Good day, and thank you for standing by. Welcome to the Rush Enterprises Reports Fourth Quarter and Year-end 2022 Earnings Results. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Rusty Rush. Please go ahead.

Good morning, and welcome to our fourth quarter and year-end 2022 earnings release conference call. On the call are Mike McRoberts, Chief Operating Officer; Steve Keller, Chief Financial Officer; 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, 2021, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved annual revenues of $7.1 billion and net income of $391 million or $6.85 per diluted share, an increase of 64% compared to 2021. Included in the $6.85 per diluted share was $0.34 per share of earnings related to the sale of Momentum Fuel Technologies and the acquisition of Rush Truck Centers Canada. Excluding these transactions, earnings per share in 2022 would have been $6.51 per diluted share. In the fourth quarter, we achieved revenues of $1.9 billion and net income of $98 million or $1.74 per diluted share. We are also proud to declare a cash dividend of $0.21 per common share in the fourth quarter. In 2022, demand for new vehicles and aftermarket parts and services was strong, primarily due to supply constraints experienced over the last few years and an overall healthy economy. We continue to invest in our strategic initiatives that are focused on maximizing vehicle uptime for all of our customers, increased our large national account business, expanded our technician workforce and diligently manage expenses to enhance profitability. We are especially pleased with the overall operational execution and financial performance considering the industry backdrop of truck and parts supply constraints as well as the extensive work required by our employees to integrate the Summit and Cummins acquisitions. In terms of network growth in 2022, we added new locations in Florida and Missouri. And we further expanded by adding an international truck franchise in Kansas. We also acquired an additional 30% for a total of 80% interest in Rush Truck Centers Canada Limited and the operating results of RCC Canada are now consolidated into our financial statements. In January 2022, we closed our agreement with Cummins, who has acquired a 50% interest in Momentum Fuel Technologies now branded Cummins…

[Operator Instructions]. Our first question will come from the line of Justin Long from Stephens.

Congrats on the quarter.

Thank you, Justin.

Rusty, I wanted to follow up on what you said about the first quarter just because I know there can be some seasonality with G&A. Could you help us by quantifying the step-up you're expecting in 1Q and anything else in terms of seasonality? It sounds like from a truck sale and parts and service perspective, you're expecting things to be pretty flattish sequentially moving into the first half of the year. But would love to just get your thoughts on first quarter.

Yes. Well, the first quarter, I will say this. We'll start with the expense question. Our first quarter is always heavy in expenses compared to the fourth quarter. We have many more employee benefits and equity stuff that we expense in the first quarter. Also, all taxes restart up. It happens every year, it's the same, right? So without getting exact, I think you can look back at historical years and see the step-up in expenses in Q1 and how high it is compared to Q4. From an overall business perspective -- sequentially around say, truck sales, for example, truck sales, Class A truck sales, a lot of things have to do with timing. I would expect sequentially we will be a little softer than we were in Q4. At the same time, we'll probably be up year-over-year from Q1 of last year, right, because things ramped up throughout the year. Now that being said, that doesn't mean it will stay at that level as we get into Q2. But a lot of it has to do with timing. As I look at parts and service, 46 days, 47 days into end of the first quarter, it has remained steady. And actually, February is looking -- getting back, we look at it from a per day and what we do volumes per day average, and February looks steady as it goes from where we were in December, really October, December, January, all in a range within a couple of points of each other, and February seems to be getting a little slightly stronger which is what we typically anticipate as we get into March. Our parts and service business comes up every year. I look out into the year from a parts and service perspective. We're looking for probably a…

And I guess building on that, at some point, I think it's reasonable to expect truck sales to come down, whether that's the back half of this year, 2024. Can you talk about your ability at Rush to outperform the market whenever we do see that pull back, let's say, in 2024, the market's down, Class 8 truck sales for the industry are down 15%. What do Rush's truck sales look like in that environment given the market share opportunities you have?

