Ladies and gentlemen, thank you for standing by, and welcome to Rush Enterprises, Inc. reports Second Quarter 2021 Earnings Results. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Rusty Rush, Chairman, CEO and President. You may begin.

Good morning, and welcome to our second quarter 2021 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.

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, 2020, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, in the second quarter, we achieved revenues of $1.3 billion and net income of $58 million, or $1 per diluted share. We are very proud to declare a cash dividend of $0.19 per common share, which is a 5.6% increase over the last quarter. Our results were primarily due to the country's continued economic recovery, healthy activity for most market segments we support, solid demand for new and used Class 8 truck sales and increased aftermarket activity, along with our continued adherence to managing expenses contributed to our strong quarter. As we look ahead, component supply chain issues are delaying the timing of some new truck deliveries into next year. And those constraints are beginning to negatively impact parts and service revenues as well. Despite supply issues, we will continue to add back key personnel to meet market demand, as we believe our financial results will continue to be strong throughout the remainder of the year. In the aftermarket, our parts, service and body shop revenues were $445.5 million and our absorption ratio was 129.1%. Our aftermarket revenues increased 18% compared to the second quarter of 2020, which is primarily a result of the nationwide economic recovery. Our part sales are back to pre-pandemic levels and we increased -- and we experienced increased healthy activity in most market segments, particularly in leasing, refuse, over-the-road customers and independent service centers. Service revenues are recovering at a little bit slower pace than parts, impacted not only by supply chain issues but continued service technician staffing as a common in the industry. Looking ahead, we expect supply constraints will continue to impact parts and service revenues throughout the industry for the remainder of the year. That said, to mitigate those impacts, we are actively hiring key parts…

[Operator Instructions] Our first question comes from the line of Jamie Cook with Credit Suisse. Your line is open.

Hi, good morning and nice quarter. I guess my first question, Rusty, I just want to -- hope you could elaborate. You talked about your sales for truck being flat sequentially and that there's risk to the industry forecast out there. I'm just wondering, is this just a third quarter risk? Do we make up for it in the fourth quarter? Or do we get pushed to -- how much gets pushed to 2022? So if you could just give color on how much risk is to 2021? And then I guess my second question. Obviously, demand continues to be strong. We have heard from other OEs sort of reluctance to open their order book yet for 2022 because of pricing. And so if you could just provide a little color on how you see that unfolding?

Sure. I'll be happy to, Jamie. Well, if you had ask me 90 days ago, I would have told you we would probably been -- given my sources and what I saw out there, we would have been through the supply, component supply issue. But unfortunately, I wasn't -- it's extended out to where we are now. I'm hopeful and the communications I've had with all the manufacturers that this thing will smooth out by the end of the third quarter. I don't see it -- it might smooth out somewhat towards the back part of the third quarter. We're already, what, 10 days or a little away from the end of July. So -- but I still think we're going to see a lot of pressure for the next four weeks to six weeks, for sure, anyway. I wish I had a better gauge of it myself. But we all know about the chip issues, but the issues extend beyond that. There is a lot of issues with other parts and components supply coming out of Mexico and Asia. I think everybody is pretty aware of all that we're dealing with. I do believe that demand is still strong. So, I don't want anybody to get concerned about that the demand is there in the marketplace. And I don't see it going away. I see it may be getting pushed out, as you said, to the fourth and into the first quarter. Just because you can't deliver doesn't mean you don't build what you committed to, right, for people in this year because those were commitments made prior to all these issues. So, I see a lot of that actually moving into the first quarter of next year, too. I don't think it's all going to get picked up…

Sorry. And just one follow-up, Rusty. Obviously, the margin performance was very strong in the quarter on parts, but also sort of new and used. And I'm just wondering on the truck side, how much of that is used? And just given low inventory used in pricing, why wouldn't your margins be comparable in the back half of the year for truck relative to what we saw in the first half?

