Executives: Steve Keller - CFO and Treasurer Rusty Rush - Chairman, CEO and

President
Analysts: Brad Delco - Stephens Inc. Jamie Cook - Credit Suisse Faheem Sabeiha - Longbow Research Andrew Obin - Bank of America Merrill Lynch Alfred Wood - BB&T Capital Markets Michael Baudendistel - Stifel, Nicolaus & Company Joel Tiss - BMO Capital Markets Brian Sponheimer - G.

Research
Operator: Welcome to the Rush Enterprises Inc. Second Quarter 2017 Earnings Results Conference Call. [Operator Instructions].

I would now like to introduce your host for today's conference, Chairman, CEO and President Mr. Rusty Rush. Sir, you may begin.

Rusty Rush: Good morning, everyone and welcome to our second quarter 2017 earnings release conference call. On the call today are Mike McRoberts, Chief Operating Officer; Steve Keller, Chief Financial Officer; Derrek Weaver, Executive Vice President; Jay Hazelwood, Vice President and Controller; and Michael Goldstone, General Counsel and Corporate Secretary.

Now, Steve will say a few words regarding forward-looking statements.

Steve 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, 2016, and in our other filings with the Securities and Exchange Commission.

Rusty Rush: As indicated in our news release, we achieved revenues of $1.2 billion and net income of $22 million or $0.54 per diluted share in the second quarter.

We're extremely proud of our financial results this quarter, continued growth in the housing and construction sectors, improvement in the energy sector and general economic improvements throughout the U.S. positively impacted all areas of our business. Both our Class 8 and Class 4-7 truck sales outpaced the industry this quarter. We experienced notable growth in our aftermarket revenues as well. we remain focused on our long term strategic initiatives including expansion of all makes parts business, advanced vehicle technologies and alternative fuel solutions.

In the aftermarket our part service and Body Shop revenues were 367 million and our [indiscernible] was a record high 121.8. Growth in the energy sector activity along with continued infrastructure related vocational business along both coasts contribute to our solid performance this quarter. We are beginning to see revenue gains particularly when it comes to all mix parts and we expect these improvements to continue. We expect aftermarket sales to remain strong in the third quarter followed by normal seasonal declines in the fourth quarter. Turning to truck sales, we sold 33,052 new Class A trucks in the second quarter up 29% compared to the second quarter of 2016, our heavy duty truck sales accounted for 6.9% of the total U.S.

Class 8. Our Class 8 new truck sales were strong in the second quarter due in part to some large fleet delivers along with continued demand from construction and refuse customers and increasing activity in the energy sector. While there are still an oversupply used trucks values have begun to stabilize. We are confident our used truck inventory is well positioned to support trade activity and future new truck sales. ACT research currently forecast U.S.

Class 8 retail sales to be a 186,100 units in 2017 down 5.5% compared to 2016 but a significant increase over its original 2017 forecast of 154,000 units. Due to increased activity from a wide variety of industries and overall economic improvement we believe our Class 8 new truck sales in the second half of 2017 will remain strong. Our second quarter Class 4-7 new truck sales reached 3073 units up 10% year-over-year and accounted for 4.9% share of the U.S. market. Our strong sales was bolstered by timing of large fleet deliveries this quarter and continues to support customers, construction, infrastructure and a wide variety of industries with our inventory of bodied up equipment across the country.

ACT research forecast U.S. Class 4-7 retail sales to be 233,600 units this year up 3.3% from 2016. [Indiscernible] market remain strong and we expect Class 4-7 sales for the remainder the year to be consistent with our first half performance. Finally I would like to say thank you and congratulate our employees for their efforts and helping us achieve a strong performance this quarter. Our business process management group continues their work to further drive efficiencies into our organization and our employees remain focused on managing expenses across our company while remaining dedicated to our customers.

With that I'll take any questions.

Operator: [Operator Instructions]. Our first question comes from Brad Delco from Stephens. Your line is open.

Brad Delco: Rusty great results here, I wanted to ask you a question ask it pertains to what you've seen in the energy market, rig count has kind of stabilized or gone down maybe slightly in the last couple of weeks but should we think about the strength of your energy related business more to what may be going on with frac sand over the next year or two or should we look at it being more correlated to rig count how do you think about your customers use of Rush to help them serve their customers?

Rusty Rush: Well rig count was always a good right, rig count is a good and indicator of what the activity is out there, right and what's going on.

We believe it has stabilized you know I mean there has been some jitters here in the energy side obviously over the last couple months with the decline of oil, now the last couple weeks that being said things seem to have -- oil prices have risen again. I had conversations with a couple of key customers, they believe that we probably bottomed out and this is not my take this is a take of a couple key customers that it bottomed out here a few weeks ago and that we should see more stable oil prices with slightly lower -- maybe a little upside going forward which I believe will lead to hopefully around a more stabilized rig counts to where we're at now. We've already seen the inflection of the growth and we've seen a slightly as you said very slight just in the last couple of weeks where rig counts have gone down slightly. So I think we're going to see and I've seen some of the reports about CapEx spend just coming out this last week so I really get my head around it all but I don't see I don't see the carnage we saw say at the end in 2015 the start took off in 2015, I don’t see that going on but I don't look for a lot of growth from where we're at in activity to be honest with you but if we can stabilize around here. The activity levels we're seeing is solid and so I would be pretty comfortable to be honest with you.

