Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Rush Enterprises Second Quarter 2016 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] As a reminder, this conference call maybe recorded. I would now like to introduce your host for today’s conference, Mr. Rusty Rush, Chairman, CEO and President. Please go ahead.

Good morning, everyone, and welcome to our second quarter 2016 earnings release conference call. On the call today are Marty Naegelin, Senior Vice President; Steve Keller, Senior Vice President and Chief Financial Officer; Jay Hazelwood, Vice President and Controller; and Derrek Weaver, Senior Vice President, General Counsel and Secretary; and Mike McRoberts, Senior Vice President and Chief Operating Officer. 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, 2015, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved revenues of $1.03 billion and net income of $10.8 million or $0.27 per diluted share. Our results this quarter include restructuring charge of $900,000 relating to dealership consolidations and real estate impairment. As expected, continued softness in the energy sector, a choppy freight environment, excess Class 8 fleet vehicle capacity, and declining used truck values negatively impacted our financial results this quarter. In anticipation of these market conditions, we implemented significant and broad reaching expense reductions throughout the first half of the year. These include personnel and variable expense reductions and the previously announced consolidation of truck centers in eight states. While we were beginning to see the benefit from our expense management efforts, we do not expect to realize the full results of these actions until late of this year. In the aftermarket, our parts, service and body shop revenues were $328.7 million, down 7% over the same timeframe in 2015 and our absorption ratio was 110.3%. Our results continue to be impacted by softness in the energy sector in the central United States. In addition, truck center consolidations that occurred in May and June and the overall decline in the Class 8 truck market further impacted by our aftermarket sales in the second quarter. We expect our aftermarket growth profit per day average to remain at the same pace like the second quarter performance through the rest of this year. Despite market headwinds, we remain committed to our long-term strategic growth initiatives in the areas of all-makes parts, service technology and natural gas fuel systems and believe we will begin to see results from these initiatives next year. In the interim, we continue to diligently manage operating expenses and aggressively pursue opportunities for increased aftermarket business. In the area of…

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

Hi, good morning.

Good morning, Jamie.

I guess, Rusty, a couple of questions. One, as I think about the second half of 2016 and the comments that you made with regards to how you view Class 8 retail sales and medium in the back half of the year, in your comments on gross profit lead me to believe or concern – that consensus in particular is a little too high, so your thoughts on that. The other side of it is you did make some good progress in the quarter in my opinion on G&A like you are starting to see those benefits, so I don’t if that could offset that at all.

Right.

My second question – two more, second question is any signs of oil and gas bottoming? And third, just broadly your view on 2017 as last month ACT lowered their forecast to down year. Just wanted to hear your thoughts relative to how ACT is thinking? Thank you.

In regards to our performance in the second half of the year when it comes to truck sales, as I’ve said, I expected heavy-duty to remain fairly flat. I didn’t give my thoughts on where the year might end up, That 200,000 was – that was ACT’s thoughts, right.

Yeah.

So as I look at it, that’s – I’m probably going to be a little softer than that, okay?

Okay.

Just the backlog is declining further as we go, you look at the order intake numbers and it is catching up. And I do think there are production cuts going into effect. Now that being said, we are still eating away inventory levels, which obviously affects retails sales. I think we will be flat with our Q2 deliveries pretty much, that’s just my take on it. But I’m – for sure, I – what we had, like, I mean, 53,000 and 52,000 in the last two quarter, I think, in U.S. retail sales, somewhere around that 105 number. I think it might be – maybe closer to 190 to 200, that’s my thought.

Okay.

You might get pick up towards year-end. And your comment on G&A, I’m real proud of what we’ve done G&A wise. If you strip out, as you know that I always look at really G&A and strip assets out because that’s really totally tuck sales right.

Yeah.

But we are down – we are down basically by – including the store closures, which didn’t have full effect in the quarter, we are down 10.9%, right, when you look at it sequentially, but same store basis, we are off 6.1%. Okay?

Okay.

