Executives: Rusty Rush - Chairman, President and Chief Executive Officer Steve Keller - Senior Vice President and Chief Financial

Officer
Analysts: Neil Frohnapple - Longbow Research Jamie Cook - Credit Suisse Matthew Paige - Gabelli & Company Brad Delco - Stephens Mike Baudendistel - Stifel Andrew Owens - Bank of America/Merrill Lynch Joel Tiss -

BMO
Operator: Good morning, ladies and gentlemen, and welcome to the Rush Enterprises Inc., Third 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 is being recorded. I would now like to turn the conference over to your host, Mr.

Rusty Rush, Chairman, CEO and President. Please go ahead.

Rusty Rush: Good morning, everyone, and welcome to our third 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; 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 more 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, 2015, and in our other filings with the Securities and Exchange Commission.

Rusty Rush: As indicated in our news release, we achieved revenue of $1.1 billion and net income of $14.9 million or $0.37 per diluted share. As we anticipated, our financial performance this quarter was negatively impacted by a sluggish energy sector, choppy freight environment, excess Class 8 fleet vehicle capacity and low used truck values.

We are seeing positive results from our expense reductions implemented in the first half of the year. And we will remain diligent in managing cost throughout our organization. Additionally, we continue to invest in our long-term strategic initiatives including all-makes parts and service technology. In the aftermarket, our parts, service and body shop revenues were $336 million and our absorption ratio was 112.6%. Continued softness in the energy sector as well as the consolidation of several truck centers earlier this year adversely affected our parts and service revenues.

But, we are seeing an increased aftermarket activity on both coasts due to housing and road construction. We expect our aftermarket business in the fourth quarter will remain fairly consistent with our third quarter results after factoring in normal seasonal decline. We remain focused on our all-makes parts and service technology initiatives and while we are still in the early stages, the market is responding positively. We expect to see more significant financial results from these initiatives next year. Turning to truck sales both Rush and the industry U.S.

Class 8 retail sales [bring us] [ph] decline of approximately 31% compared to the third quarter of 2015. Our Class 8 truck sales accounted for 6.5% of the total U.S. Class 8 market. A choppy freight environment and general economic uncertainty combined with an oversupply of used trucks and low residual values continued to create challenges for Class 8 new and used truck sales. We believe our used trucks inventory is positioned appropriately to meet current market environment, but expect used truck margins to remain below historical averages.

ACT Research currently forecast U.S. Class 8 retail sales reach 201,000 units by year-end 2016 down 20.5% as compared to last year. Given market headwinds, we expect Class 8 new truck sales could decrease more than ACT's current forecast this year. And our Class 8 new truck sales in the fourth quarter could be down slightly as compared to the third quarter this year. For 2017, ACT Research currently forecast U.S.

Class 8 sales of 154,000 units down 23% compared to this year. We believe this forecast to be accurate. However, construction and refuse activity remains solid and we continue to aggressively pursue incremental Class 8 truck sales from new customers despite tough market conditions. In medium-duty our Class 4 through 7 new truck sales reached [241,069] [ph] units in the quarter down 14% over 2015. U.S.

medium-duty market remained flat over the same period. Rush's Class 4 through 7 new truck sales accounted for 4.4% of the total U.S. market. Our medium-duty results were impacted by the timing of several deliveries in an increasingly competitive market. However, our medium-duty truck sales remain solid especially with the construction related demand particularly in Texas and the Southeast.

Our ability to start bodied up trucks allows us to meet a wide-range of customers' immediate needs across the country. ACT Research currently forecast U.S. Class 4 through 7 retail sales to be 231,400 units in 2016 and 233,100 units in 2017. We expect our Class 4 through 7 truck sales in the fourth quarter to be consistent with our third quarter results. In closing, I would like to thank our employees for their continued dedication to our customers, while carefully managing expenses.

Their efforts are sincerely appreciated as we continued to work through tough market condition this year. With that, I will take your questions.

Operator: [Operator Instructions] Your first question comes from the line of Neil Frohnapple from Longbow Research. Your line is open.

Neil Frohnapple: Hi, good morning guys.

Congrats on a very good quarter.

Rusty Rush: Very good morning Neil.

Neil Frohnapple: Hey, Rusty, just clarifying the expectation for part service and body shop sales in the fourth quarter, so you are expecting sales to be really consistent with the $336 million in revenue despite the fewer working days in normal seasonally lower activity?