Brad Delco: And then again strong results generating good cash flow thoughts on M&A or uses of cash, any change maybe that question is for Steve just high level thoughts.

Steve Keller: I think it's more the same I mean we're always open minded to M&A, we have no deals to announce right now but there's things we constantly look at. We've got an authorization from our Board of Directors to repurchase $40 million worth of stock, I think that authorization expires around the December 1st, and we're about $30 million into it and then we repurchased about $18 million worth of stock in the porter so we expect to continue that and then we'll discuss it with the board about updating that authorization when as this one expires we do it on an annual basis but we intend to continue to generate good cash, look for areas to grow and return it to our shareholders.

Rusty Rush: I'm going to jump back in real quick Brad and to your first question it was about energy because everybody's always focused on energy. While energy was a no question, a pretty significant part of our growth from parts and service perspective in the second quarter, it was by no means the only piece, okay.

As I've told everybody guess was it strong? Yes it was stronger and it has been because the comps were pretty easy, right. At the same time it wasn't till levels that we saw back in 2014 etcetera, so it was a pretty broad based growth which has you know you know fairly feeling good as we go forward as we're starting to get traction with some of our strategic initiatives along with just better execution at the store levels right and just a better overall market out there at the moment. So much better as I've told everybody out I sure was glad to be wrong in December and January for once in my life but you know the markets turned out better, right now there's quite a still optimism across a lot of areas, or at market segments that we serve from a customer perspective.

Brad Delco: And when we said you're making progress on some of your initiatives I'm assuming you're talking to some extent about all mix parts business, can you give us an update on that?

Rusty Rush: Yes, I mean you know as I break it out when you know as I break it out, when you see the growth that we had, so that was it was not the majority of it by any stretch, you know it’s the piece when you strip it out, look at where the oil and gas side help but there was just general, there was a piece in there, maybe 15% to 20% of growth was on that side, right? So that’s good, that’s more than I felt about before from a parts and service perspective. We believe it was attributed to those initiatives, 30%, 40% of it was just or 40% on top of that was probably just general across all stores and we were strong on both coast.

And then there was third, probably was attributable to energy. So you know when you look at it from that perspective when you're talking about double digit 11.5%, 12%, growth you feel pretty good about it when you see it from my perspective right? That’s why I said a minute ago, if we can be stabilized and stable where we are at from and oil and gas perspective, from a service side, parts and service side and then continue to get that broad based growth as we move forward you know those are the things I like to see. And from a truck sales perspective, I mean yes there was energy in there for the first time in a couple for years but at the same time our truck sales still would've been up sequentially without that. So you feel pretty good about it. I took a list of, I looked at the last quarter I took a list, these are different deals, 15, 20 deals that we did each month, April, May and June and oh my, Senior VP of Sales I just looked at it and I felt pretty good looking at it, it was pretty broad based, you know there was garbage business, there was mixer business, there was fleet business there was small fleet business and then of course there was energy business in there.

So you hope that continues right and while it may not be it's the summertime so order intake is never as strong in the summertime as it is other times you know later in the year. You know the 2018 buying season hasn't kicked off and that works right around the corner but it hasn't kicked off yet really. So you know you feel pretty good about it, if somebody asked me what's 2018 well I'm going to differ to ACT when it comes to that I also can give you commentary that you know I saw a couple truckload guys their average fleet was maybe a little higher, at the age of it coming out this week and I haven't had time to go through everybody's reports yet but you feel good on that side of it and then construction activity. I had a board meeting earlier this week in Colorado I could barely get around in Denver, they are working everywhere. Those roads were -- just a commentary and I was trying to get around Florida here recently and the road they are working on roads everywhere its just a pretty broad based stuff going on out of there from a truck perspective and from a parts and service perspective.

And I will shut up because you know me I can give rambling answers

Brad Delco: I will you ramble for somebody else, but thanks Rusty for the time.

Operator: Our next question comes from Jamie Cook from Credit Suisse. Jamie Cook : Congrats on the quarter first of all and I guess to begin with just a question on used truck. Rusty, you did mention that values have begun to stabilize which was encouraging to hear. But do you see this used truck overhang, sort of persisting in the back half of the year and maybe into '18 as well or is the worst behind us given the stabilization prices?

Rusty Rush: I have to believe there's still some overhang, okay.

Just dumb logic, dumb Rusty logic says there's got to be overhang. If you look back, used trucks are always for years, are pretty simple to predict because you have what's it, supply and demand. I can't always answer the demand side, but I can pretty much tell you the supply side. And we're coming off, you take a 4 year average from over the road, right, still 70% of business is the freight business from a product perspective. The high mark was -- 2014 was 227,000 units and then I think 2015, we sold 253,000 units in these U.S.

numbers. While those products haven't come back yet, that's we're on a 4 year cycle, they don't start coming back till '18 and ' 19. So you've got to be hedged and believe there is still a little bit of -- there could be an overhang. Now, that being said, if we continue to have some decent general economic conditions, the market says -- space over the market ate them up and the market was absorbed should I say, better term I guess for you folks, but the market will be able to absorb them. But that will need to be taken place to be able to absorb all those without having a dramatic effect upon values.

And when I say values, it's stabilized, that doesn't mean they stay flat. That just means that you're in more of a normal depreciation mode, okay. You're not in an accelerated depreciation mode from a market valuation perspective. So that's what I was saying, that's what I was referring to when I said that in the commentary. So we feel good about our inventory.