Well, I don't plan on going backwards that much in '24 as we look out there. I think you got to -- you're going to look at our partnerships. It's not just Rush, even though I think we're pretty good at what we do. It's your manufacturer, your OEM partners that you must look at. When you look at the heavy-duty side, I still -- I have always told folks that I think Navistar are probably the best tailwinds in the organization or have great tailwinds, right? If you look at their market share now and with new ownership over the last 1.5 years, per se as they get their feet on the ground and get moving forward with product and stuff, I think that they will be a tailwind for us going forward as they gain market share. When I look at the PACCAR side, I have been PACCAR dealer -- reputable dealer for 55 years. We have been. But I have never been more bullish on their ability to increase share. They've always been, at least in the last 10 years or so, between 13.5% and 15%. I believe this is one time, that Peterbilt has the opportunity, when I look at their product lines and where they're at, to increase their share by a point or so. So that would be the record high. It's historically recognized. So both of our OEMs on the heavy side, I think, have good futures and drive them with -- when increasing their market share, right, as we go forward. So it just begs to reason that we're going to participate with them as their market share increases. So I hope that would combat some of the cyclicality where everybody is looking for '24 to be down. Of course, then we…

Very helpful. And maybe one last one, and this one is probably for Steve, but anything you can share on free cash flow expectations for 2023?

This year, we were -- I think if you look at the back of the release, our free cash flow was about $375 million. We're probably $300 million to $350 million this year. This is where we think it will be right now. The business continues to generate good cash, and we don't see that changing.

[Operator Instructions]. Our next question comes from the line of Jamie Cook from Credit Suisse.

This is Themistoklis on for Jamie. So I wanted to ask, medium duty has a better growth outlook versus heavy-duty this year. But what are you seeing from OEMs in terms of ramping medium-duty production? And then does it have any mix implications on your margins, if any?

Okay. Medium-duty production is ramping up. Medium duty, there's no question about it. As I mentioned a minute ago, obviously, Hino's back in the game, right? They were out of the game for us during the last year or 2, but they're back in the game, as they have integrated the Cummins engine into their product. I have seen medium duty build rates increase at basically all medium-duty brands that we have. So that only bodes well. We look for our medium duty to be up substantially more. The market may say 8.5% for the total market, but I look for us on medium duty to be up more than that, as given the things that I was talking -- I've seen, medium-duty increases at all our OEMs. So when it comes to build, understanding the medium duty got hit pretty hard because, especially for the 2 suppliers, now will start Peterbilt, when we run the supply constraints, a lot of times, you have choices, heavy or medium. Well, heavy one out, okay? Obviously, it's a bigger ticket item. They probably make a little more money to sell those at that time. So -- but everybody is -- that supply shortage getting taken, passing away, getting more normalized. It's still a little bit there, but not as bad as it was by any stretch. Medium duty is going to get more focused when you -- what was the second part about -- was it about mix, margin?

Yes. Yes, if there is any implication?

Yes. I would tell you our margins -- while I think our volumes are going to be pretty good, we'll probably have a little bit of margin compression. Inflation, I do believe will slow down as we get into the year. But at the same time, it'll still be way above historical margins, okay? Possible some squeeze on margins as we work our way through the year. But again, I'm not -- I don't want to give up on it. I'm just being my typical [indiscernible] . So it's unfolding in front of us every day, as I said, we go into the year, into the year further, we get more and more confidence in the back half of the year. I'm very confident in the front half. I'm getting a lot more confident in the back half of the year as the year unfolds. So slight margin compression. At the same time, still way, way above historical margins.

Okay. Great. And so yes, you're obviously telling us that you feel better about the second half now versus before and you have really strong backlog and good visibility. I was just wondering in terms of supply chain, do you think it's maybe healing quicker than you would have thought a quarter ago? And when do you think that truck production can fully normalize? If you have any sense, that would be great.

Well, I think we're pretty close, okay, to normalize truck production. There's still some room for a couple of tweaks. I don't know every manufacturer, every OEM where they're at. I do know with the OEMs that I'm with, I would tell you that supply has not been -- a lot of the question has been around labor. Okay. There's been a lot of labor issues to deal with here. But I feel pretty good about where they're at. As you saw ACT staying pretty closely just a little bit short, a couple of percent less than last year on Class 8. I know you all -- I know Jamie today is in an Analyst Day, I do believe, for PACCAR. So tell her ask Preston where he's at. But anyhow, I would tell you, we're close to -- we're 90% -- 85% to 90% recovered from the part shortages that we dealt with. It's not to say we just still don't have things that pop up for the manufacturer. But you asked how I felt now compared to where I felt a year ago, a whole lot better. Did it recover quicker in the back half of the year than I expected? Yes, it did. I think you can tell that by the delivery numbers we're posting.

And I'm not showing any further questions in the queue. I would now like to turn the conference back to Rusty for any closing remarks.

Well, we thank everybody for their participation, and we will talk to you again in April, I'm sure with hopefully great results again as you. Thank you. Bye-bye.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.