Rusty Rush: Well, I think what we are trying to imply that there is typically a little bit seasonality down tick in there. I think it will remain flat with fewer working days. So it will probably be less as a total, when you look at the overall total Neil.

Neil Frohnapple: Okay. Got it.

Rusty Rush: You are affected by the holidays.

Neil Frohnapple: Right, right. Okay.

And then Rusty, can you just help us frame the part service and body shop revenue outlook as we move into next year obviously the portion of aftermarket tied to new truck sales are likely to be down, but then, you have the initiatives in 2017 around all-makes parts and like I have seen energy might be a little less of a drag maybe a positive versus this year, so considering all of that, I know it maybe too early, but do you think aftermarket could return to revenue growth again in 2017?

Rusty Rush: No question. I mean that's the plan, right? As we go forward obviously, you are dealing with the market, right? And everybody likes to predict what markets are going to be, but given the initiatives that we really have been working really hard on since the Q1 of this year. But, with a lot of behind the scenes work [indiscernible] is not reflected currently in the numbers because there is a lot of work that goes into some of these strategic initiatives that we've embarked upon. The plan would definitely be for an up tick in parts and servicing. And again, well, I'm not sitting here and telling you, it's going to be in the oil and gas.

I would expect that we have hit the bottom. I think we hit the bottom about April. And if there was any pick-up whatsoever, it would be more than what we have had here in the last -- over the last eight, nine months of the year or so. So, I would tell you, given those initiatives -- the initiatives we have going are possible, I'm not here to guarantee any oil and gas pick-up, when you are in the bottom, there is only gateway to go right. So we definitely are planning on having some growth in the parts and service side of the business next year.

Neil Frohnapple: Okay. That's helpful. I will pass it on. Thanks guys.

Rusty Rush: Thank you.

I'm not going to get in percentages this year with you Neil.

Neil Frohnapple: Fair enough. Thanks.

Operator: Your question comes from the line of Jamie Cook from Credit Suisse. Your line is open.

Jamie Cook: Hi. Good morning. Congrats on a nice quarter. Rusty, I guess follow-up question as we look to 2017, you mentioned on the part side, do you think you will be able to grow your business next year. How do you think about your -- about market share opportunities on the new truck side and your ability to outgrow the market for 2017? And then, my second question is, you have done a good job on the stream -- in terms of streamlining cost, are there any incremental savings that we should expect in 2017 versus 2016? And then, my last question, is more of a market question versus a Rush specific question in the sense that we have heard a lot of chattering, OEs have come out and said that they are taking production cuts in the fourth quarter, what do you think the risk is, that we need incremental production cost in 2017? Thanks.

Rusty Rush: You bet. Well, let's start. Where do you want me to start Jamie?

Jamie Cook: Start with my first one, 2017, your ability to outgrow the market on the new truck side and then also saving potential incremental savings 2017 versus 2016?

Rusty Rush: Well, when it comes to the market, we would expect next year our goals internally, no guarantees, our goals internally if the market is supposed to be down 20%, our goals internally would only go down 10%, right? Given that we took a pretty good hit this year probably we took a larger hit on the Class 8 size when the overall market went down this year. And I would like to believe that we can go down half of what the market is overall from a truck sales perspective. Now, given that…

Jamie Cook: And wait, which brand is driving that for 2017?

Rusty Rush: That would be both.

That would be both brands. Obviously, when we can talk a little more and bit about -- Navistar had quite an announcement since we talked last. But, it would be across the board from my perspective not either brand leading the way, but both brands leading -- going -- doing it equally going forward. But, I would look for us to be able to pick-up not take the hit. We are going to work very hard not to take the hit at the market.

Now, that all said, getting trucks right now, sort of like add water to stir, right? You want a truck you get one of them. So, the backlog is not after, we all know where the backlogs have gone. And my backlog is actually slightly down. My backlog Class 8 is down about 7% pretty much flat on the overall -- on medium-duty size of the business. So, our backlog is sequentially down a little bit.

I'm hoping that we can get a few ideals, [run] [ph] some deals. But, I don't think that customers are that pressured to order when you can get trucks that fast customers are not that pressured to order because they are worried lead times, things like that. So, when you talk about possible incremental cuts, I will go first on expenses. We can always take more expense out, I'm sure. But, that will be market driven, I'm pretty, if we can maintain the numbers we have got right now, it will be very difficult backend numbers.