So that’s a good job from our people, right, in managing. And I do believe we still have more in there, okay? Now when you ask about guidance, one thing I’m a little bit concerned about why we expect to maintain the same run rate from a parts and service perspective we have been having because we did not get the pickup we normally do seasonally, okay, in March, April, May, June, it’s been pretty flat-ish, we are down and back up, the system is bumping around. I look at it for working days than a per day average, the back half of the year does have three less working days in it, so roughly less than $6 million in gross profit.

Okay.

So that will be something – along with holidays, et cetera, while I expect to maintain the same run rate, I do believe that it’s going to be difficult to achieve the whole total being the same. In counter to that, I expect expenses that I said to weak – that you need a better job of managing expenses in the back half of the year. So what was the second question again, Jamie?

The second question was any bottoming of oil and gas and third was 2017?

Yeah, oil and gas bottom, in my mind, I think, I said on the last call we were getting into the bottom from my parts and service perspective, we’ve already been in the bottom from my truck sales perspective, there are no truck sales. Okay? But from a parts and service for second, for sure we have bottomed, okay? And you would expect, if you look – if you are wise, there is nothing big. I’ve been watching rig counts for the last six weeks and they are coming up eight rigs a week or nine rigs a week or ten. It’s just going to slowly keep ticking away. Our inventory levels are coming down. There is not going to be a big boom, but I would hope as we get – but completions are coming up, also there is so many uncompleted wells, I would hope we will start to see a little bit. It’s not going to be something that’s going to be like take us up over the top, but starting to see some little, better performance from a parts and services perspective in the oil and gas region in the back half of the year, really the back quarter of year, someone is – at this trend over the last month and a half continues, right? So that one being outlook. Hope. The thing about it is, Jamie, we are coming into selling season, right? We are coming into order intake season once we get to the summer. And I have told – I’ve been asked this a couple of time, well, I said, give me till I see what happens in October, November and December, right. I mean I can throw a dart on the wall for you right now, but it’s going to be very interesting because these are big order months, fourth quarter of the year, right? [Audio gap] So you’re going to have to really do a revamp, but it you want to throw a dart on the wall, 170,000 U.S. retail at best.

Okay.

Because the backlogs are coming down and there is no way once we get through this, I just don’t see how it picks back up greatly into something much better. I mean we are eating away inventory levels, so they are eventually going to get in line, if you don’t, your backlog is down, it doesn’t really bode that well for 2017.

Okay. All right, great.

And again, Jamie, used truck values.

Yeah.

I mean I talked to you before and I’ve said, used truck values, they are not changing. Used truck values are still declining at a more rapid rate than normal deprecation cycles, okay?

Okay. Any color on sequentially or year-over-year in terms of what you are seeing?

You can say – it depends on the [indiscernible] year-over-year, take the 2012 model or 2013 model or whatever, you know, it’s probably declining an extra – say 2012 model would normally would decline this much is probably declining – probably down, close to 8% to 10% more over the normal depreciation cycle than it normally would be, okay?

Okay.

And that number is still growing. We’re not getting into exact semantics and not dollars and stuff, that number is still growing and we are still looking for a bottom to be honest.

Okay. Cool. I will get back in queue. I appreciate the color.

Thank you, Jamie.

Thanks.

Thank you. Our next question comes from the line Bill Armstrong from C.L. King & Associates. Your line is now open.

Good morning, Rusty. Good morning, everyone. You mentioned that large fleet customers reduced demand, are you seeing them really just kind of cutting back across the board or perhaps did you maybe lose some market share or they going elsewhere or is this just kind of them hunkering down and really just waiting to see conditions getting better?

I would say – I can’t say that maybe, of course, I pick up other customers too, which were always sometimes losing, but 80% plus of what I’ve just mentioned is people that’s not mine. A lot of affected with used truck values and some may overbought, so they don’t need to continue to refresh, but a lot of it has to do with used truck values right? I mean you’ve got a plan in place and then values drop on you and you got an issue inside your balance sheet, is to where you are at, from a valuation perspective you start to go trade, like somebody wants to really don’t know what to do with that extra money. So it’s both – it’s not a loss of customers. I can think of our top five that maybe we are not doing as much business with this year, one of them we might have lost a little bit, but it would be the smallest one of the buyers, okay? So 85% to 90% of it is just a matter of – people are not purchasing for one reason or the other.

