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Operator: Good day, and thank you for standing by. Welcome to the Rush Enterprises Reports Fourth Quarter and Year-end 2022 Earnings Results. . 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.

Rusty Rush: 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.

Steven Keller: 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.

Rusty Rush: 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 Clean Fuel Technologies. All of these changes strengthen our network and enhance the offerings we provide to our customers. In the aftermarket, our annual parts, service and body shop revenues were $2.4 billion, up 32.3%. Our annual absorption rate was 136.6%. We added 190 service technicians into our network and expanded our team of aftermarket sales representatives, allowing us to focus on strategic initiatives including Xpress services, mobile service and contract maintenance while continuing to support large fleets and national accounts. With normal seasonal softness, parts growth began to plateau in the fourth quarter, but service revenues remained strong due to the additional technicians in our workforce.

Parts availability remains somewhat choppy, but has improved significantly, and we believe demand for aftermarket parts and service in the first half of ’23 will align in the second half of 2022. As we continue to add technicians as well as aftermarket sales representatives, we believe our results for our aftermarket parts and service operations will remain strong in 2023. Turning to truck sales. In 2022, we sold 16,778 new Class 8 trucks, accounting for 6.3% of the total U.S. Class 8 market. Limited new truck production continue to impact the industry, but we experienced healthy widespread demand for new Class 8 trucks. Our results were further shrinkened by our focus on national accounts and the timing of some large fleet transactions early in the year, which helped us gain significant market share.

We ended the year strong with continued healthy demand from over-the-road and vocational customers in the fourth quarter. ACT Research forecast U.S. Class 8 retail sales to be 225,000 units in 2023, down slightly from 2022. While we expect we will continue to feel the effects of truck allocation, production has begun to normalize. Our backlog remains strong, and we believe that our Class 8 truck sales will remain strong through at least the first half of 2023. Our Class 4-7 new truck sales reached 11,025 units in 2022 or 4.6% of the U.S. market. Though production remained limited throughout the year, we experienced healthy demand from most market segments we support, and we’re able to outpace the industry in 2023. In the fourth quarter, medium-duty truck sales declined from their peak in the third quarter, largely due to the timing of new truck availability for manufacturers.

ACT Research forecasts Class 4-7 retail sales to be 253,600 units in 2023, up 8.5% from 2022. As we look ahead, we believe there will be continued pent-up demand for medium-duty trucks, especially from construction and leasing customers, but production constraints on medium-duty trucks will likely continue. We expect our Class 4-7 results to keep pace with the industry in the first half of 2023. Our used truck sales reached 7,019 units in 2022, down 6.7% year-over-year. As 2022 began, there was strong demand. There was strong demand for supply — excuse me, with limited supply of Class 8 trucks — excuse me, limited supply of new Class 8 trucks in the market. However, in the second and third quarters, demand and values declined significantly as more new trucks became available.

In the third quarter, we took swift action to minimize our used truck inventory to historically low levels. In the fourth quarter, low freight rates continued to cause weak demand and used truck values declined further. Looking ahead, we expect used truck values to continue to decline, and we plan to maintain our low inventory levels until conditions begin to normalize. Due to seasonal increases in employee benefits and payroll taxes, we expect our general and administrative expenses to be sequentially higher in the first quarter of 2023 compared to the fourth quarter of 2022. Before I turn the call over for questions, I would like to take a special minute to thank all of our employees of Rush Enterprises, not just for their outstanding work and unending dedication to our customers that led to our record-setting financial results this year, but for their efforts and execution of our strategic goals over the last 5 years.

You see 2022 was somewhat of a milestone year for our company. In 2017, we developed a strategic plan that was heavily focused on expanding our market share and improving our quality of earnings and including aggressive financial goals of growing revenue $7 billion and pretax return on sales of 5% by 2022. Thanks to their outstanding work. Not only did we achieve our revenue goal and exceed our profitability goal, we also were able to enhance our shareholder return programs through opportunistic share repurchases and by introducing a quarterly dividend that we have been able to consistently increase on an annual basis. Our people have demonstrated their ability to execute on the company’s strategic initiatives and that they are why I’m extremely confident we will be successful in achieving our strategic goals of $10 billion in revenue with a 6% pretax return on sales by 2027.

Again, to all of our employees, thank you. With that, I’ll take your questions.

Operator: . Our first question will come from the line of Justin Long from Stephens.

Justin Long: Congrats on the quarter.

Rusty Rush: Thank you, Justin.

Justin Long: 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.

Rusty Rush: 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 high single-digit growth from a same-store basis.

So we feel good about where it is. We’re not seeing anything that’s showing any signs of weakening at the moment. So that being said, we’ll just continue to work throughout the year. In the note itself and what I said, the difference between this year and last year is last year we were under a lot tighter allocation. We’re under allocation still, but we’re dealing with a lot more issues when it comes to parts availability, both from our perspective, from a dealer perspective and also from the OEM perspective, right? So as I look at it going forward, I think that’s obviously, I think build rates are up. You can tell by what was delivered in December. I haven’t seen what was delivered in January, but I’m sure it was extremely strong. I know retail deliveries in December were probably the strongest ever.

So — but I don’t have the visibility I had. We were pretty much sold out at this time last year. While we’re not sold out currently, our backlog is extremely strong and fairly deep but we are still selling trucks into the back half of the year, right? We feel really good about the first half. The back half is evolving. Every day that goes by, I feel a little bit better. I must tell you that. You’re always trying to be — you have to be conservative in your outlook. But as you get further and further into the year, we’ll be able to give you a little bit better guidance in the back half of the year.

Justin Long: 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?

Rusty Rush: 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 can always talk about ’25 and ’26, probably being the 2 of the biggest years ever in history.

But getting through ’24, I think we’ve got some good things going with the partnerships we have and also with our people and our realignment is going to market as one, using that whole network, not just selling trucks but selling the Rush network. And we continue to get better and better at that. And I have — I’m not going to get into all the specifics, but I have many examples of where we’ve had some conquest accounts. That’s why it’s not just the product. It’s also that Rush network that can service a broader base than any other network in this country. So — in our industry, right? So it’s something we’ve been working very hard on the last couple of years, and that’s the go to market is one. Now this is a truck sales organization, but it’s just overall commercial supplier or taking care of everyone, right, from cradle to grave.

So when you look at the medium-duty business, I think I feel very good about that. The last couple of years, Hino hadn’t been in the game, okay? We used to sell 1,500 to 2,000 Hinos a year. Well, guess what, they’re back in the game again, right? So we basically had 0 sales for over a year, I mean, 100 or so. I mean, very, very little. So that’s a plus. As they get back in the game here as they switch to Cummins engine and their product going forward on the medium-duty side there. So I mean I feel good about the Ford product line. I feel good about the ISUZU product line. I really do. And I feel good about our network again. So I can — that’s how we’re going to combat it. We’ve got plans for it. I can’t sit here and guarantee you anything, but I can — I’ll bet you this right now that we don’t go backwards as far as the market does.

Justin Long: 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?

Steven Keller: 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: . Our next question comes from the line of Jamie Cook from Credit Suisse.

Unidentified Analyst: 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?

Rusty Rush: 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?

Unidentified Analyst: Yes. Yes, if there is any implication?

Rusty Rush: 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 . 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.

Unidentified Analyst: 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.

Rusty Rush: 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.

Operator: 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.

Rusty Rush: 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.

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