It would be very difficult for me to take more expense out without cutting service, okay? I may say that with customer service, CSI, our customer service index would probably take a hit and I'm not going to let that happen. So, it's a balancing act. Now, we did take some reduction like Q4 of last year was a very difficult quarter from a parts and service perspective. We took 10% hit or $4 million of gross profit. Our quarter -- a month rather, so about $12 million a quarter, so we had to make adjustments in this year.

Now, I'm not planning on taking, we didn't really get the big balance throughout the year that we typically get but we managed extremely well. I don't want to see -- I'm monitoring very, very closely, I just had a call with all of the folks last week reminding them that we cannot take parts and service seasonal per day average hit. So if we do, do that, we will make adjustments say as needed as we go forward. What I'm hoping, we don't have to because I don't want to dig into those customer service levels. And at the same time, I will say, we are continuing to spend money towards our initiatives, right? Those initiatives, I talked about from a technology -- service technology perspective and the all-makes parts business, trust me, we are still got the pedal down on the floor on both of those initiatives.

So, regardless of where the market is, we will go to the right long-term things to do. As far as the manufacturers taking, oh, Morris, you know, as you mentioned there have been production cuts pretty much across the board. We will just have to see what the order intake is -- if it doesn't get any better could there be more incremental order intake, you bet. I think both the manufacturers I represent from a Class A perspective, the two I'm closest to -- I think if ACT's numbers -- for once Kenny and I agreed, we both are on the same number, that 154,000 U.S. retail number, if we maintain to that level.

I don't believe they will need any more cuts. But, if it takes a hit -- if it takes a little -- another 10% hit or something then that -- there could be cuts no question.

Jamie Cook: Sorry. Then, one last question because you brought it up, I wasn't going to ask you publicly but you brought it up, so I will. I mean can you just talk about your view on the Volkswagen Navistar agreement what you think that means for Navistar's market share longer term and just how you think about what engine wins out under that scenario in over what timeframe? And I will get back in queue after that.

Thanks.

Rusty Rush: Sure. No worries. Don't mind talking about it at all. That's a great thing.

I mean did it mean something right immediately not really. I'm mean there is no -- I can't tie a number to it and what it meant immediately, but what did I tell folks, what it did do, take care of the long-term stability of Navistar, okay? You can see it transitioning over the next few years probably with Volkswagen, I would imagine have a larger stake and be involved in it. So, the most important thing I guess it did is when you walk out, you talk to a customer and competition with other OEMs and they say well, this is going to happen to him, and that's going to happen to him. Now, you can walk out with your chest popped out. And say look we are solid, right? We are solid.

And also from an internal perspective, if I worked at Navistar, I can walk in that office every morning and say we are solid from a long-term perspective it's going to mean a lot. I would think when you get them back in a better position to be able to handle the engine emission issues to come forward and have a proprietary engine into the next decade, there is no -- these next decades, wound up like three engine government deals we got to deal with in 21, 24 and 27. So, now, are they going to just -- no [commerce] [ph], isn't going to go away, [commerce] [ph] will maintain a large portion of Navistar's business and I would believe, but it will be a balanced act and I'm not sure how that all works out. But, you would have to believe, that yes, Volkswagen will start integrating their engines 2019, 2020 as they work towards integrating with Navistar and putting the two brands together to get the scale. Why did it take scale and that was the one thing that Navistar was missing the scale to be able to handle all the investments, [indiscernible] investments they needed going forward.

So, we are very excited about it, right, from a long-term perspective.

Jamie Cook: Okay. Thank you. Congrats on a nice quarter again.

Rusty Rush: Thank you very much.

Operator: Your next question comes from the line of Matthew Paige from Gabelli & Company. Your line is open.

Matthew Paige: Good morning and congratulations.

Rusty Rush: Good morning, Matt. I will see you in a couple of days.

Matthew Paige: Yes. That's right. Looking forward to it. I was wondering if you could describe any differences that you are seeing in buying behavior between the lager and smaller fleet.

Rusty Rush: Pretty much a broad -- the larger fleets that had to slowdown for sure, right? I think if you go read some of the reports that have come out from some of the public carriers, obviously, the biggest -- and this is across the board though, I mean, no one asked me yet, but, I have got to -- I can't go without touching on used trucks.