I mean you go back a couple years ago, our inventory was -- we carried average of 2,500 units, where we're 35% under that now, 40% sometimes, we're under that at the moment. So we feel real good about where we're at. Also from a valuation of our inventory, we watched it closely right now and so we're pretty solid which sets us well in our mind to be able to freight for trucks as long as we can -- as long they are proper -- they are maintained on the market on the valuations from a market perspective. But at least from a inventory perspective, volume of inventory, we're in pretty good shape to as we go forward to be able to work with customers that do have freights.

Jamie Cook: Got it and then maybe just going back to parts, I think your previous expectations were for parts sales to be up in the mid-to-high single-digit range for the full year.

And I mean, given the strength we saw in the quarter, are there hopes to maybe get to double-digit growth for the full year in parts assuming we continue to see this broad based strength you mentioned earlier?

Rusty Rush: Yes, there's hope to get there or get real close. We started off that, I think from a same-store perspective -- . The first quarter was like 6.6% or 7%, I don't have it in front of me right now. This quarter on a same-store perspective, then we have some store consolidation going last year in the first and second quarter, but we had a strong quarter. I would hope that we will be able to see that in Q3 and Q4 is always -- the only thing I would tell you is, I look forward to that.

Going into Q3, I will say -- it's we're going to continue. We will be pretty strong. It'll depend on how Q4, a lot of times our customers' budgets, little softer, they spend all their money, when you get into Q4. So I'm not sure how that all works out. We've got a few less working days in the back half of this year.

We've got a couple like -- just take Q3 for example. I'm planning on our -- we may not have any growth on a per day average, about per working day average. And I'm hoping that we can maintain the average in Q3 that we had in Q2. At the same time, I've got an extra holiday and one less working day . So that's going to quite $0.03 or $0.04 there on you, so you have to be careful with that too when you get into the fourth quarter and you've got another less working day, both of these next two quarters.

So we'll be dealing with these typical seasonal things we deal with, but I'm not giving you a long answer to your short question, but at the same time from a -- where we're at in Q3, I think we can maintain Q4, we'll just have to wait and see how things pan out for Q4, but I'm hoping we can maintain an average similar to where we're at, because I'm looking for some of our strategic initiatives continue to grow in spite of just normal market stuff that we're dealing with, fair uptick in markets, broad based, but I mean for example, I mean, I can just throw out examples, right. So, I guess I was in Denver the other day. That shop was packed and had a backlog bigger than , so I can derive the proper customer service, I'll tell you that right now. So that's a good thing though, right. So why didn't you get into shop? I feel good for the foreseeable future that we can maintain similar to where we're at.

Fourth quarter, we'll just have to wait to see, but for right now, things are still pretty busy.

Operator: Our next question comes from Faheem Sabeiha with Longbow Research. Your line is open.

Faheem Sabeiha: Can you provide a little more color around your comment that new Class 8 truck sales will remain strong in the second half of the year? I mean is the second quarter unit sales level a good run rate for the remainder of the year or did timing of the large fleet deliveries kind of really bolster the Q2 and something 3,000 units per quarter a better way to view the second half?

Rusty Rush: I guess, the best way for me is, I'm not going to get out. We're still building trucks, I build trucks .

Production if you haven't seen has ramped up. I think June, what I see is the late June run rate on production was what 270,000 that's a lot. So with June run rates, with that kind of run rate there, at least, they are eating up the demand that was there and so I feel good about Q3. I think I commented it can be similar to Q2. I don't know whether I can maintain in Q4, but it's still going to be good.

So if you want to take an approach, say second half like front half, that was getting out of the quarters, something along those lines right now, but again, I'm still, I think I was talking with a customer yesterday about some stuff. I'm still, we're still, not I'm, but we, the company is still building trucks this year. So that being said, Q4 is not totally made yet, right. The cake is still in the oven per se. So we're not, I don't have my hands around that, but I will say for this time of the year, pretty decent, we're in the middle of summer doldrums, man.

And so you typically -- but there is still activity out there. I refer to a couple of deals, I guess -- it's not huge deal, but deal is going on. So, it is still percolating and as I look forward and look out in '18, I look at some pretty good reports from the freight side of the business, from that side of the business. You've got to feel decent, but to answer your question, maybe just take the whole halves, look at it as a half and not quarters or maybe -- I haven't build Q4 yet, it's still not totally full.

Faheem Sabeiha: You delivered two quarters in a row, a very robust new and used truck gross margins and I'm assuming favorable mix drove a lot of it again in Q2, but with higher new class 8 sales being driven by broad-based demand and used truck values beginning to stabilize, I mean, can we expect new and used margins to remain above 7% for the remainder of the year?

Rusty Rush: Good question.

I think we're at margin peak right now from my perspective, I'm not going to take -- get up any higher for sure. We could see some slight deterioration in margins. Especially, as we get into the last quarter of the year for sure, I don't see that we might have fairly decent margins, because it's a mixed thing, right. It's always a mix right. And we're doing a lot of small business right.

And we're doing well from that perspective. Am I getting into other stuff, there's a lot of building and opening and stuff going on, because we're zoning with the truck, not just truck. I would look for some slight deterioration in margin as we go forward, not gigantic. In Q4, I'll just have to wait to see what the mix is. Q3, possibly slight deterioration, not dramatic, but slight.

The mix, I believe will be somewhat, we're still pretty strong in the small stuff right now. I know we have mentioned fleet and that kind of stuff in there, but with that volume of trucks that we did, there is still a good small customer business in there also which tends to, when you are selling 3 or 4 at a time instead of hundreds at a time, your margins will obviously always be better on that business.

