Good day, ladies and gentlemen, and welcome to the Rush Enterprises Inc. First Quarter 2017 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to turn the call over to Mr. Rusty Rush, Chairman, CEO and President of Rush Enterprises. Please go ahead.

Good morning, everyone and welcome to our first quarter 2017 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, General Counsel and Corporate Secretary. Now, Steve will say a few words regarding forward-looking statements.

Certain statements we will make today are considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Because these statements include risks and uncertainties, our actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in our annual report on Form 10-K for the year ended December 31, 2016, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved revenues of $1.5 billion and net income of $14.5 million or $0.36 per diluted share in the first quarter. I am pleased with our financial results this quarter, especially considering the continued challenges in the Class 8 market. However, modest increases in activity from energy and construction sectors, positively impacted all parts of our business. Our Class 8 truck sales outpaced the market this quarter and while our Class 4-7 results were negatively impacted by timing of a few large fleets, we expect a solid year for both. Aftermarket revenues were up slightly in the first quarter. Further we better aligned our operations by reorganizing certain positions by our leadership team, also allowing us to heightened efforts on our strategic initiatives. In the aftermarket, our part, service and body shop revenues were $350 million and our absorption ratio was 113.4%. Vocational aftermarket business remained steady with growth on both coasts primarily due to construction activity. We also see modest growth in the energy sector and we believe this pace of growth will remain throughout the year. Our dealerships continue to diligently manage costs and gain efficiencies, which have contributed to our overall operating profit this quarter. Turning to truck sales, we sold 2706 new Class 8 trucks in the first quarter, up 1% compared to the first quarter of 2016. Our results accounted for 7.1% share of the total U.S. Class 8 market. While over the road fleets are still challenging, moderate increases in stock trucks, small fleet and vocational truck sales contributed to a strong quarter for us when compared to the overall truck market. That said, an oversupply of used trucks continues, keeping residual values low, but we believe our used truck inventory is positioned to aggressively pursue sales given…

Thank you. [Operator instructions] Our first question is from Bill Armstrong with CL King Associates. Your line is now open.

Good morning, everyone. Good morning, Rusty.

Hey, good morning, Bill.

You've set a 0.1% market share and that's the highest it's been in a while, is that really coming mostly from the oil and gas sector recovery or are you seeing maybe a broader share increase outside of the oil patch?

Well no, I think it's more broad than that to be honest with you Bill. As we've got into April here, we continue to see activity from basically all sectors. That's what my note said in my release and that's surely what we're seeing is a pretty broad-based and no question, we're receiving more activity in the oil sector, but at the same time we're seeing construction-related business, when it comes to mission refuse trucks and over other vocational, more differently our vocational activity is just up across the Board and while large fleets still remain difficult and given the valuation of used trucks, we're still hearing a few deals there too. So, I have to tell you I was pretty pleased as to how it looked. It is not all focused in just one area, but there's no question that energy did contribute to it.

Got it.

Most of the energy orders to be honest with you though have not been delivered yet. So, there was just activity that was received during the first quarter.

And can I guess the same can be said then for the parts and service business as well, especially going into the energy sector?

If you really -- some of it, if you look at our parts and service, let's take a same-store look, you are looking at the overall, but you got to remember -- our consolidated shut down some stores last year. So, when you take a same-store evaluation, we were up a little over 6% in parts and service but that was spread nicely too to be honest with you. Definitely energy was up some, but there was also activity in other sectors on the East Coast. Florida was -- and Ohio was up and West Coast was slightly, but like I said there are certain regions, different pockets, it was broadly based to be honest with you.

Okay. Great. Very nice. Thank you.

You bet.

Our next question is from Neil Frohnapple with Longbow Research. Your line is now open/

Hi. Good morning, guys. Congrats on a great quarter.

Thanks Neil.

Could you provide an update Rusty on the part service and body shop sales outlook for this year? I believe last quarter you indicated maybe mid-to-high single digits, could be attainable. So, wonder if that projection has changed at all, given the Q1 performance and activity you're seeing in the market?

No, as I just mentioned to Bill a second ago, when you take a same-store look, we were over 6% and I would look to hopefully increase that a little bit to be honest with you. We haven't and obviously, the year is still to play out, but at the same time, I still feel we're just beginning to get traction on some of our strategic initiatives. I also mentioned to you all before I was probably out my skies a little bit last year thinking that we would take off right away on some of those initiatives, but the foundation was laid, the infrastructure from a personnel and systems and we're continuing to invest in those things. We continue to gain steam and I think when you add those to some of the organizational changes that we made during the first quarter and moves we made from personnel perspective. I am extremely excited, we'll be able to hit the numbers that I mentioned before.