The biggest overhand is used, I know people that probably have to make some adjustments inside their depreciation schedules given the devaluation of used trucks, right, and this part of the cycle. So, I think that's affecting everyone. I think it maybe affecting some of the large fleets a little more. We are still seeing -- we are seeing still decent activity from the smaller folks. I think it really affected some of the large carriers more and adjusting their fleets to that.

And some people are having to hold their trucks longer, right, given the fact that the values of used trucks are down, just as simple as that. So, instead of -- if you typically own a say around a four-year cycle you might have to go to a 54 month cycle or something else trade cycle, just because it's hard to -- again, you can't fight the market and the values are down. There is an oversupply of used trucks right now my friend. So that's probably the biggest thing and that affects everybody. But, I think it probably affected some of the fleets even more, I think what you see in some of the order intake numbers that have come out so far.

But, we will get a better idea of where things out over the next three months as we watch, October typically is the start order season, I will be interested to see what the order intake was in October and break it down a little more once I see it come out here in a few days so.

Matthew Paige: All right. And then, just a follow-up on that. Have you seen any changes in constant level of trucks that customers are buying?

Rusty Rush: No, sir. I mean, if anything added content, right, with all the technology, it continues to come out whether it would be people are seeing all the technology, I'm not a super expert to help with their insurance and the regs and things like that.

I think the [indiscernible] boardings and all the different stuff that's out there on the market continues to come on the market, right? Technology is a just an amazing thing. And now, I will say the truck business is always behind the car business about 15 years. Let me tell you, we are catching up quickly. I think it's better for everyone, right? When I mean that because this makes -- whether from an engine perspective, better fuel mileage, better safety, so products are introduced to the market and they can say bring an ROI and there have been products that have been introduced over the last few years, customers will take them, okay? It just as to bring an ROI with it.

Matthew Paige: Perfect.

Well, I appreciate the color. And I will see you next week.

Rusty Rush: Thank you. See you in the conference.

Operator: Your next question comes from the line of Brad Delco from Stephens.

Your line is open.

Brad Delco: Good morning, Rusty. Good morning, gentlemen.

Rusty Rush: Good morning, Brad.

Brad Delco: Rusty, you made a comment about, I guess looking for new customers, I'm assuming that's on the Class 8 side.

The reason I ask, you have pretty strong average selling price in the quarter. I'm assuming that's because of the construction and refuse market. Is that correct? And then, I guess your assumption for average selling price in the fourth quarter, is that really what's driving the -- only down slightly, I don't imagine you have any fleet business in these numbers, right?

Rusty Rush: There is some, but not a lot. Okay. I think that's why when you're seeing some of the fleets that we didn't have a bigger mix of this year that affects margin, right, because obviously, large customers buy.

When you are buying in volume, you buy probably the better price and you're buying 500, you are buying five, right? So, where in some fleet business involved in there in the fourth quarter, but we expect it down. I expect deliveries to be down, when I say slightly, we are slightly being, right? We could be down a few hundred deliveries, okay? I think we are -- because we were up a little bit more because some of that is just timing, okay? Lot of times it has to do with timing too. So, when you start talking about moving a few hundred units here this way or that way, it can just -- timing of couple of deals, you can move it. But, I would -- moving down I would expect that right now to be down a few hundred -- couple of 300 units or so, that would be off, depending on the timing. But, I think when you look at the backlog and I say the backlog of Class 8 is down 7% that sort of is indicative, right, 10% off -- 10% something like that.

You can sort of lead that into deliveries.

Brad Delco: No. That's great. Thanks Rusty. And Steve, I know each fourth quarter; we do see a step down in SG&A to the extent you can provide the details on what could be expected this year? Could you provide that and if not -- if we don't necessarily see that trend, why would that be the case?

Steve Keller: You will probably see some step down that's normal.

It depends on how you are -- we have told you guys, a lot of it is based on some of our internal self-insurance accruals and adjustments and true-ups to their actuarial determined amounts. So that depends on your experience and your activity in those various insurance programs that's the largest driver of it. And the other piece is just some benefits and taxes and things like that that expire as the year goes on as people reach different earnings amount. So, you should see it. But that number varies from year-to-year and it depends upon the experience you have in those insurance program.

So I can't tell you the amount, I can tell you but nothing has changed in our process of how we approach those and how we book them from a quarterly flow into our numbers.