Operator: Our next question comes from Andrew Obin with Bank of America.

Andrew Obin: Just a question on all-makes parts strategy. You sort of highlighted it in the press release, I think sort of retention tone.

Can you give us color as to what kind of -- I think you sort of talked about it, but how big it's going to get, what's new about it, why you're now highlighting it, just talk a little bit more about that and what kind of impact it's having on margin and parts and services as you reported?

Rusty Rush: Well, I think it's having a good impact on margin, okay. That's the whole plan. Even though it's an all-makes, you say well, that's probably more highly competitive and yes, it can be. But there's many different avenues that we work on that from procurement to all the way through when we're selling it to the end customers. So we believe and it's not just -- it doesn't just come with parts right.

You like to drive service with it, so it's not just a parts initiative. I think that's one of things maybe I failed to really play in well to folks last year when we started talking about it. Yes, we're talking about all-makes parts, we're also talking about all-makes service to go with it, a combination thereof, because you're going to sell some parts which are not going to provide service so you are going to sell some parts that you do provide service to. So it's very important that you work towards both pieces, because the service side is obviously a higher gross margin than the parts business. We're getting traction as I said a minute ago where 15% to 20% of our growth came from that area.

Not a lot, but you know, you're starting to move the needle a little bit and we feel very good. As I said last quarter, I think, I said I came out with [Technical Difficulty]. By 2020, we're going to double our parts business. Well, I think I realized the foundation that had to be laid and I take full responsibility for that. So we've actually -- I'm not giving a year anymore, but internally we're looking at 2022, I'll be honest, to double our parts business from where we were at to get to $2 billion of parts sales.

And we feel confident that we can do that and it won't just be through all-makes. We're working on some independent shop -- independent type stuff outside of our normal dealership pay wards. We have many things going on around that whole agenda of doubling that. And then also, we may not double our service sales, but try to increase our services sales by X number right, I'm not ready to talk about what that number is right now, because we're getting arms around it. As we look at it, it will be always different strategies that are feasible, impossible for us, driven by what we believe will be customer demand given the connectivity where trucks are going and everything else.

I know, I'm getting into the typical rambling Rusty here, but trust me, there are a lot of initiatives and I feel good. I feel good we have had some -- we bought some -- we've had to add some expense here at the corporate level to try to really consolidate this and drive it to get out. I mean I've been out visiting customers -- big large customers and I'm not going to name myself personally and trying to buy them and show them the benefits of doing business with Rush and that includes all-makes for sure. But it's also more comprehensive than just that. But we're very excited about where we can go with that and we're -- as I said, I get a little bit, not understanding all the investments that had to be made not just from a personnel perspective, because remember one thing people lose sight of is, it takes people to sell parts, it takes -- you've got to have people to move parts, people to do that, so it does come with some expense, it does come with some foundation of understanding what the marketplace needs are.

And we've had to spend 1.5 year or so getting our arms around that, but we're now starting to see and I look forward to being able to tell you that some of the growth was -- hopefully about 1 year from now, I would say half of the growth you're seeing right now is coming from that. That would be my goal. But we're still working at it. We're definitely not -- we haven't got it perfected yet, so I feel good about where we can go as we continue down that path.

Andrew Obin: I'll take my 2020 forecasts from $4 to $3.50.

Question on SG&A, very nice cost control. Can you just talk about some puts and takes on SG&A into the second half. Obviously, you're probably adding some workforce, you're probably paying people up. But at the same time, we know that you are also focusing on taking costs out. Can you just discuss what that dynamic looks like for the second half of the year?

Rusty Rush: I would tell you Andrew that it's always -- when you ramp up like this and I just -- like I always pinpoint, when you ramp up it's always on the front side of it, right, you are coming in from a low base.

Remember last year was pretty tough on everybody around here until we had, it was what I the slug it out here, right, we had to slug it out and I put three digits up on scoreboard which we did, but it wasn't an easy accomplishment. Well, at least it gives you a start off on a low base, right. So when the business ramps up, your costs are down already. Well, as you get into -- especially this time of the year, you get into summer time and it's hot and you got all -- you have got lots of air conditioning work going on and vacations and people and stuff going everywhere, it is inevitable. But there is cost in G&A, remember I split it apart, Answer is always going to be -- I'm going to talk about two sections, Fs I think that goes off for years.

There's Fs and there's D&A right and at the same time there are just natural increases. If we create more gross profit in parts and service, I typically run properly on the front side of the cycle, I will keep 70% of now it. Now I add some G&A and as you get to the mid part of it, not what we call cycle, but as you get to the middle part, you have to add some people and SG&A. Normally we like try to key 50% of our gross profit dollar from our parts and service part, it will increase, because someone has to get the part, someone has to deliver, someone has to pick it up, someone has to sell the part . It just doesn't do it by itself and leverages shouldn't cost G&A.

I said no, there are people doing these jobs and when you increase the volumes, it takes more people. But you are supposed to keep a percentage. So as we give, we've seen a little bit of some expense creeping right now just in the last 45 days, but that's where we're going to our best to manage that, mind you, but you cannot do it without some expense creep. You can't have the uptick and parts and service we've had and not have some expense creepers. Also as we look forward, I would tell you that typically our lowest quarter is the fourth quarter when it comes to expenses and we've got and we do have some things that we're investing in behind the scenes also at this time.