Right? Got it. And getting back to the rig count discussion, you’ve indicated in the past that your parts and service business response pretty quickly to changes in rig count, obviously we’ve had a little bit of an upswing over the last couple of months. You are looking right now at about flat, kind of a flat run rate for parts and service; you think there might be some upside to that as we continue to see the rig counts recovering?

I don’t know that I want to jump out and say that. I’m hoping there will be some, but it’s not going to be huge. It’s not going to be dramatic, I don’t believe. We are talking about rig counts up eight units this week and this this week. We are not talking about jumps of 50 units or 50 rigs going into service, consistent weeks of 30 rigs going into service, we are not seeing that. But I would like to believe that there may be possibly some uptick in it. As I mentioned, the only down side to all of it, this year – where this year laid out, well that with a leap year – a leap year, et cetera, I have three less working days in the back half of the year, when I say that Monday through Friday it’s not that we are not open on Saturdays, but truly those were much more prosperous days, three lesser days to work in. Then I did the first half of the year, so that’s going to be a little bit of [indiscernible]. At the same time, I hope what you are saying when it does come to fruition, but I have a feeling, if it does, it’s going to – we need a few more, a couple of more months to this to really see any real uptick in it, okay.

Right, okay. It makes sense thank you.

Yeah.

Thank you. Our next question comes from the line of Brad Delco from Stephens. Your line is now open.

Good morning, Rusty. Good morning, Steve.

Good morning, Brad.

Rusty, I was trying to do some math on your, call it, 190 expectation for this year. It seems like you’ve assumed some improvement in market share in the back half of the year, is that based on visibility with some of those larger fleet customers you have or how should we expect market share I guess the trend in the back half of the year?

I would expect our market share is – as the overall market goes down, if I’m staying flat, it’s pretty easy to figure out that mine will be up, okay? When you look at the overall market share. So that’s good math on your part Brad.

But I sort of back into like a 6% number, does that seem out of line?

Yeah, I think you are backing into where we are looking at, right. That’s what we always do. We’ve seen the bottom of our market share, okay? Do you think it’s easy for me get here say 4.9, you are wrong. But I understand it, I want everyone else to understand, I believe it’s an admiration and we will get back to more historical levels over the last couple of years.

And I guess I would imagine Steve had given the breakout gross margins per truck line, but I would imagine heavy-duty margins were strong. You saw a nice improvement in parts and your truck sales gross margin. How would we expect that to trend in the back half of the year, I’d guess if – the improvement in market share is a function of more fleet customers, that would probably pressure that number, I’m just trying to put A and B together here.

Right. It may not be the fleets I spoke about, but yes there could be a little bit of market share – margin pressure, because our margin was high, right, but we had really no fleets in the second quarter, but we do have a few more fleets coming on, not the ones that I’m referring to, that I missed, they are not buying the fleets, but a couple other Conquest accounts that are showing up to help maintain the same where we’ve been to be honest with you. So, I maybe markets to margins slightly down, not dramatically, but slightly and not to say the bottom, not to like Q4 I would say, it won’t be that low because we are up a point, 1.3 for Q4 of last year right, but somewhere in the middle of it.

Okay, perfect. And then maybe, I’m trying to pin you down on, you mentioned something about not realizing the full benefit of the consolidation yet, and you said back half of the year, maybe back towards Jamie’s question of, we’re thinking flat heavy duty, flat medium duty, flat parts and service, you know trying to get a sense of does that mean lower G&A and higher earnings or improved absorption and is that a third quarter or fourth quarter event?

It will probably be, I’m going to say over both. Spread over both. Q4 without a doubt will be the best G&A quarter, it typically is, okay.

Okay.