Brad Delco: That's great. That's all I wanted to hear. And then, maybe finally, and maybe just a follow-up to an earlier question, on the used truck market, that is a big topic. I think there was a comment in the press release about seeing used truck margins sort of below historical norms.

Can you kind of define that how long do you think that's going to happen. And what impact if any is this having on your lease and rental business and it had to change any sort of residual value expectations or change depreciation in that business?

Rusty Rush: No. Well, first off, let's talk about, the answer is no. We haven't. We constantly pay attention to it.

Yes, has it cut into gain on sale? No question. Has it put us in a position where we feel things are right around, no, just cut into gain on sale, right? We are not getting what we were getting couple of years ago, or a year ago. Back when we got to the summer of 2015 because that's when used trucks started going down. And as far as margin, we were down a couple of points, I would imagine. I got to move volume, right? So, I would expect used truck margins to be down couple of two, three points going forward.

When is that in, I don't have an answer my friend. I got this answer for you. It's not going to be any time soon because we enjoyed what I thought was one of our longer good used truck runs. We were around for almost 4 years of really good volumes and good margins. That said, there is a lot of trucks laying around, lot of used trucks man.

And that's not going to go away anytime soon. The used truck market -- I was at [indiscernible] for a while, pretty simple. Just look back and see what was sold, you can't recreate these trucks, okay? Just look back in history, pretty easy to see what was sold in what years and they lay it out. You want to say the over the road business is typical that first owner is a four year owner, it's not all, but you got to peg your numbers somewhere. So it’s a four year owner.

Well, let's see 2013 that was only about 118 that would be, why we have come back in 2017 that's only 188,000, 2014, it was 227,000 U.S. retail that would if you say it's four years that means that's 2018 come back number. That number is right, that's not everybody, some people are on them eight, 10 years, [some people] [ph] are pegging a point. And then, 250 three year and 2015, we only got close to two year. And so there is a lot of used trucks out there.

We have had a drying up of export. Export typically I think from my perspective was 25,000, 30,000 units, we [don't miss] [ph], sound like a lot but that is a pretty good relief out. So what rises up, which it has and you just continue to put more pressure on it. There are a lot of folks with used trucks right now. And I don't think they have all been put on the market yet.

So, I don't see -- I'm not preaching doom, I'm just telling you reality there. The reality is, they got to work their way to the system. And the reality is, the dynamics and demand for used trucks are less than the supply side. And so, we will -- [indiscernible] continued. But, what happens is, it eventually reaches a point where the values will stop, we will have to wait for 2019, trust me, provide with the -- for devaluation used trucks to stop.

That wouldn't be that long. But, what will happen is, at least where you can buy whatever -- you can buy three decent used trucks for the price of one new, so it will create an entry point for some people into the market or some people will look at, in fact, neutral business, a good quality 400,000 mile used truck, I might buy -- I can get three of those for the price of new one. I might do that 2.5 or 2, whatever that number is. And the market sort of self-out and when that happens that will be back when you down in a trough, but until such time and until there is enough demand, we all know freights been choppy this year guys. I mean I didn't see any public carrier, just told me how great freight was this year, or how great their gain on sale was on used trucks.

So, the contrary there had been anybody. So, we are just working our way through it. I have done this numerous times in my career, trust me. And it will work itself out. I'm sure life always does.

But, until then we will monitor hours very closely and I think you can help that I got to keep pushing him through the system because if you -- I don't want to have any large big used truck. So we are very much on top of it and believe we got that properly balanced, but they're touching the margins to do that at the same time. So, I know I have given you a long winded answer, but I was very -- that was very much -- this morning talk a little about used trucks because I don't think sometimes people understand the overhang is out there and the determent to new truck sales that we will deal with next year. That being said, we are trying to manage in our way through as good or better than anybody.

Brad Delco: No, I believe so.

Well, thanks Rusty for that detail. I will hop back in queue.

Rusty Rush: You bet.

Operator: Your next question comes from the line of Mike Baudendistel from Stifel. Your line is open.

Mike Baudendistel: Thank you. I just want to ask another one on SG&A because that's really, really the positive variance was in the quarter, I know you said it was going to -- probably go down a little bit in the fourth quarter. But, as we start to think about 2017, is that $142 million roughly, is the right run rate to use or is there going to be some -- just natural inflation there?

Rusty Rush: Well, we are pretty seasonal, by the way welcome, nice to -- [indiscernible]. Remember we are always going to be the highest -- our highest, I break into two pieces my friend. So, [indiscernible].