Well, sometimes it's timing of certain transactions, whether it's more smaller transactions or larger transactions. I think margins -- used margins were just barely under what they were in Q1, but they were way above historical, okay. I'm not here to say they won't be close. But I think we sold a lot of inventory, and those are typically deals that we make really good margins on, okay. So, our inventory levels are pretty low, okay. You're balancing between taking care of long-term fleet customers and the other. That would be the only thing that might impact margins; that will still be good. I don't know that new margins will be where they're at because of mix of business, but we'll see. I don't expect it would be terrible. But across the board in every segment, I don't care if it was new, heavy or medium or used or parts and service. They were extremely strong for the quarter. We were pleased with that, but a lot of that is demand driven and supply side, demand side. But I don't see that changing, maybe slightly, but not -- it's not going to get super depressed or anything. I've not said. I said that somewhere, I don't think I did. I'm not saying that. But I'm also -- there could be a slight dip in uptick in some new margins just because of mix with more robust fleet customers, not as many small individual inventory sales.

Okay, thank you. Congrats on a nice quarter.

Thank you, ma'am.

Thank you. Our next question comes from the line of Justin Long with Stephens. Your line is open.

Good morning, gentlemen.

Good morning, sir.

Wanted to start with a question on parts and service. Rusty, can you give a little bit more color on how much growth you're expecting in parts and service in the back half of the year and maybe you can talk about how much this outlook has changed as a result of the prolonged supply chain issues?

Well, as I mentioned in there, we are back to pre-pandemic levels, okay, from the -- where we were, say, the prior five months or six months. We're not back to summer of '19 quite because the oilfield was still holding back then. But we are back to pre-pandemic levels in parts and service in the second quarter and gradually increasing. I think that while if they're solid numbers, as you can tell, we might be able to do it even a little bit better if we didn't have some supply constraints. We've probably got more open work orders in the shops percentage wise waiting on parts by far than we typically do. So yes, it sort of slows it down, but it's not bad, okay. So it's not like it's bad or anything. It's just -- you're always striving to do more, even though you have record numbers like we've had, that's the way we put together around here. So, I do believe that we will probably continue to see gradual and I'm not talking about 2% jumps on a daily basis every month, but continue to see gradual increases in parts and services, especially as we're able to continue to staff up a little back to pre-pandemic level as well. It's put a lot of stress on the organization, but we all know what the employment markets look like. And so for trying to hire -- inside some of those skill sets that you're looking for has been very difficult, but the organization has done an outstanding job to get back to where we were doing more with less, which we continue. We believe we will continue to do, by the way, but we want to do more, bring some people in and still do more than what we're doing now. And we do believe we're capable of doing that but there are supply constraints. But don't mistake the fact that the demand is there. So, we'll continue, I think, to do like the performance you saw here and continue to try to strive to make that better. Again, I go back to those -- we could never have gotten those kind of unit deliveries prior and perform with the -- and it's across the board, whether it's expense management, its production of the back-ends and back to those levels and performance even though the volume wasn't there on the sales side due to constraints, but performance from a margin perspective on the sales that we did truck-wise.

And on the point of returning to pre-pandemic levels, I was under the impression that parts had recovered to pre-pandemic levels, but services had not fully recovered. Maybe you could just clarify that. And if that's true, how much room do we have to go in services to get to that full recovery?

Great, great question. I was looking at it as a whole. So the mix is a little different. You are correct, okay. Service hasn't recovered quite as much as parts. Together, the combined total is there from the margin monthly, daily margin perspective, but it shifted a little bit more to parts. So the upside of that, we believe -- because we believe our technologies and some of the things we're doing are allowing us to take more -- get larger parts of market share. Once we're able to hire more technicians, qualified technicians and get them into our workforce, we do believe that work will be there. Or just, again, it goes back to that employment. I'm not the only person in the world. I talk to a lot of people. And everybody's read all the articles. It's just been difficult between stimulus and unemployment paychecks in the last year and I half, certain job sets have been hard to fill. It's just facts. I mean, I can walk you through double the time to replace people. We have all the stats and numbers. So it just blows up the amount of people because you are going to have replacements, you're going to have recruitment. That's part of business. And so it's been more difficult to increase that technician count. Now, we are increasing it. And I like the fact actually that we are increasing it at a gradual rate. We -- one time back in our history, just a few years ago, we increased, I think, at too faster rate. And so our efficiencies and proficiencies weren't where they needed to be. So I feel good about that. They are much better, just not quite to the overall volume that we want it to be, but we're doing a whole lot better job, I think hours build per tech, all the different stats I'm not going to get into on this call. But we feel good about that. It's just been a -- we'd like to go a little faster than we are and bring in people back. But again, it's tough labor market out there in certain jobs sets.

