, okay, of our business.
So the other 40% is really that middle bucket, which is the largest bucket we touch, right? So that diversity of customers is really what's allowed us to navigate what you know, what has been a rough rough cloud for a lot of our customer base and that focus on vocational, right? When I talk about revenues being up. And I told you about oil and gas being up in our wholesale business, still being municipal being all these other areas are up to a Okay, regardless of whether they're national accounts or mid-level gas. We break it into a lot of different buckets, but those are the areas that have allowed us to overcome with 32% of your customers around 12% and still posted a positive year.
Justin Long
Got it. And I was wondering to if you could share anything on expectations for the first quarter, maybe truck sales, parts and service. And Steve, I know typically you see an uptick in G&A, so maybe some thoughts there as well.
Rusty Rush
Yes. Well, first quarter is always G&A goes up we didn't put it in releases here. We put it over the last 25 years. If nothing's changed rights, all the equity comp and taxes, all that ramp back up and get expensed out in the first quarter of that is natural for our business. You can go back and model it every year. So we definitely expect that from a truck sales perspective, we are going to start declining.
Okay. There's no question the mill, everyone knows we've noted for a couple of years that 2024 was going to be a little bit soft due to no one expected 23 to be as big as it was well, the demand, the pent-up demand. But the key thing in the wholesale side is this is nothing that we didn't expect. We're not expecting a city as it down about 22%, and I'm going to agree with that. I don't expect it to be down 22% in Q1, but I do expect it to be softer and we expect to do better, by the way, given the diversity in our customer base.
Right. I can tell you that the overall business is going to be put tapped more like 30%-plus for the whole year, I believe. But the key thing is we've got 25 and 26 coupled with EPA regulations of [day one or 27], there will be -- I'm guessing as we get to the back half of this year, folks are going to wake up and realize that they are probably going to pre-buy at the 25, 26, given not just the new technology. But look, I mean, I won't get into prices pricing with the engines are going to cost to go up by day where I wanted 27 with all the new aftermarket for Africa excuse me, after treatment systems that are going and we're going into play to meet the new EPA regulations so that we believe the freight market will go back to the overall business is still the biggest piece of volume out there.
So not in Russia, which was we were 50-50 right between location on that, look in the real market is still the Americas piece. So, you know, those folks as they can get their feet underneath them. There is no longer an average like I said, they get their feet under. I would expect some will go up. Everybody start possibly in the back quarter toward the back half of this year as folks realize what the cost stuff will be around that equipment from an aftermarket perspective, the asset in the first half would be flat. When I went through it a minute ago, I have hopes that were up slightly about when we put that out there.
I think some of the initiatives we have are still we keep rolling them out and we still haven't gotten to fruition from a lot of the ones that we have rolled out over the last couple of years. So I got to believe that we're still really focused on would remember, we're also battling less inflation, okay. Regardless of the report yesterday, overall, obviously regulation is not what it was two years ago or even the first half of last year. So where it will be real growth, it will be taking share. That's what we focus on every day.
We get up the parts and service business has to take share. So I've got to believe that we're going to be, like I said, I said flat, I have hopes to do way better or a little better in. I'd love to say I could be here know low to mid singles up for the year, but in U.S., so it's not as easy to look at as it was the last couple of years, right? It's the day-to-day hand-to-hand combat type work, but I have all the governance of the world as I always do. I think the results bear that out of the organization and our strategic initiatives that we've laid out there and what we're focused on as a whole as a group to that, we can execute on those, right. I'd like to believe we've executed in the past. We'll continue to execute as we go forward regardless of what the truck sales market if I can't make a drug market, but I expect to do better. I don't want to -- I'm not going to guarantee, but I expect to do better than 22% I can promise you that.
But that's going to be we're working that every day. You don't have the lead times. You don't have allocation like yet that's not out there anymore. So it's not like I've got a year long backlog of trucks, so I'll still say is posted and most of them are still selling approximately Walsum. Q2 luggage is up. So that's just where we're at. We're back to normal times.
Okay. Let's just say that when it comes to truck sales, I do think we'll be back to what allocation this time almost next year that I can provide. I do believe that will come to pass, whether it's whether it's February or whether it's kind of April next year. I can't tell you but there's no doubt in my mind, we got to an allocation market and 25.
Justin Long
Got it. And last one for me. Rusty, you've talked about earnings expectations and free cash flow expectations and the trough in 2024, any change to your outlook there?
Rusty Rush
None whatsoever. I don't take back anything I've said the last couple years, Jay, and as usual we're focused on. I'd like to over deliver above that.
Justin Long
Yes, I like it. I'll leave it there. Thanks for asking.
Operator
Andrew Obin, Bank of America.
Andrew Obin
Are you calling the bottom of the cycle because that's what's your you know, it's a heavier coal. I don't think you called the bottom of the cycle before it seems that you're basically saying cycle will bottom sometime around this summer?
Rusty Rush
Yes, I think so. I think where you're going to have a little carryover of when it goes back truck sales and I'm not talking about aftermarket business agribusiness totally there. But when it comes to Class eight truck sales, I say that, you know, the summer is going to be a little more difficult than what we have experienced the others will carry over to Q1 from finishing up the year. Remember, we're at the end of the frame. We don't manufacture and we deliver a lot of them from state bodies and things like that, it can be up to 60 to 90 days for those start to get delivered to our customer base, especially on the vocational side.