Okay. Great. And then could you talk more about the new and used truck gross margin in the quarter that's 7.5% I believe that was the highest in a number of years and whether that was mix or anything else you could point to that your thought?

A lot of it was mix. There was some -- there was one batch of trucks, one sort of trucks that had a special incentive on them. They actually did extremely well, but overall, yes, the margin was higher. I would expect margins going forward probably not quite as high. I can't hear around our head, but volumes will by increasing as we go forward, but we feel really good. We hope and I would have to tell you that I hope the results from a truck sales perspective, they paid a good -- painted a good picture of the rest of the year, but it's still a work in progress. We're still building, you still get trucks built in July right, but it's further out than it has been the last year, but that at the same time, we're excited about the activity that we have seen and continue to really see currently in the last few weeks.

Okay. Great. And one just housekeeping maybe for Steve, Steve could you provide the gross margin breakdown by truck in the quarter between heavy, medium, light and used?

Yeah heavy is 8.2%, medium 6.7%, like 5.1% and used 8.6%.

Great. Thank you very much.

You bet.

Our next question is from Brian Sponheimer with Gabelli. Your line is now open.

Hi. Good morning, Rusty. Good morning, Steve.

Good morning, Brian.

So just kind of digging in from a brand perspective, you mentioned some medium in the Southeast that's obviously international acceptance there, just thinking about the fleet side of the business, is there anything from a brand perspective that is holding Navistar back still from a used value perspective relative to [Fact] or relative to [free liners] you're seeing in the industry?

Well, we've still got a little bit of MaxxForce overhang, okay. Understanding that that's still out there, yes, we're -- remember where we've just reached a four-year points since they built the last MaxxForce Engine. So, are we over the top, yes? When you go clearing this hurdle, but are we all the way through it, no. I still think we still got to deal with that overhang, but the good part is, the overhang is less and less every week that goes by, every month that goes by as the trucks continue to -- as they continue the residuals continue to come down as they're depreciated on balance sheets. That's still one of the biggest overhang and then you got -- the product is great. There is no problem with the product. The new LT they came out with last fall is performing accurately with the Cummins Engine in it and that was a -- that truck was a fine truck, the PROSTAR with a Cummins engine prior to the MaxxForce Engine. So, we feel good about that on the international side and our quoting activity is up, but you still have -- there is still certain bad taste in some people's mouth and you just have to get through them, right and you get through that. Our people are working extremely hard with the manufactured to work our way through those residual aftereffects of people, the taste the people have right. But we're confident that there's is no more -- it's only going to go one direction from here. Now the pace of that direction, I'm not sure I can totally give you total insight into that, but we do know what the pace is an upward trend not a negative trend like we had to deal with a couple three years ago.

Fair. I guess alone those lines with them now partner with Volkswagen, what's been the customer response to that, particularly those that have been used to purchasing the vehicles with a Cummins Engine?

Well I don't think there is any question there, it's a positive right, good in that way because that also had made them a global boy right, which you really have to be if you're going to be competitive. Navistar needed to be a global players in some form or fashion and Volkswagen brings a lot stronger balance sheet. So, what that brings is credibility from a customer perspective, from an internal employee perspective, just from an overall perspective. It brings long-term stability when people look at the product and they look at the company and so that was the positive. As they integrate and what they're going to do, they know more about it. [Stuart Clark] and his team know more about where they're headed than I do from that perspective as they continue to integrate the ideas and where they're integrating on all sides, but our employee speaks about it. So, I am not going to speak to what he speaks about, but it's a positive, it has to be. There is nothing negative that you can say about as you look. So, you got to believe that the future is brighter from that side of our business, but the same time, that repeatable side of the business is performing admirably right now, especially in the first quarter and going forward, we're very pleased there. So, as Navistar continues to catch up in their arena, we think that bodes extremely well for our future.

Thank you very much.

You bet.

Our next question is from Brad Delco with Stephens. Your line is now open.

Good morning, Rusty. Good morning, gentlemen.

Good morning, Mr. Delco.

Rusty, appreciate the comments on the mix of Class 8 truck sales customers, I think if the stock is small, fleet and vocational, what are the small fleets trading in and what are those deals look like that you're able to work with those customers?