Understood. And maybe one last question for Steve. Any clarity on expectations for SG&A as we get into the third and fourth quarter relative to what we saw here in the second?

Yes. I mean, as we continue to add back and grow parts and service hopefully in Q3, that SG&A will grow as a percentage of that. Like we said, I think we grew about -- the G&A piece grew about 50% sequentially compared to the increase in back end gross profit in Q2 versus Q1. We'd expect that same to continue.

Yes. And S was up. With the higher margins, even though with volume trucks were down, with high margins across the board, truck sales S was up in Q2 also. So -- and I would expect that if we can maintain where we're at to be similar on the S side where we are at, it will just correlate with truck margins and truck gross profit.

Understood. I appreciate the time. And congrats on the quarter.

Thank you very much, Justin. You noticed how well Steve's voice is? It sort of sounds like mine today, doesn't it.

It does. I like it.

Thank you. Our next question comes from the line of Andrew Obin with Bank of America. Your line is open.

Yes. Hey. Good morning, gentlemen.

Well, good morning, Mr. Obin.

Can you just talk -- I think during COVID, I think the part of the story that is being -- maybe starting to be appreciated by the market, but it's just the structural change in how you guys are managing your costs. And it does seem that the recovery could be -- there is more going on in the recovery than anticipated, the supply chain constraint, right, labor shortage. Can you just talk to us about how your sort of cost management and your approach to managing costs in the cycle? Can you remind us what the thinking is and what adjustments do you need to make near term to manage this very volatile environment that you guys are facing? Rusty or Steve, whoever wants to answer. Thank you.

Sure. Well, from a cost perspective, Andrew, you learn a lot. I think I've told you all that a few calls back. You learn a lot during the COVID year versus last year. And while we know the business we're in requires people to do it, I'm not just loading money to someone. I'm turning wrenches. I'm selling parts, I've delivered parts, [indiscernible] part warehousing stuff, doing -- that's what we do. But what we did learn is that we can do a better job, as the market comes back, spending a certain percentage or a less percentage maybe than we historically have. Because of some of the technologies and things we're adding also, we believe that's going to allow us, and it's showing out, like Steve said a minute ago, we spent a little more than maybe 150% [ph] of the gross profit increase sequentially from Q1 to Q2. At the same time, if I can manage close to that going forward, I would feel pretty good about that. And I think we expect that to be the case in Q3. It's just the diligence we've put in some other -- I'm not going to answer -- some other -- all everything we do. Some of that is proprietary to us, I think. We put in some other measurements that historically we didn't use. And we've taken that through training. We're taking that down to different levels of our organization, so that whether it's a mid-level macro, general manager, regional manager, but these people understand that we can do things differently, just like he's talking about, I'd like to mention there, we haven't rolled out the optimization of our delivery service. We've rolled out projects like that the last two years or three years. We've rolled out all the…

But the thinking is that sort of the amount of cost deployed to get this extra dollar of sales is structurally lower this cycle still, right?

Yes, we structurally -- we believe that we don't need to spend. I've always told you, we've got to spend x. But when you really looked at it over the cycle, you start one place, you get some place. As the cycle hits, when the cycle starts flattening out, sometimes your costs don't flatten that out. We think we put the tools in place to manage through the cycle better from a cost perspective to stay with the revenue fees, right, because we've seen these before. It goes up, up, up, and then it starts going the other way. Well, sometimes you're not as good when it does flatten out on you because it's hard to keep that pitch of growth. Like you see -- just like it was hard to lose that pitch of growth when COVID hit. It's just as hard as you go back up. It makes it a more gradual now than it was earlier in the year or late last year from a gross profit perspective growth. So, we believe that, yes, we will manage the cost side much better than we historically have, which will continue to lead to better returns at the end of the day, okay.

Got you. And you've been very useful in the past giving us color about your key end markets. Maybe you can just sort of take us around the country, key end markets like construction, oil and gas, what are we doing? Thank you.