You go back and look at us historically, we typically buckled out as hard as we can in Q4 and a lot of your taxes and things run out in Q4 that’s just seasonal, okay. So, Q4 will be the best G&A quarter. She was trying to get me, she was talking about consensus, right. Well I usually don’t comment on that. My comment would be, if we remain flat, we’re not going to make everything up saving our ways, I would say, you can’t save your way to greatness, but we can effect where we are at, but only to certain levels of performance, but I would, if we can stay flat in those areas maybe slightly down in total overall gross profit from parts and service with respective given the less working days that are there, we should be able to more than make that up plus a little sum. We know with good management, just with [indiscernible] on good G&A management and the company is highly focused upon that right now.

No, no. You guys definitely demonstrate you are doing a good job on that front. So, keep up the good work, thanks guys.

You bet.

Thank you. Our next question comes from the line of Neil Frohnapple from Longbow Research. Your line is now open.

Hi, good morning guys.

Good morning Neil.

As a follow-up to Brad’s question, Steve will you be able to provide the gross margin breakdown by truck type in the quarter?

Yeah, heavy duty was 7.3, medium duty was 6.0, light duty 5.4, and used 9.2.

Got it. And then Rusty can you comment on used truck sales trends, I think you mentioned last quarter you had seen a pick-up slightly in March after a slow start to the year, wondering if that continued at all or was that more of a head fake and I guess this was a follow-up, do you think that used truck prices are reaching a point on the market that could start spurring incremental purchases or is there something else you can point to or...

Not right now, okay. Not right now. I would tell you that sort of a head fake, it didn’t continue to trend that way for sure. March was better than January and February, but they were terrible, okay. And we pretty much from a [indiscernible] we were just basically flat. I will be honest from quarter to quarter, so just a head thing. Maybe spread more evenly from a monthly perspective than the first quarter, but flat overall. So, I will take the head fake and answer on that one from a volume perspective. Even that’s in spite of initiatives on our part to promote higher volume. Try to push volume out the doors. It’s just, the management now – I think you will see that across, anybody ask. Demand has been softer and I don’t see a lot of change in there right now. There is not, there is not - you have to mention the export market in the last year or so is pretty much dried up, unless something opens there and we get some, I mean I know June was a better freight month for you, but one month does not make a year and a trend line. Okay. So, and we still had over capacity, I mean those issues just didn’t disappear in the last 60 days. Sometimes people are looking for everything that disappear that quickly, but it takes a while to turn that ship right, it takes, the market has to reach, go backwards a little bit and get to an equilibrium before you get a pickup in it and I don’t see anything there which says used truck buyers are going to get better anytime soon, especially when you look at the supply side. I mean the next couple of years we’re going to come into years where we sold a lot more used trucks, it will be coming back and so the supply side is not going to get, it’s only going to grow over the next couple of years. So, we’re going to need a better market overall. There will one day be an inflection point to your question Neil. There will be an inflection point to our used, we’ll make a lot of sense. Late model of used will make sense versus the price of new, but at this moment in time I don’t see it in the near future.

And then a follow-up Rush, that’s helpful color, I mean you mentioned, your inventory levels on the used side at appropriate levels, but I mean it’s your sense that industry wide that we are still…

We still got a little bit of a glut. I said minor value probably. I could probably take – if I, you want a perfect word, I will probably take my total inventory down to a little more, you know, but that is the problem. Every deal you are on right now, you know you will never mange in this. You don’t miss, this is many cycles that I have. You know, you know where you are at. Now the clock goes all the way round and it is 360 right, you know where we are at in this piece of the cycle. And then everybody has a trade, okay. Everybody wants to trade a vehicle. We need a growing market like we were in 2015 and 2014. You don’t have as many trades to deal with, you’ve got a hire used truck market. Right now everyone has a trade, well if I don’t take trades, I don’t sell new trucks. So, I have to balance in between making sure I do the best they can to keep the valuations proper, even if I’m having the whole inventory a little longer than I want because it is going down faster. It’s a tricky slope to ski down, trust me. But if it was perfect, I might take a couple of 300 units out right now, but I’ve got to continue to be able to trade for some. I got to make sure my baggage is right. So, it is the game we all play and it’s just that part of the cycle right now, but trust us, we’ve done this a few times in our lives and I’m sure we’ll figure out a way to manage through it, as you know we took a write-down in Q4 last year and right now we believe we still managed proper valuations. We look at everything every quarter and check our valuations and make proper adjustments.