Some of those have been without -- some of them were vocational small fleets and I guess I should have better clarified that. There's been a lot -- we've been -- on the international side, we've been picking up some business from just small fleet trucks right and we're taking them out of MaxxForce or conquest accounts they might be, but the majority of it which would be on the PACCAR side, repeatable side it was been a lot of vocational small stuff, right. You've had -- there's a lot of construction in some of the areas that we're located. Someone is in the Southeast and I mentioned Navistar, but Florida we're doing really well in right now. Even Texas, Texas was oil and gas picking back up especially in the Permian Basin and even down in the Eagle Ford right now with the amount of rigs, you're having customers pop back up again that have been pretty much ground out from the last couple years and what happened was a lot of -- a lot of that stuff got dispersed into other markets. So, there has to be a built back up from -- you got to reignite the candle right. So that's what you see going on whether it be from water or sand perspective in the oil field side, your construction side is still good. Housing starts are still good and continuing to be better. So, it's a lot of -- it's a lot of businesses that are wrapped around that type of stuff. We're getting some small regular fleet business and we're trading for some trucks, but I expect it to get better because some of the people have hung on in the last 8 to 12 months. The trucks are a little bit longer given…

And the major change in that outlook is related to energy or construction or both?

I'll go back to Brian as I said earlier it's pretty broad-based, pick some step up, look you really want to know and I'll real give you real long-winded answer. If it goes to doing business with us and it goes to doing business with our people and the services that we provide the 20% to 25% of our technicians are out on the field and mold trucks they're here. It's not just selling a truck anymore. It's not just cost of sales. There is so much more involved there, it's connectivity, it's all these different things that you don't want to listen to me ramble on about, but it's what we've invested in for 20-plus years since they went public 21 years ago on June 06 and continue to invest in the customer answer and they're continuing consolidating of the customer base that's asking for the things that we believe we can do better than others.

And just real quick add-on Rusty, can you talk about progress on all makes parts business and what kind of growth you're seeing there versus just pure service business?

Yes, I'll go back to what I said earlier, we're starting to get some traction and it's up over 8%, but that's not good enough by any stretch okay. That's in our catalogue stuff, but as I said earlier, I got over my skies a little bit. I started talking about a little over a year ago right. It was about a year ago I started talking about in this form, it was maybe in the first quarter call of '16. But the foundation who has been laid, I have just as confident as I was day one we started this. My timeline as I said might have been a little off, but the goal will not be off. We won't miss the gold and we'll double that. We'll double as you watch. Just sometimes you get out of your skies a little bit on the timeline, but I have all the confidence in the world that we'll gain traction. Some of these recent moves here that I mentioned in my release and in my notes earlier, I feel confident. We have the staff that we've built here to help push that out through the field. Our approach to national accounts, our approach to just redefining what a dealership is from our -- what we believe we should be doing at the field level and taking advantage and leveraging off the biggest asset we have. We'll the biggest asset we have is our people first and foremost, but this is our network right. That's the differentiator for us and we have to do that. So, as I said and that's up over 8%, which is not in the right about in that area, but trust me, we're going to get traction later this year, we just will.

Thanks, Rusty for the time. Appreciate it.

You bet.

Our next question is from Jamie Cook with Credit Suisse. Your line is now open.

Hi. Good morning and nice quarter. I guess Rusty two questions, one when we think or Steve I guess is well when we think about you mentioned on the medium-duty side the timing, mean of orders and that's why the first and that hurt your first quarter and will help the rest of the year. Can you just give more color on that and I guess what intrigues me as you put up $0.36 with a timing issue on it mean on which implies a run rate for the rest of the year in terms of earnings should be higher assuming things continue to move along at this pace? And then I guess my second question, my second question is there's been I think as you mentioned earlier, the Class 8 truck orders have obviously been surprising on the upside, I guess how sustainable do you think that is and just your view. I know the vocational market has been strong, but your view of the line haul market, thanks.

Got it. Well on the medium-duty side it was couple 300,000 -- 253,000 units but of the lower margin units, and say Class 8 units. So, while they're still very important to us and where we're at, it was just some delays. There were some manufacturing and some timing issues, but we expect to maintain pace of the rest of the year where we should be, which was paced with where the market is, which is slightly up. It was down a couple percent in Q1. I think it's forecasted 3% up. To me that's basically flat either way. So that's where we anticipate ending up the year at. So, we feel good about that activity still strong. It's still good, activity is good. It's seems stronger maybe back in January, but it's still good. So sometimes you hit one month and it's pacing out. So, it was not quite as strong the next month, but we're still doing a nice job in the field executing there. When it comes to earnings, three questions I think you know I don't give EPS guidance, but I would say this, obviously, I feel better about the year, right. But the year is not done. The year is not done by any stretch. I can still get trucks in July, but we have executed on some of the activity, the quoting activity here in the last 60 days or so. So, I'm pleased with that. I'm pleased with the outlook, but I can still get trucks in July. So, the year is not done, but as I said earlier, there is no way, we're going to deliver at least as many trucks if not some more than what we did last year. Now how you tie that in and I expect the absorption…

All right. Great. Thank you.