I cannot -- to get to our 2020 anymore, there are certain things that I have to invest and I don't want to go into a lot here, but there's technologies and things that we have to do from a CRM, from an infrastructure, well, from an IP side that we need to continue to invest there when it comes to how the world is changing and how business is done. And we have to stay on that leading edge. It's not going to be overly -- kill the company from and expense perspective, but we do have to spend a little money. We always do, people will say to me years back when we rolled up our SAPs and -- I guess that takes care of it, right. No, you never stop, okay.

It's a never-ending spend. If they get done then you're never done because the world is moving at such a breakneck pace right now to stay on top, but we have to continue to invest or I can't produce the kind of results that you're seeing right now, okay. And we produce better results in the future and this company has never been more focused than it is currently, I think is not as cohesive as right now, a organization to achieve long term known results. As I said, you used rest of this when we have right. Well no, we've got some very strong strategic initiatives that we're going to be held accountable to by you folks.

And I'm fine with that because we hold ourselves accountable to do that, maybe a little different organization that it has been in the past and but it does take investment and I've been talking about the business, I get kind of excited, but we will have some cost, we will have at Q3 we'll probably have some sequential uptick in some cost, there's no question. But at the same time, our business is strong and I look for a decent quarter. How's that?

Andrew Obin: Thank you, now it seems like the entire Rush team works very hard. So congratulations and thanks to your teammates.

Operator: And our next question comes from Rhem Wood from Seaport Global.

Alfred Wood: Yes, absolutely. Rusty can you talk just a little bit about what you're hearing in your discussions with fleets with regards to their purchasing plans and specifically allocation of CapEx to trucks versus trailers?

Rusty Rush: I have to be honest with you Rhem. I would be probably speaking a little -- I have not had a lot of conversations with over-the-road customers about what their spend is. It was a few, okay, as they look forward. Probably indicative to me is obviously the age of the fleet right, because I know when the age creeps up, even in today's times, obviously maintenance costs creep up.

And then we've got -- don't ask me how to explain it and I'm going to, we got the ELD to overhang right. Our ELD is sitting on top of what was going on December 18 if I remember right. But I feel pretty good, typically when customers and this is pretty old school with that. When customers business -- when their business is growing and better they'll spend money, okay and they'll buy trucks. So as I look at those reports, this is just high-level broad based when customers' report are good.

They're probably going to be more and they can look forward, they are going to be more apt to purchase new trucks. And look, trucks -- the other things it's always -- that's really been keeping this running pretty good I think is the fact that trucks are -- they continue to become better, okay. I mean, the quality of truck and with the fuel efficiencies that are built nowadays compared to what was 4 years ago, okay have advanced. And I don't see that changing ahead. The R&D that's being done and the quality of the product that's out there, it sometimes starts making sense.

Probably the biggest overhang is always the used truck market right. But I think with this slightly -- I don't think we sold as much fleet business this year as we have other years. I think there's been a lot of vocational sales this year. I think 2017 is going to end up looking like a very strong vocational year not as much over the road business. So that tells me the over-the-road guys' fleets are going to raise more this year and so I got to believe and I've got reports that are out there and everybody is really positive.

I won't say not everybody, it is too inclusive. The majority are pretty positive about and pretty bullish with the ELDs that kind of mandate kind of on the board about their business. So I really can't get into this slip between CapEx on truck and trailer. You probably know more about that than I will but I've got to still feel pretty good using my old school box, the spend on trucks next year that we're -- I don't look for us headed for a down year in truck deliveries next year. And I think most of your -- ACT and everybody else still believes that the truck for sales forecast is up for next year.

Alfred Wood: So can we switch to margins for a second. Specifically on parts and service in a leasing business, both spiked up in the quarter and to tie that into kind of a absorption ratio, that's how you set a new record. I thought as you kind of grew out this parts business it would stay, kind of creep up, but if it's kind of spiked up. I mean where can that go at this point, just a little help on the on the margin side?

Rusty Rush: Leasing margins, look, I've been very frank with everybody and told you I hadn't been happy with leasing margins for a while and I have -- well I think we've finally got ourselves right sided. We had some issues here, the one thing about the leasing business, it's not .

Once you -- if the ship turns a little in the wrong direction, you just can't snap your fingers and turn the ship. But we've been working at it for about 1.5 years and I feel pretty good about where we've got the business right now and margins are back to what were more historical margins, they were in 16% range or something I think this quarter. When we got down like the okay and we were -- Steve was looking at it, when we checked things this morning we came in early preparing diligently for you guys and it looks pretty solid. There's no -- nothing in there that makes us save some one-time thing in the leasing margin. So look what it would be as high as it will be now is going to be around that range and give or take a point here, point out for a point now.

It's going to be in that range we believe going forward. So we feel good about that on the leasing side. We got it rightsized, we got the rental fleet, what we got -- we got caught in two things. My new leased fleet happened to have a bunch of engines called MAXXFORCEs in it, okay. We have been trying to get out of those, right, we're not all the way out of all the customers but by the end of the third quarter, we'll be out of all our rental fleet MAXXFORCE engines, okay.

So that happens, okay. You're not fixing and repairing them all the time, okay. On the PACCAR side of the business, well, we got a little caught up like everyone in the -- what was going on with the oil field here a couple of 3 years ago, right. So we got too deep, maybe a little bit too deep into that. Well again, it's not an , we have worked our way and got rightsized over there on that side of the house.