All right. Okay, thanks very much guys.

You bet.

Thank you. [Operator Instructions] Our next question comes from the line of [indiscernible]. Please go ahead.

Hey, Rusty. Hello everybody else there, how are you guys doing today?

Fine, thank you.

Hey Rusty, would like to stay on the used truck inventory evaluation and just wanted to press the topic a little bit and knowing that as a shareholder I’ve been with you on more than one 360 circle on this before and we’ve had periods where we thought we had the used truck inventory valued properly, unfortunately in the next period. Used truck values keep on going down and we find ourselves having to take a rate of our re-evaluation hit. Why is that we think that we’re properly valued today or we have this, we have a good handle on this despite the fact that your comments are saying, hey know what, the used truck values are still falling pretty fast, where we’ve run into a problem with this before.

Well, let’s step back a minute. If you go back and look, if you have been an investor for Q4, you will see I took a write-down in Q4, correct. I look at it, what you don’t understand is I look at also levels are down. Go back to year ago levels we’re 2500 units, not 2000 units or so, okay. So, first off, the inventory is down year-over-year, I took a write-down in Q4 and by the way, I look at it every quarter and make adjustments, not just the ones you see. It’s just those stick out sometimes, right. There are adjustments inside every quarter we do. We re-evaluate our inventory every quarter. If it gets, where it is too much than I bring it up to you, other than that we look at it every quarter and make adjustments every quarter and don’t think we didn’t do anything in the Q2, but I don’t discuss that because that is part of normal ever operating business every year, every quarter. So, that’s why I believe we are properly valued to be honest with you.

Fair enough, very good. In regards to parts and service we’ve been going through a period here now for a couple of quarters where the purchase of new is dropping off. Used tuck values are going down. My way of describing this, the truckers are kind of like a deer in the headlights, I’m not sure what’s going on here and they freeze. We also know part of the parts and service revenue is associated with new trucks, when they, as for some upgrades or just setting them up before they go out the door. In regards to this business coming back, we start to see a pick-up in used trucks, shouldn’t we see a pick-up in used trucks, shouldn’t we see a pick-up in parts and service first as people start to feel confident again or like, I got to make sure everything is up and in running order here because I see things coming back.

Well let’s take a look, if you look at the earnings release. I have the press release, it says year-over-year revenue and parts and service revenues were down 7%. You want to break that into its pieces, basically the $38 million of which $29 million was related to oil and gas stores and another $8 million was related to store closures. So, that gets you pretty close to a flat with everything else within a couple of million bucks. Okay. So that’s really where we are – that’s really where most of that is coming. It hasn’t picked up, but if you want to strip it apart that is really where the downturn has been, okay. So, that means a lot of it is still - so that means we probably picking that, and remember truck sales are way down, right and it is not 4000 or some Class 8, so we probably picked up a little business in some areas, because as I have always told you’re probably close to 10% and that can vary depending on at the mix or trucks of our gross profit from parts and service comes from the sale of a new truck, which I said, whether you are adding on this or you are adding on that you just phrased it yourself, but obviously certain market segments, construction trucks, oil and gas that type of stuff produced more of that business, okay. So, that was already gone last year. So, I am going to basically tell you, we are probably pretty flat across the whole country. Now, certain areas are up. The center of the country, Illinois.

Sure, sure there is going to be different parts that are up and different parts that are down. As we are looking for an inflection in the business, would it be reasonable to look to parts and services flat now stripping out the parts that you mentioned say, you know what when we start to see that growing, that would be our first sign that the customers are starting to feel a little bit more confident and starting to put in a little bit more money back into their fleets.

Yeah, you could say that, but I mean we haven’t seen any growth in that. We are pretty flat across the whole country in that. I keep saying, when you strip oil and gas, you strip close stores, year-over-year we are pretty flat.

Yeah..