So yes, I would tell you that little trough for us in Class eight deliveries will probably be sometime this summer. But again, like I said, I do expect it affected the freight market cannot continue. I don't believe two biggest represents the last couple of years. So, you know, I would expect that to pick up and along with the EPA emission laws of 27 -- January 1 of '27, I do firmly believe will be a pre-buy without question. I think most people expect 2026 to be the biggest year in history given based on economic conditions overall in the country, right.
So yes, I mean, I would tell you truck sales will be the real soft bird and the second on the summer of into Q2 and Q3 then what we have seen. But again, we believe as a 22%, I think the majority of it will be in summer. But I expect to start bouncing back by the end of the year.
Andrew Obin
Excellent. And when can you just remind us when is used pricing bottoming?
Rusty Rush
I wish I think, Andrew. If I can tell you that I may give you a raise, okay, which I would gladly take. But anyway, I'm going to do fine, Ross. I think we're doing fine as a matter of fact, I would agree with that. Probably overplayed. Did I say that?
Andrew Obin
No. Don't say that.
Rusty Rush
Andrew, I would say it's I will say this used the decline in used truck pricing has continued. While it is not as dramatic as what it was a year-and-a-half ago. It is still declining more than normal. I think our average used truck price was like [53,000]. And when you look at average and if you go back to 19 resigning directors and authority to high 40s or something like that, 47,000, 48,000.
So you've got to believe with the inflationary of what trucks cost now that's red has gotten is the U.S. only so far it could go, but the problem is that pricing is one thing. Demand is the other, right? And when you've got spot markets, which are the main driver of used truck values in such rough shape and down so much is still and they use it and it will happen.
Quick wanted to add, as you want, I can't tell you when those semis, I guess they will give my raise, but exactly where but I would tell you I got to believe sometime before the year's out, but I don't look forward to the next. It will continue to decline at a faster rate, but not as fast as it was declining. There's still trucks being put on the market over a couple of batches this week on big numbers, but people drive down loads, which puts pressure on it puts pressure on the market.
But the most important thing is to create demand, which means you got to get the spot market back you've got to have some of these others over the road business spot market back to really stabilize it and make it come to make used truck values go up again and of course, the stock is still is still decelerating faster than what I would say normal percentages are.
Andrew Obin
But just a question in terms of macro and I always I love asking this question just because you have great systems, can you just take us around the country just by region, how is the economy holding up relative to your expectations, maybe six weeks ago, and I know that it's only six weeks, but you do have some of the best systems of anybody I cover. Just maybe you can take us around the country and tell us what's Rusty Rush's 30,000 foot view of the U.S. economy?
Rusty Rush
Well, obviously the biggest concentration we add would be indexes, right? And Texas is doing just fine. Okay. Our Texas stores are still the other states still growing at normalized growing states in the nation and from both population and a business, you know perspective, our business is still coming in here, Florida, just to underwrite them where we've got to go up. We're going to work and we're getting through it. I would tell you a little softer maybe clearly in Ohio, as I am, but I think Illinois is decent and doing well. We go out west California is still in good shape. I do -- I worry about California within the 24 wildcard laws that came in at both that we have in the back half of the year. They may be suffering on the truck sales side. Right now they're doing fairly well but we've made sure to have some inventory, things like that to carry over into the markets out there.
Whereas central almost real good loans from Arizona is decent. They're also pretty decent across the board has had a little softness in the rental status. So I'm really going to allow for whatever reason have notices or softer up there recently. But I don't expect that to hold up. I expect them to come back. So I'm hoping you'd have some I mean, glad you are on. And as I like to look at our markets our revenue, not just geographic markets, but other markets, maybe I'll break it out into the global construction is better. That's what we hope will help keep the order board better with the government on the hits that we're seeing on the Over the Road business, both from a large customer and for the small parts, which you know, pretty much capped right now out of our mix. But you know, revenues is really going strong.
Construction is doing extremely well. Municipal business is holding strong with no moderate growth rates, as I said earlier, and we expect that to continue. You know, it's like I said, the hardest thing we've got going is the small customer, right? That's why when the small customer does come back on the road business, we're going to be in really good shape because we're having overcome that third of our business being up double digits. So you know, that's that we'll bring back and that'll I expect vocational to continue to be strong given that all the government monies that are out there that are being spent right now.
So no, look, 24 is not going to be what 23 was. But at the same time, it's going to be I'll stick to my goals, as I was asked earlier by or by just about what I've said in the past is to we'll still execute the truck market. I can't like drug market by bulk onshore and to take share and grow in the aftermarket and that's the goal of the organization, probably the most profitable business we do.
Andrew Obin
So if I were to summarize it, truck market is bottoming economies, solid Rush Enterprises is executing. Is that a fair summary?
Rusty Rush
That's what we like to think that, you know, I guess, through further Spirit numbers, but I think we've had a fairly even during the COVID year, right? And 20 at and what we did in 21, what we didn't want to what we did 23, we're going to execute really well. I believe inside of what's 24 market with a 20%-plus Class eighth decline, it may be that balance.
So we're better than that. I don't want to guarantee anything, but I'd like to see us only be half of that, but I can't guarantee that because I've still can build this up and is still a moving target, right? We're back to normalized times. We got to get out of this allocation world we live in. And so you are going to sharpen up their sharpen up their tools and go to work and get out there and take some share to the Company in a little more competitive environment. But we've always been able to do that now.
Andrew Obin
Well, you know, my view. You guys have built a high-quality organization. Thanks a lot.
Operator
Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Leslie for closing remarks.
Rusty Rush
Yes. So I want to thank everybody for joining us this morning, and we will see you in mid April at you and your loved ones. Have a happy Valentine's Day. Thank you very much.
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