So that is reflective in what margins we're seeing, okay. So that should answer the leasing question. The parts and service side look, we're very happy with where we're at from an absorption perspective. Where can it go? I mean we had some good stuff going on this quarter. We had a lot of vocational business, there's lots of -- a lot of rigging and a lot of stuff going on this last quarter, not -- it's pretty high at levels and we should still be pretty solid in Q3.

So that contributed, it was by for -- not all of it I would say was broad based, I still feel good about those numbers I said earlier, the construction staff where I can't drive. We had been and took 1.5 hours which should be of less than 1 hour drive the other day. I just stopped everywhere and I've seen that in other states, so that I feel good about continuing, okay. I think that's going to continue and housing continues to look good. So I think that broad based part of it will be there.

And then the strategic stuff, that's the stuff that should ramp up, okay. That's what I'm looking for next year to take a larger percentage of the growth from a gross profit perspective in the parts and service growth. It will continue that our strategic initiatives do not need to go red from any quarter going forward. I can't tell you exactly the climb rate, but I can tell you they should continue to take hold and grow. So I'm not going to answer where they are going to go, I'm not going to get to the hard number where absorption could go because remember absorption is two numbers, it's a numerator and denominator.

There is the expense side in there too. But I do believe that I'm not going to cap ourselves as to where we can go either over a long term perspective. So I look for a nice close to the rest of this year and I have my arms better around '18 as we continue to move forward where we've got a little bit of 5 months left and the year coming up there and I look forward as these next 60 days . When I get on the call in October, I will be able to give you a lot better description about what I see in '18. As I said from a truck sales perspective, it's just going to be kicking off right now this quarter.

This is the kick off but also I have to go on with what the analysts say and what customer sentiment is, it's hard for me to feel bad about it. That's all I can tell you right now, but we haven't booked it, okay. So when you haven't booked it, you still got that little piece of anxiety and because it's not there yet. But you got to feel pretty good about it overall on truck sales and back to your original question, I'm not going to give you a number but I do feel good that it's broad based enough regardless of -- I may miss a little in one market if it goes away, but it's not going to just drop to the floor.

Alfred Wood: Can you help me on the -- with the tax rate it was little bit lower in the quarter.

Is that 39% still?

Rusty Rush: If you recall at the end of Q1, there was some of -- an accounting change and how you're accounting for your equity and stock compensation plans affect, run through your income statement versus your balance sheet on taxes. So really our tax rate from a normal, historical, operational perspective is pegged to like 38.75% right now, but every quarter depending on exercise activity, there's going to be adjustment to that tax rate. It could be up or it could be down, it could go either way. The first couple of quarters it's resulted in a lower tax expense that comes off of that rate. So to recap, we take pretax income on a normal basis and use a 38.75% tax rate and then we make an adjustment that is depending on -- that is adjusted for the equity activity.

This quarter, the adjustment was about $800,000 and we can update you on what that is every quarter, but it's not really predictable because we don't know exactly how people are going to exercise. So that's what you're seeing there.

Alfred Wood: And then last one, I'll turn it over. Just Rusty, can you talk about Navistar, new products in particular what you're seeing there and maybe some of the new PACCAR stuff as well?

Rusty Rush: I feel very good about both of my -- I feel good about all the OEMs on my class, whether be it a Ford product, whether Hino product, whether Isuzu product on medium-duty side and also obviously Navistar, Peterbilt feel good about their products on the medium-duty side right now. There's a lot of new products coming in on the marketplace in that arena.

On the Class 8 side, no question that both of my OEMs leading -- in my mind are leading the way when it comes to product investment. We've got a new model, I think we'll be showing, coming out over for solace, but I know that on payroll side, we're coming out with the new configuration, with sleeper side, with integral sleepers going forward. I guess I can say that. We're excited about that and that a couple of customers are very excited. In fact, we're going to build some for a couple, something we haven't had in the past, so we feel good about that on the Navistar side, super well received.

I talked to one large customer right the other day, said the product is running like it rained. So with the LT and they got their ATECS out on the -- on the offroads and in your construction type product, they came out with last year. It's been about a year since they came out with their re-done LT version, I think it was there in the fall last year. We're doing well with it. So I don't think I could be -- it could be hard for me to get down on any of my OEMs right now when it comes to advancement of product, because they're doing a great job out there, they really are.

Operator: Our next question comes from Mike Baudendistel from Stifel.

Michael Baudendistel: PACCAR reported in last couple of days and I just want to try to get and see how their part strategy fits with yours. They've talked about -- they've opened one large parts distribution center there. They are thinking about -- they are building another one in Toronto and they've talked about expanding retail locations for parts. And just trying to sort of see how that fits into your parts strategy, how it influences you, if it does?

Rusty Rush: It's a good question.

While we both have similar strategies and we're collaborative, we're both -- they're not exactly the same all the time. So, while we're both trying to grow our business. I'm trying to go across a broader network in just my PACCAR business right. I'm going across Rush Enterprises which includes the Navistar division, also a lot of medium-duty franchises too right. So it's not exactly the same.

At the same time, we work with them on the Peterbilt side of the house and continuing to expand our presence in the market, right and that's typically through all-makes and as they continue to get more vertical or be through all-makes parts sales and things like that as we go forward, we should produce good margins on the parts side. We're expanding inside our territories, that's one of the things you talk about growth. We actually will be opening up this quarter, we're opening up a new store in area of Texas, we're opening up this another store on northwest Houston, a large facility. And northwest Houston this quarter, we're looking at a couple other expansion opportunities inside of our territories and that really helps drive parts growth right. So those are collaborative efforts that you could reflect when you say they're opening up more stores.