Now, [indiscernible] 5% or 6% range that would be - say 5%, 6%, 7% range. That is a normal same-store year-over-year growth rate for us when you look at everything, but right, so yes you can say it is all, but we are basically flat, so we start seeing that that could be an inflection point, but I’m not seeing it right now, I could tell you that.

I understand that. I know where we are now just on thinking ahead, looking forward.

I understand you are looking forward. You trying no one to get in, go ahead.

I’m already in.

Good.

Can you comment on the status of financing in the industry and if you wouldn’t mind a quick comment on a press release that I had seen about you partnering with a new finance company.

Well the finance business is, as markets still pretty, I mean – like it has been there is still a decent market, we are not having really that much trouble getting good credit place, okay. We haven’t seen, I’ve heard people, I have seen those sign here, somebody has told me I read an article which everybody is getting a little bit tighter. We have not seen the effects dramatically or anything of that coming forward, I haven’t see a lot of people pulling out over anything like that right now. So, answer is, no we are still about where we were last quarter and the quarter before when it comes to the portfolio of finance companies that we, our third party lenders that we use. So, in regards to…

We added one, but that is not unusual, it just so happens that Marlon was a public company and they wanted to put out a press release letting the world know that they were using a heavy equipment truck business and they were partnering with Rush, but our top 3 for a long time have been what the [indiscernible] was now BIMO, Packard, and probably Wells Fargo are the top 3 providers and we probably broke her for another 30 or 40. And they all have their niches in the market and Marlon fits into that portfolio of offerings for us.

Okay, okay I appreciate that. And Rush if you would, last question I have is on capital allocation, press release indicates that you spent $20 million on share buyback, and if you, and certainly as you are, if you are trying to reduce your overall inventory that should be a positive cash flow scenario. And we also know from past cycles when things get a little tough it’s when certain dealerships reevaluate their desire to be in the business long-term and acquisition opportunities kind of rise, so can you tell us for the next 18 months how you see your capital allocation positions panning out and prioritize it a bit.

Well obviously as I look at our capital allocation last quarter, pretty good quarter. You can tell that we just finished spending all that real estate money as I have told folks they’ve spent a couple of hundred million in real estate over the last couple of years, okay. That doesn’t mean we are not spending money on real estate, but that big push of real estate came to an end. We still pick up cash nicely on the balance sheet along with buying back 20 million of stock. So, we were very happy with that outcome in Q2 as we, when you say getting inventory, selling trucks does not relieve the pump – [indiscernible] pump any cash, it is just finance or dollar for dollar with BIMO now used to be GE on a fore plan, right. So, other than the spread that goes to profit it really doesn’t have that’s the only part of a truck sale that has an effect on cash, okay. The rest of it is a 100% financed or [indiscernible]. You talking about acquisitions going forward, I haven’t seen much yet, but at the end called to this cycle enough times, I’m sure the calls will be coming. So, we are looking to continue to build cash throughout the rest of the year, I think you will see that. When our projections in cash will continue to build throughout the rest of the year, so we will be set and in good share if something does come along and make sense for us from an acquisition perspective. So, we feel good about that piece and how we will be set. When that happens, when that inflection point, when the phone starts ringing, I don’t have an answer, it hasn’t started ringing yet, but I would, yeah, I expect by the end of the year as people continue to get squeezed down, you know there were still some deliveries a lot of deliveries made. May not been a lot of mine in the first half, but there were still a lot of retail deliveries around 2000 run rate deliver in the first half, but that’s going to be coming down and those opportunities will probably start showing up in an 18 months, probably within the six, I say between 6 and 18 months from now the phone will ring a lot. Okay.

Okay, and how do you priorities share repurchase in this 18 month period.

Well for now, I will speak for the end of this year, I have $40 million approved with the board and I am probably about five more in this quarter into it, so we are about 25 million, has been repurchased already and we anticipate repurchasing the other 15 million by 12/31. Okay.

Okay, great. Hey, thanks a lot for the time.

You bet, thank you.

Thank you. And at this time, I’m not showing any further questions on the phone lines.

Okay, great. Well we appreciate everyone’s attendance on the call this morning and we look forward to talking to everyone in October with our Q3 results. Thank you all very much.

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