You bet. Well, I would tell you, construction is already very good, and we're seeing signs of it even getting better. It's been a bigger mixer market, even that's not a huge market. We're a big part of it, a big part of it for us this year. Refuse remains -- continues to remain strong. We feel real good about where we're at with that and where we are in that environment and our relationships with many municipalities but, of course, the major players on the private side -- but the public companies have not been on the private, not municipal. The over-the-road business, my goodness, that's the biggest driver, as we all know, and it's extremely strong right now. Again, we're just getting trucks to everybody that wants them, and that's why it's going to be stretched out, in my mind, into next year because we're not going to meet commitments that we've made on for demand to customers earlier this year. So we will -- that will carry on. I'm telling you, Andrew, it's across the board really. I mean, I don't see any one sector that's super soft. Oil and gas, yes, we talked about O&G. Everybody always -- go back seven years, eight years, everybody thought we were an oil and gas company. Well, one thing we do, we're doing better now than when we had the oil and gas business. Our parts and service business in the quarter was slightly up from a year before. But you got to remember, last April, they were paying you to take a barrel of oil. So it was totally depressed. You're seeing some pickup in it. I don't rule out the part that it could, but I realize is how they open up the spigot again. It's going…

And you know, what, I usually don't do but I will ask you one more question. I'm talking about carbon-free future. You do seem to be doing quite a bit more than people realize. Can you just talk about what have your interaction been with these emerging players, autonomous driving, electric vehicles? What kind of dialogue do you have and are there any potential opportunities longer term for you to work with these new emerging players and new emerging technologies? Thank you.

Right. Well, first off, I think we're going to have the biggest opportunities with our own OEMs, okay. And they're emerging and they're investing into it. I've always said the majority of the win is going to come from the guys -- the folks that have had their feet in the ground, planting the routes down but that doesn't mean other people won't win. And I think that's one of the strongest things we have is our distribution network and our service capabilities, which are larger than anyone else's. But we don't cover the whole country, but if you -- and the one things these startups don't have are that -- are those capabilities, right. They aren't best in technology in trying to produce a product and no distribution network, et cetera. I would tell you that those opportunities continue to pass by or I would say pass, continues to show up on the doorstep and we will listen whether it's -- whether in any of these types of new technologies that are coming on board. I mean, we work with other people. And we have that ability and our capabilities inside, not just our dealerships, but inside of our up-fit centers and stuff like that. We have a few of those around the country. So that's a hidden -- to me, that's one of the hidden nuggets of the future for growth for us. And I still believe that -- I still believe one of the biggest tailwinds we'll have one day is market share gain by Navistar, one. They're still not where they need to be on what they were historically were before. MaxxForce, and I expect them to get back around then or somewhere down the road. Now, with the acquisition with Traton closed in July, I…

That was a great answer. Thanks so much.

You bet.

Thank you. [Operator Instructions] Our next question comes from the line of Joel Tiss with BMO. Your line is open.

Hey, guys. How's it going?

Very good, Joel. How are you today?

All right. Well, definitely, great expense management. I think you got to ease up on cutting Steve's pay so he can get his voice back.

Well, he's a little jealous of me. That's all.

Thanks, Joel.

I see.

I think I could let him do the rest of the call and you wouldn't know any difference.

I'm going to get a little philosophical today. I just wonder if you can talk a little bit about the implications of trading Navistar on your parts business. Are there going to be more global opportunities? Or are there going to be like Latin American opportunities with Scania or MAN? Or -- just any, any idea that you're starting to get that could have some impact in kind of like the five-year timeframe.

Well, I mean, honestly, Joel, those types of questions is a little bit early in the ballgame for me to truly understand. The deal just closed about three weeks ago or two weeks ago. And I really don't know about those folks yet, okay. But I'm sure I will get to know them and research and understand what other opportunities might be out there for us, okay. I do believe the biggest and easiest one is to get market share back here in North America where it belongs. When you got margin share that drives parts and service down the stream, not that we don't work on every day, but she will typically work more in your shops and the OEM you represent. So that would be my number one thing. I don't know, I have not -- as I said, it's a little early in the game for me to understand those opportunities. I haven't even personally been able to get -- they were arm's length during this till we are getting the transaction closed. Remember, wasn't just huge integration of people coming over and stuff like that until the transaction close. So, I think we're in the beginning stages of understanding what if any those opportunities might be for us from a larger-scale perspective and obviously given our -- given who we are, we're always listening and looking for other growth opportunities. And just like I talked about a minute ago with Andrew and obviously, emerging technology, we feel good about our place in the marketplace differentiating ourselves from others to take advantage of these things. So I don't have an answer for you. It's too new and the guys -- it's too new. I don't know everybody. I don't really understand what those opportunities would be because I haven't had any conversations with those folks yet.