Those are things that they're referring to also than I refer to. And at the same time I've got some independent strategies going on, that might be outside of my typical territories with my OEMs. They won't be branded with anything, they'll be branded Rush. But there are -- where I can't have a franchise from an OEM or I may not be able or capable, I'm looking at different alternatives to make sure, because I'm looking to service our customer, okay. It's not just parts I said earlier, it's parts and service parts being the biggest driven at the same time.

If I have to dig it up, I will go independent where I may not be able to get the advantage of having a franchise, but I guess I could tell you I have a lot of customers at Rush Enterprises and there are a lot of Rush customers too. And I realize they are loyal to a brand but they're also loyal to Rush, so you can make sense out of it especially with continued consolidation of national customers that are looking for that guaranteed price. And while I would not be able to do warranty and things like that, I can still pick trucks, even if I don't have. So that would be outside of territory and that is definitely an issue that is underway here at the company. I think there's -- as I said, I'm giving areas where we're collaborative and then we also have our own strategies that are outside of the collaborative strategies, inside of the territories that we represent PACCAR or for that matter Navistar.

We'll continue to look where there are areas that we can open inside of our territories and we'll take our own strategies outside of our territories. And again, we're getting too deep and as part of our old offer to double that, there's a lot of initiatives behind that doubling our part sales over the next few years that we're definitely going to undertake.

Michael Baudendistel: Great that's helpful detail. Just one last one on PACCAR, it's just fresh in my mind. I mean, they said that they have a -- and the used truck market, their brand to command a 10% to 20% premium over other brands, I mean, setting aside the MAXXFORCE engine, is that consistent with what you're saying?

Rusty Rush: Well nothing -- I've been in this business a long time.

I can go back to anytime and there's no question that the Peterbilt brand commands the highest value in the market. Other manufacturers have risen the gap may not, as much as it was 25 years ago. At the same time, the quality of PACCAR product as always, it's got that legacy with it right and the investments that they have made continue to allow their used trucks to command a premium in the marketplace, I guess. I'm not going to get into percentages with you, because that can vary depending on volumes and where you're at in supply side stuff at the same time can drive. That can maybe move up and down, supply side always does.

But for a premium and getting their demand and premium priced in the marketplace, yes, that has not changed. Over time, maybe the gap has moved, because everybody's quality went up to where it was 20, 25 years ago. But it still, demands in the used truck marketplace which is a second tier buyer right -- the first tier buyer, the second tier buyer and the third tier buyer, especially when you get down into the third life of the product, it definitely recommends it for you.

Operator: Our next question comes from Joel Tiss from BMO.

Joel Tiss: Terrible quarter guys.

Rusty Rush: I'll give it a bet, I struck out last -- this time, but we'll go back to the plate again next time.

Joel Tiss: There you go, you'll always have another quarter.

Rusty Rush: Yes, that's what I hope. I hope I'll get a job, at least the Board meeting this week and I'm still going to get --I hope I get a paycheck here this weekend, because when I see they have -- the first is on a Monday, so I should get a paycheck on Friday.

Joel Tiss: You have built quite the entourage there and people have lined up on the call.

I want to -- maybe this is more of a Steve question, but I wonder like as you take a step back and you think about all the changes you made in your cost structure and the mix, so your product has changed a lot in the last 5 years and just can you help us with some sort of an idea where do you think peak operating margins can get to or peak gross margins, I know it depends on a lot of factors, but it's getting -- it seems like it's getting a little less variable with all the focus on the parts side of the business?

Steve Keller: Joel, I mean it's -- with the strategic initiatives we have, it's a ramp up but if you look in our presentation, we put out a goal, a financial goal to be a $7 billion dollar company with 4% pretax margins. So that, I think, -- we don't give a specific gross profit margin that it depends on your mix in the year, if it's a 250,000 crash truck here versus a 200,000 that will change, because of the difference in back end margins and truck margins. But overall, we've hung a goal out there for now that we're pursuing to be have 4% pretax margin on a consolidated basis. So that's the goal we've publicized and that's one we're pursuing.

Rusty Rush: And I'm going to add a little bit to that Joel.

You've got to understand when you say how do you do that and I grew what -- so we were this last quarter. That has a long way to go and have a good quarter right. Well, the hidden thing is the growth, what we're talking about is growing the parts and service and that's the biggest growth area. You probably have some acquisitions in there. I can't go too along with that buying something.

But there will be that focus on that strategic initiative. That plus the other thing to remember is, It's not been easy being an Navistar dealer in the last 3 or 4 years. It has not been easy okay, so all I can believe is the PACCAR has -- there's a one down, I'm going to believe the grass will be greener on the other side. You can't go through all those MAXXFORCE. We're 4.5 years past the last one they built.

Now we're not through it all. I got a question with Board the other day, when you're going to be through all of that. I said, we've way crossed over the top of the hill, because what happens is valuations continue to go down on balance sheets of customers. So that the closer -- the more of the balance, the valuations go down closer to zero and the gap decreases right, with reminder zero. With that gap that spread decreases.