But, I think, yes, put it to the side because the answer is pretty variable, right, that's going to be driven a lot by -- almost totally by your truck sales, okay? So that will -- so, then, imagine business -- I got to imagine G&A piece, it's just a G&A piece. Yes, we typically are best as we get through the year, our best G&A quarters are always typically three and four and our worse is still in Q1 because everything kicks back in from payroll taxes to lot of other taxes to -- just a lot of stuff kicks back in early in Q1. So we are going and you will get an up tick, no question from our equity programs everything it kicks higher and harder in Q1. So, we will look -- I'm not going to say but historically, I would look forward to be in line with normal percentage wise increases, okay, in Q1. And then, we will work it down as we typically as we go through the year or not, we won't have that big hit anymore.

So, but that being said I'm going to manage the market, as I mentioned earlier, if we can maintain our parts and service profits from a per day perspective, I understand how it is, and I will give that up. But, as I have told my folks that we got to maintain and we can't go through what we went through last Q4. And I don't anticipate that, I anticipate some possible softness, but last year in Q4 from a profit perspective, 75% was oil and gas related, what we took was parts and service gross profit. So hopefully, we will be able to maintain and then it will be just like we typically go through a year where the bump in the first quarter and then we work through the rest of the year from a G&A perspective. And like I said, yes, it's going to be totally reflective of products sales.

Mike Baudendistel: Great. That's helpful. And needs to the high level ones, since I'm new to following you is, could you just talk maybe a little bit on your strategy of how you grow the parts aftermarket and service revenues or what levers do you have to pull there to increase your market share?

Rusty Rush: Sure. Well, we have been fairly open strategically. We are going after the all-makes parts business in a big way.

We are not the only one out there though. But, we are putting a lot of initiatives in place and I don't -- I talk to you -- I really don't want to talk about some of the industrial, what I would call -- like I think advantages but the levers that's what we are going after, okay? And we are going after the all-makes parts business. We are going after connectivity with our customers from a service perspective with some of our -- we got some crazy stuff going on out there. It really hasn't come to fruition from a revenue perspective, but it is working for a lot of our customers on the service side that we are keeping them up and running. The better job that we can do, keeping our customers on the road, whether their haul and freight picking up garbage, four in concrete, drilling all wells, whatever they are doing.

The better job that we can do with service connectivity through telematics, through our call centers, through all the different things that we offer and continue to roll out throughout this year. And we have not -- I'm personally going on the road for about 3 or 4 days myself and getting to a lot of customers here in about three weeks. And make sure everybody is aware of some of the things that we are doing. Back to the parts things, we are working extremely diligently to go after that all-makes parts business because that's the biggest piece of the market out there that's probably the most opportunity that we have. So, without going into all strategies and stuff in detail, which I don't really want to do because that's for our folks just to understand that we believe -- I wouldn't be talking about it, if I didn't think we can achieve over the next -- it's not like I said earlier about something -- it's not an add water stir thing.

It's not instantaneous gratification, but it's something that once you get those initiatives in place, once you're going after and your people are focused and dedicated to it and you support them with the right tools in the tool box. It’s achievable for us. I have never seen this organization; we set our mind to some; we get it done. And I'm looking forward to -- delivering for the company, for our shareholders and everyone on these initiatives over the next few years.

Mike Baudendistel: Great.

Thanks very much.

Rusty Rush: You bet.

Operator: Your next question comes from the line of Andrew Owens from Bank of America/Merrill Lynch. Your line is open.

Andrew Owens: Thanks.

Rusty Rush: Good morning, Mr. Owens.

Andrew Owens: First question on margin on parts, lots of trending towards the lower end of history and I thought part of the sort of downward traffic, it's probably from the fact that you had field service technician with sort of [shale] [ph] business like relatively low, why the sales are still in lower end and what it takes to make the margin up in this business over the next year or two?

Rusty Rush: Well, okay. When you speak part Andrew, if you are going to parts and service…

Andrew Owens: Yes. I'm talking about obviously -- yes, the way you guys reported.

Rusty Rush: The way I reported is splendid. Honestly, it's pretty consistent the last year and given that the biggest hit we took last year, I was just looking at the numbers from Q3 of last year to Q3 of this year. The biggest hit we took was service. Parts sales were down a little, but service is way off right. And along they had to do with the oil and gas business, okay, a lot.