You bet Jamie.

Our next question is from Joel Tiss with BMO. Your line is now open.

Hey this is John Joyner for Joel.

I am going to miss Joel.

Yeah, it's just a busy morning.

I know it's a busy morning. I know [Cat and Pack] are out this morning, go ahead.

So yeah you got the B team. So just real quick, you touched on international and the new products there, but can you talk about some of the new products that have been rolled out by OEMs over the past couple years and any traction that's being gained whether it's certain nameplates or models. When we listen to the OEMs they will all tell you that are gaining traction. They're all getting market share, but what are you seeing?

Well, I think, I think I am going to step back, I am going to speak to the OEMs that I represent, PACCAR has been gaining market share the last year and half and I expect them to continue to gain some more market share. They’ve done a great job from a product perspective and we've got a great foundation. The company continues to be poised well. I think if you look at the order intake last year and you look at it so far, this year, they’ve been really dong a nice job and I don't expect that to change going forward and their continued investment in technology now and the high-end prime -- high-quality product has never wavered okay throughout the years and continues. They came out with a 579, it's been a great model with beautiful side. They’ve come out many of the miles. I am not going to get in all the numbers, but there is a consistent investment program and a consistent investment program going forward from what they tell me. So, I have all the confidence in the world there. On the Navistar side, the product, they're easier and not a lot of product, but starting last year in the first quarter with the HT I think we came out, excuse me, HX I got it wrong there, and then the remodel of the PROSTAR that came out in the fall. The LT, they're new products and they continue to invest now. They’ve got refocused because they went so many years. Everything was focused on engines instead of products. So that only bodes well for us in the future and then I'm sure, like I said earlier, you have to talk more about where the integration with Volkswagen is going because I am not…

Okay. Can I get one more?

Sure, I got all day. You can go a long go because I was in Joel sooner and now some people may not like Joel, but I got to enjoy Joel.

Well I get to hear it every day, so it's like torture, so I know Jamie touched on this a bit in terms of the new orders, but when I look at the new orders and then the continued weakness in retail sales and the tap in freight, so there is obviously a disconnect there right and the production levels that are down year-over-year, so when I hear you, you attribute some of that to timing on the retail sales side and it seems like your outlook for the rest of the year is a bit more optimistic. So, is that fair to say that there is a disconnect or am I just missing something?

You got to remember, we do our vocational business and so we continue to see investments in each one of them, areas where we continue to see investments in construction and activity is strong. Obviously, we're in the oil business and the oil field areas in Oklahoma and Texas, into Mexico and Colorado and we see strength in those areas. There is no question that retail is off, that's if you go back to what I said, my concern are rates at the carrier-based right from the over the road business but that's just one piece of what we do and why we've always had a diversified portfolio and not so tied to just one piece of it. But I do expect that we'll start to see some rate increases later this year if there's -- if some capacity is taken out of the market due to ELDs and I believe there has to be some going out of it. I don't see how -- I still see how there is not some capacity that comes out of the market and I don't know 10%, but there is going to be a 3% or 4% I would think capacity come out of the market by the first quarter of next year, which should help should help the freight guys from a rate perspective because the shippers have been doing a pretty good job over the last year and half. And I hear you on retail sales, but a lot of ours reflects I don't want to say infrastructure although just activity and the areas that we're located honestly. And again, a lot will attribute to our network okay and we're doing we're getting Conquest customers. We are getting Conquest customers. Sometimes people lose sight of the fact, I think customers continue to consolidate and get bigger. Look at ELDs. It's going to continue to take out some of the smaller folks and so when they are that broad-based across and when you do have the largest network, which we do, you can't provide services that distinctly differentiates you from everyone else okay. So, from that perspective and we work at it very hard on the service side of the business to help drive truck sales because as you saw in my release, I think we we're 67% of our margin and all comes out of parts and service sales, not truck sales.

Okay. Fantastic. Thank you so much.

You bet.

Our next question is from Rhem Wood with Seaport Global. Your line is now open.

Good morning, guys.

Good morning, Rhem.

First question what was the same-store absorption ratio in the quarter?