Okay. And on another little philosophical direction, too. Can you talk about how you're thinking about how the dealership model is going to change as we go forward this 2024 California CARB, you're going to need to partner with charging stations or any other kind of ideas that are floating around about how the business might look in five years to 10 years.

Sure. I mean, it will integrated into the needs of whatever these technologies are, okay. Yes, California, we just had a meeting and approved. We spent the last year deciding how we were going to handle California being our first grounds to really do what we need to do. So, we're prepared to meet the demands as manufacturers. Remember, people are building thousands of units yet, so you don't want to get kart before the horse. So -- but yes, we just approved getting all our California stores prepared for 2024 CARB, right, and what our customers will need. We had to really -- we really do want to understand because you don't want to go out when you're this new in something and do a bunch of work and find out a year and a half later, where you didn't do enough or you didn't do this right, but we think we've got our arms around it. And just a couple of weeks ago, approved a plan, that we will roll it all out at the end of next year, with all the charging necessities along with all the stuff [indiscernible] from solar, a lot -- a big -- a whole plan, not just go stick a charger someplace. So, we feel good about that. And now we're exploring. We'll start working on talking about and thinking about what we do in other areas. But California, of course, would be what they always are, the leader in this space. And so yes, we're going forward with that around that, and we will continue to look at other areas where attainment of certain regulations is ahead of what maybe the EPA might be. There's 15 states that are typically tied to car. I don't believe they will come out at…

Yes. You remind me, my wife only plugs in the hair dryer when I'm in the bathtub. I wonder -- just a last quick one. You're growing a little bit slower than the overall industry. Is that supply constraints? Is that your regional positioning? Like any color into what's going on there? And then, I'm done.

Well, when you say that, I'm guessing you're talking about volumes. A lot of that I would tell you, I think that our backlogs probably ramped up a little bit slower than others. But as I told you, my backlog is really up now maybe go back, back a few quarters. It's rather large at the moment. So maybe some of our customers transition. We transitioned a little later on the deals that we did book. So -- and now we're calling the supply constraint issue that we're dealing with. So -- but I feel good about the demand. It's not going away, okay. I'm talking to customers, they're still blowing and going. So, we -- and then also, as I mentioned, on the Class 4 sale, we've had one kind of OEM that I typically sold about 2,500 units that has sort of been out of the marketplace. And we get back into it starting in October, so that's quite a few units. And they've been out of the marketplace for about nine months now. So, they'll be back and doing stronger than ever. I'm confident in that. So that's kind of hampered some of my 4 -- Class 4 to 7. I mean, you might sell -- flip some of them to something else, but you don't flip them all. So that's what I would have to say. We expect to be -- hopefully, I think the market share will stay flat because I don't think retail deliveries are going up in Q3 across the board, my friend. I really don't. Because retail deliveries always lag production. And if production doesn't meet what it should, then you'll see the retail deliveries follow because there's no inventories. Everybody sold their inventory, right? We were able to support a lot of things through inventory, but inventories are extremely low right now. So it's just some of the headwinds. But again, I go back -- I hear you. We lost a little share. We plan on getting it back. It's just a matter of timing here. I've got the backlog to do it.

All right. Thank you very much.

You're welcome, sir.

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Rusty for closing remarks.

I'd just like to make one quick comment. Most people don't realize this, but this last quarter, on June 7 was 25 years since my father and I and our team of people went public when we were the first car company to ever to go public. It's been an amazing 25 years, and it couldn't have been done without the support of all the personnel and people that have contributed to Rush Enterprises across the country. So with that, I want to thank them one more time from the bottom of my heart for their efforts and their future efforts, too, as we continue to move forward. But it was -- I still reflect I could get -- I had a little bit sentimental on June 7 thinking about it. And talking to some of the people I know in the industry, but we're still the only public truck dealer. But all the car guys started coming out in the fall, but it was -- it's been a good ride, and I've enjoyed it all and I'm planning on riding it for quite a while longer. I'm getting Steve's voice and tuned up now, as you can hear. So anyway, I'm sure it will be even more closer to mine by Q3. I don't know Steve [indiscernible] we report Q3 results. But thank you, everybody, very much. I appreciate your time.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.