And when we lose more service then we lose parts. Service is a much higher return than the parts business. So, that's a mix, right? There is a blend in there. But, it's still fairly consistent. I mean, we have been running around 36, give or take half a point for the last year and half or two.

So, I think it just moved, one time was 35.7, one time it was at -- up to 36.9, but it's been really run the last couple of quarters 36.1, 36.5, 36.3, and so that's really about what we are running blended wise. So I don't see that has being -- now, if you go back eight or 10 years, this ran a little higher. But, it ran higher but there was -- competitive pressures and it's a mix of business. Most of it, really want to look at it. We probably taken a little bit of parts hit and sometimes we may have taken a little bit of service hit, but we are out there, we might have to discount a little more to get a large customer service business.

And a lot of that, if you go back, then we also ran a whole lot less 10 years. So, I can't cash percentages, but I can cash dollars. So we have to manage our way through that that would be the best answer I could give you. I wish I can give my margins back what they were 10 years ago. But, if you run close to 40, but to go out and capture volume some time you might have to discount a little more and if you grow your parts, more than you grow your service then that's a lot less margin than the service margin.

Andrew Owens: But, this range should be fairly consistent, we shouldn't -- it is because one -- field services will come in right, I mean if rig counts keeps improving, I would assume that tax will go back out on to the field. So that's been -- that in two years, we can have additional margin pressure on this business.

Rusty Rush: We can have additional -- it's possibly additional margin. But, I expect it to get back to 40 right now. Especially, if we are keeping our parts initiatives because that's going to bring a little lower margin business with a higher dollar piece, right?

Andrew Owens: Right.

But, you will not be modeling it, but can it go down to low 30s?

Rusty Rush: No. No. You just keep it where you got it. How is that? Where we are running right now would be what we anticipate because we anticipate growing our service business and our parts business really if you look at next year, our internal growth budgets are the same, okay? So, we would anticipate it staying around where it has been running for the last year and a half or two.

Andrew Owens: And just to clarify just a follow-up question, on your commentary you gave very long -- good answer, long answer, exhaustive answer on --

Rusty Rush: I tend to ramble a little I know.

Andrew Owens: No, no. On used equipment, I just don't want to belabor that but I would imagine that used equipment is an additional incremental negative going into 2017, yet at the same time you seem to be pretty confident with your macro outlook and it seems to have as far as I can tell unchanged versus the prior quarter. So, given a little bit more negativity on used pricing, how comfortable are you with 2017 outlook for macro?

Rusty Rush: Sir, I don't put any upside in it, okay? If there is anything slight downside, but I think look -- if you look back even when we have -- forget 2009/2010, if you go back -- back in the days, take 2001, remember thought recessionary, but take those it says not but pretty stagnant growth. But, when we had a little recession back in 2001//2002 that was three years running there, average Class 8 market was not because I don't count 2009 because I don't count 2009/2010, excuse me, those were abnormal. But, you can go back to two times before when you hit that part of a trough; specifically around a 140,000 was the average bottom.

I'm hoping that become -- as long as we don't have extended recession, I'm hoping that bottom was in this 150 something range, right, for U.S. retail. So, and I believe that it can maintain, but I don't see a lot of upside in it and the biggest overhang to me, it is used trucks to get, I know I give a long winding answer to it. But, I was trying to make sure everybody truly understand that doesn't mean we are not going to manage our way through it and that doesn't mean I don't think we can -- I don't give earnings outlooks for anybody. But, obviously, our goal is to maintain in spite 20% headwinds in the Class 8 truck market next year, okay? At least to be able to maintain and grow some of these other parts of our business and manage our business expenses diligently and produce a decent year for everybody.

Andrew Owens: Well, Rusty, you had great execution, your market cap is back over a $1 billion today.

Rusty Rush: Right. There you go. That's a good thing. I'm number one quite a while there earlier this year, but I'm not charge of that.

You guys are the shareholders. I'm here to help run a business with 6000 and other people.

Andrew Owens: Congratulations.

Rusty Rush: Thank you very much.

Operator: [Operator Instructions] Your next question comes from the line of Joel Tiss from BMO.

Your line is open.

Joel Tiss: Hey, guys. How you are doing?

Rusty Rush: Good morning, Joe.