I think it was 107 last year something like that.

It was 113 this year last year same-store went year-over-year.

It was 107 last year.

It was 113 this year. It was flat.

So, Rusty, so you've added two new dealerships, what's the plan for adding dealerships going forward and then I think you mentioned that the absorption ratio should be up, but can give some context there how much if you add dealerships…

From a dealership perspective, we added to a little in Farmington and then another one, but we've also got -- we've got a couple more and we've got another one going in Houston and Northwest side of Houston of nice pretty large sized store in the Houston area and outside feeling. We will continue to Greenfield where it makes sense. On the repeatable side, I know we've probably got three or four that are on -- that we're looking at right now, but having done anything about it but we are continuing to look, we'll always. If you look back historically, we'll always open two, three, four Greenfield stores a year in our territories as territories have continued to grow because fortunately we saw all the states like Texas or even in Florida or whatever. We're in some pretty growth areas. So, as populations grow, and construction and infrastructure gets built in, where it makes sense, we'll add stores will add stores. I don't really want to project out on the absorption rate, but I feel good about it giving our strategic initiatives. I look forward to seeing how well we can manage expenses. This is always, the first when you get a pick-up we picked it up right, but it's been the last 30 days. It picked up in January from a parts and service perspective and it's a little flat the last 30 days on a per day average, but I hope that we'll see sometimes around tax time and things like there here in April it's a little cloudy, but I hope as we get through May and June and July, I would like us to start picking up. Last year we stayed pretty flat. Typically, we get some seasonal pickup throughout between now till October, but…

Okay. And then did I hear you say that you've taken a lot of energy orders that hadn’t been delivered yet?

I don't want to say a lot, but I've taken some. You heard me say a lot have been delivered right, you did. As most of those orders came in the first quarter right. So, they will be a part of our business going forward. Most of that stuff was orders taken first quarter and delivered Q2, Q3 from numerous customers. But it was a piece, the best if not the only thing as I keep saying, it was pretty broad-based. While it has some over the road business too that was taken here. I had some construction bids and I think three or four mix deals off the top of my head. I can think of some refuse stuff and I am not pretty at all and I am not in a 100 stores out there looking at every deal every day, but do pay a little bit of attention every now and then. And so, I think it's fairly broad-based, which is what you want right. The only problem will be the over the road with a lot of heavy trade-ins, but I'm hoping we've seen, look these truck market hasn't declined in the last years these questions is kind of interesting, usually that's the first question I get. But it hasn’t -- the steepness of the decline is more in a normalized residual value decline right now, but we've already taken a hit, but it's not coming up right now and I still as I said I talked about earlier, there still got to be some type of overhang from looking at a four-year cycle and I think I read where there's like 15% more used trucks coming into the marketplace something like that this year. So those are going to be enough okay, those got to be disposed of. So, we'll just have to say, I think there's still quite a few trucks parked on fields out there right now that create an overhang, even though what's being sold the values have not -- they're not coming as deeply as they were the last couple years.

Okay. Great. And then last one, just on the energy business again, you talked about it as you lost $0.50 from '14 to '15. Where are we getting that back and then how many more noble text can you add at this point? Thanks for the time.

You bet, I'm not going to -- look we're not as hot as we were -- only where we're seeing is high as it was in '14 okay. That was crazy hot on fire. The energy business is better, but oil is not $100 a barrel last time I checked. So anymore okay. So now the good thing is technology has allowed the oil companies all combined with services and the drillers and everyone else to figure out how to get out of the ground a lot cheaper than we could years ago through efficiencies and technology and everything else and just so happens that the two cheapest places are in the Permian Basin the Eagle Ford, which where we happen to be located. So that's a little bit of God said I guess. But the oil business is better, but I am not going to quantify it into the $0.50 of how much is back, but some is back okay, how about that and we have added mobile text in the first quarter, but the legs on that and actually the good part is it's not just in the oil field and you go back to look at us 10 years ago. If we've taken a hit in the service business that we took from a mobile site last year, we're really all went down almost fourth quarter of '15 when it fell off on me, we would have, I can go way back, we went out like five mobile techs, but our mobile tech business is much more broad-based nowadays, much more broad-based because we do it across the Board and we do it extremely well on the payroll side. We're getting better on the Navistar side. We're adding on that side of the business to now. So,…

And I am showing no further questions. I would now like to turn the call back over to Mr. Rush for any further remarks.

Okay. Well I appreciate everyone's attention to the call this morning and we look forward to talking to everyone I guess that will be in July. Thank you all very much.

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