So I think that we're probably 65% -- 70% through that. So I think by the end of 2018, we will through that. I think you know that's all to me the nugget that's in there that we can get the returns that I believe we're capable of on that side of the house. The further away we get from this and while we still -- we will have some -- there are some headwinds mind you and the headwinds are there, it is 11% -- 12% market shares have kept the population from a truck perspective that we can work on where they used to run. Historically they were 18% to 20% --, forget the 25%, that was historically what they were in the 8 side.

And they were 40% player on the 6 and 7 side, where they've been more mid-20s% here the last couple of years. But I do expect those to come back so we'll have some headwinds. At the same time I think we can overcome those with our strategic initiatives inside of that brand and I do believe that their truck sales will slowly creep up and ramp up. And with the investment and the partnership with Volkswagen going forward, you've got to believe that we will return better out of those stores going forward than we have over the last few years with what we've had to deal with. So when you -- and Steve talks about getting it, you just can't put a number out there, you've got to have a plan.

Well that's two of the biggest things out there I think I'm talking to right now, as to how we get there. And that achievement of our strategic goals at the same time, getting a better return out of that side of the business, because it does not return as well as the other side of the business. But I believe that's the nugget that sits out there for us to hopefully get better. And again it's not an add water and stir thing, but with those two things -- those two items out there. I believe that -- and it continued by the way.

Don't worry, I hadn't forgot the other side of the house and I hadn't forgotten all my medium-duty stuff either. Hino, Isuzu, Ford brands, we continue to grow in those arenas and we will continue to grow in the Peterbilt arenas with initiatives like I just told you earlier, putting two more stores in this quarter in Texas. And looking at independents strategies where there's just parts and service room outside of our typical territory. So we have many plans that we believe in past, that we believe we can go down. There's an organization.

And to achieve the kind of things that we've laid out there for the organization and by that time I'll be close to mid safety, if I make it that long and you probably want to get rid of me anyway. Can you believe in 8 months I'm going to be 60 years old, but don't worry about, I'm not going anywhere, so unless you want me to.

Operator: Our final question comes from Brian Sponheimer from Gabelli & Company. Your line is open.

Brian Sponheimer: You spoke at the products that are coming out on the truck [ph] side of the business, we have seen Volkswagen buy another 250,000 shares or so of the company this past week.

Things are clearly heading in one direction--

Rusty Rush: Obviously I've been busy, I guess was at the board meeting in Colorado and got back in -- I didn’t know that, okay, thank you for that telling. I did not realize that. Okay.

Brian Sponheimer: It's all moving in one direction, I guess what my question is two parts, one, what's been the difference in how your dealers go to their customer since the equity injection and two, if there is a full confirmation where [indiscernible] Volkswagen outright, does that change anything beyond what you're doing right now?

Rusty Rush: No I mean, there's nothing bad I can say about I think I talked about it when Troy was talking with me last call, the Labor Day weekend, we all announced it, when it was announced last year about creating our shares, Volkswagen getting in that was a watershed day. I said at the time and probably still holds somewhat true, I mean the deal didn't get close to something earlier this year, right, so it took time to get all the deal closed and get the injection in there but at the same time it laid a path and it laid a path, a little path of stability, a path to long term viability in a global market because there was just did not make sense for [indiscernible] standalone anybody could see that even me from a North American platform so and then what it brought was credibility right from internal, from your people who worked for you, from your dealerships from the customers or everybody you know you had long term viability and credibility and we are seeing that in customers, just starting to see it by the way that you know we're 4.5 years past the last [indiscernible] engine was built, you got Volkswagen there and we are starting to be able to talk and get in the door so they told me about a deal just to yesterday, it was yesterday day before and it’s a fleet account right, I watched them try to do this deal for three years.

We couldn't crack in there. They sold some trucks, it wasn't a huge deal but they were able to break into an account that two years ago I guarantee wouldn't have done it because of the concern of the long term viability of the manufacturer. So those are the good things while they're just tid-bits but their antidotes what should continue as we go forward and this thinks continue, it should go that direction you got to believe it will. So but again it is not add water and stir thing, but those kind of notes when I hear those from people are good when it comes to that side of my house that's why I spoke earlier and that's one of the huge upsides inside of Rush Enterprises is one day if they can get back on their feet and get back to more historical volumes you know more historical market share and while I have some short term headwinds and I'm going to ask you little [indiscernible] from a parts and service perspective because of lack of product we will overcome those, we will fight through those but now we can start seeing hopefully some gains going forward that are going to be positive over the next few years. They are not going to jump three or four points in one year in market share not going to happen but can you continue to pick a way at it, continue to get the investment with the German partner and confirmation of the whole thing which we believe obviously someday will happen I think we all do, understanding the current ownership structure of Navistar and you've got to believe that confirmation will happen and both wagons desire to be a global player, clearly stated a couple three years ago and the only way into the North American market place as I watched people from other countries maybe the other side of the world tell me they were going to come to this country 12 years ago and I've kind of laughed at them and I said well at distribution you're not coming in the commercial business over here and Volkswagen realized that and they seized the opportunity and I look forward to nothing but -- it's only going to be good, I have to believe that they will bring decent jobs and stuff around the globe and so I got to believe there it will be good for Rush and I think it'll be good for Navistar as a whole and will continue down that path.

Operator: Thank you. I'm showing no further phone questions at this time.

Rusty Rush: Okay, well I would like to thank everyone for their participation this morning. We look forward to talking to you in October with our third quarter results. Thank you very much.

Operator: Ladies and gentleman thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.