Joel Tiss: So, I wondered if there was any color that's worth talking about, is there any kind of initiative from the OEMs to push down production a little harder in the first half versus the second half to work on cleaning out some of the excess inventories or is it just more kind of steady as she goes and let the market clear itself over time?

Rusty Rush: Well, I think we will be able to give a better read on that Joel, we will see what the next [16 and 19 mixed] [ph] when we get through December; know what the order intake number is. It will dictate.

It will tell us what to do. The market will drive the OEMs, trust me there. I don't see any big initiatives to get after and help relieve the inventory levels that are there right now. I do see production coming down but I think it's more related to backlogs and order intake, right? And if we don't get any more as I said earlier, I would believe if the 154,000 U.S. retail which ACT out there and that's right in the ballpark to my box currently.

Then, I would expect that the two OEMs, I represent can manage through, it's a race. I think they both have come down some. We are cognizant of that. And I will tell them speak to themselves, but I think they both come down some in their production. And they would be in race that would be sustainable inside of that market.

Now, if we take some hits, it goes down 10%, a little low on the outlook then I would speak to everyone to make adjustments because I think they are -- where they -- where they could be for the market is projected out there right now. But, if you don't get any order intake and you continue to eat away your backlog and your lead time shortens, then you have to continue to make adjustments. As I said, though I don't see much upside to it next year, I really don't. But, I think that it should fall about where ACT says and where I say, I still think we will have that type of year. The only issue is for some people that's 100,000 less units and we didn't -- that we did in 2015, right? That's basically a 40% off of 2015 from a retail sales perspective on the eight sides.

But, I think that I think both the OEMs again that I represent are geared for that currently, but if it goes down anymore then I'm sure they would have to make adjustments.

Joel Tiss: And then, I wondered if you can frame for us the incremental benefits on the parts initiative in 2017 over 2016?

Rusty Rush: Well, Joel, I'm looking as I said was some growth, right, I'm not going to put more than what we typically look for. Typically I can save 5% or 6%. No, I'm looking for higher single-digit growth next year on parts and service. Now, but that's we are looking for internally.

I think you will only accelerate as the year goes on as the initiatives get hold. We are just -- really and truly, I mean, I started talking about this one, first quarter of the year. But, I probably got out little over Steve's, I think, okay, here it is instantaneous, right, well, it's not then quite work that way. And as we continue to gear up, I'm not going to quantify it other than what I did just a second ago, that's about as good as you can get out of me for quantifying it. But, I wouldn't speak about it if I didn't think we couldn't achieve it.

And it could be as I said when you look at the organization Class 8 is off 20% and we want to maintain our results that should tell you we got some growth in there somewhere.

Joel Tiss: And then, just last, with the market under pressure, is it time for you to go back on the offensive and look at continuing to consolidate the industry, or it's still too soon after you did your own internal restructuring and you need to let everything settle out?

Rusty Rush: Well, those, referring back to when we did. Those were just deals that needed to be done whether the market was up or down and probably should have done them earlier because I had stores within 30 miles of there, it was just -- that was just really most of that other than one -- mainly all on the Navistar side, it just goes back into the heritance of the organization and they had too many dealers on top of each other and then we had too many stores too close together. And we got still with today's technology and mobile service technology and parts of ecommerce. So we can still take care of customers without having a brick and mortar there that we historical had.

So that really didn't have anything to do with timing us looking for deals. I would expect as everyday goes by the opportunities would increase next year. But, they got to make some sense and given the growth of the organization in the last 20 years. I got a lot of the math covered, but I won't cover, so my opportunity is to give less and less. But, there are some out there areas and countries that we would like to have some more stores in.

And we will be focused on those areas and see if the opportunities arrive. But, it's always, it is there except takes more into willing seller-- a willing buyer, you got a willing seller too, right? So, and typically these things are brought and sold based upon lack of succession in the company because they are all private. So, but, realize that if the opportunity arises, yes, we would grow and we will be watching diligently to see if something pops up.

Joel Tiss: Great. Thank you very much.

Rusty Rush: You bet.

Operator: I'm showing no further questions at this time. I would now like to turn the conference back to our host.

Rusty Rush: Okay, folks. We appreciate you joining us today.

We will be talking to you -- I guess it will be a while in February with our year-end results. Thank you all very much.

Operator: Ladies and gentlemen, this concludes today's conference. Thank you for your participation. And have a wonderful day.

You may all disconnect.