Executives: Rusty Rush - Chairman, Chief Executive Officer and President Mike McRoberts - Chief Operating Officer Steve Keller - Chief Financial Officer Derrek Weaver - Executive Vice President Jay Hazelwood - Vice President and Controller Michael Goldstone - General Counsel and Corporate

Secretary
Analysts: Faheem Sabeiha - Longbow Research Rhem Wood - Seaport Global Neil Frohnapple - Buckingham Research Mike Baudendistel - Stifel Joel Tiss - BMO Capital Markets Shawn Kim - Gabelli Brad Delco -

Stephens
Operator: Good day, ladies and gentlemen and welcome to the Rush Enterprises, Inc. Third Quarter 2017 Earning Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Mr. Rusty Rush, Chairman, CEO and President.

You may begin.

Rusty Rush: Good morning, everyone and welcome to our third 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 risk 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 earnings release, we achieved $1.26 billion; in net income, $29.8 million, or $0.72 per diluted share in the third quarter. We are very happy with our financial performance this quarter. Overall economic growth and continued strength in most market segments throughout the country positively impacted our record high profitability this quarter.

Our Class 8 and Class 4-7 truck sales outpaced the industry for the second quarter in a row and we experienced significant growth in our aftermarket revenues. We remain committed to our long-term strategic initiatives, including all-makes parts and service, which are now benefiting us financially. In the aftermarket, our parts and service and body shop revenues were $376 million, up 11.7% versus the third quarter of 2016. Approximately, 40% of this growth is attributed to broad-based strength in the overall commercial vehicle market, 35% is attributable to increased activity in the energy sector, and 25% is directly attributable to progress made towards our aftermarket parts and service strategy. This aftermarket growth combined with good expense management resulted in quarterly absorption ratio of 120.9.

We anticipate activity for aftermarket services to remain solid in the fourth quarter. We expect revenues will be negatively impacted by normal seasonal declines. Turning to truck sales, we sold 3,647 new Class 8 trucks in the third quarter, up 21% over last year and accounting for 7.1% of the total U.S. Class 8 market. This growth was due – third quarter last year was due in large part to increased activity from energy customers and further strengthened by continued demand from construction, refuse, general freight and other industries we support.

While used truck values have stabilized and our used truck inventory is well-positioned to support current market demand, we expect the supply of used trucks to increase in 2018. ACT Research currently forecasts U.S. Class 8 retail sales to be 190,000 units in 2017, down 3.5% compared to 2016. We expect the U.S. economy will remain strong and our Class 8 new truck sales will remain solid in the fourth quarter.

However, we expect our sales mix to shift more towards fleet trucks, resulting in decreased new truck gross margins in the fourth quarter. In medium duty, our third quarter 4-7 new truck sales reached 2,830 units, up 15% year-over-year and accounting for a 4.6% share of the U.S. market. Our medium duty sales performance was again strong this quarter, largely driven by our in-stock, work-ready inventory to serve vocational customer needs around the country. ACT Research forecasts U.S.

Class 4-7 retail sales to be 238,475 units this year, up 5.4% from 2016. The medium duty market remains strong and we also expect our Class 4-7 sales to be solid in the fourth quarter. I would like to thank our employees for their hard work and dedication to our customers, helping us to achieve such strong results this quarter. I was also incredibly proud of their generosity and thoughtfulness, donating time, goods and money to support fellow employees and the community at large impacted by Hurricanes Harvey and Irma. With that, I will take your questions.

Operator: [Operator Instructions] And I am showing our first question comes from Faheem Sabeiha from Longbow Research. Your line is now open.

Faheem Sabeiha: Hi, good morning. Rusty, can you provide a little more color around your comment that new Class 8 truck sales will remain solid in the fourth quarter? I mean, is the third quarter unit sales level a good run-rate for the remainder of the year or should we be thinking about a number similar to the second quarter or maybe something in between the second and third quarter?

Rusty Rush: Well, you hit it right on the head. It’s all about timing sometimes, especially as you get to year end because of the holidays and everything you deal with.

Some people trying to accelerate it, some people trying to not accelerate delivery. So, a lot of that’s driven by timing. So when I say solid, could it be off a couple, 300 units? Sure, it could, depending on the timing, but you are right in there somewhere probably in between, up to where – up to where our third quarter performance was, but somewhere in between the two, just really based on timing, but overall as our backlog, while down a little bit – we are right in the middle of selling season. Okay. It still remains strong and a lot stronger than it was at this time last year.

Faheem Sabeiha: Okay, thank you. And can you talk a little about the discussions you are having with fleets regarding their purchase plans for 2018? I mean, just any concerns they may have, looking out into next year and just how orders are progressing thus far in the fourth quarter?

Rusty Rush: Well, ATA just ended, right this week and really that’s sort of the kickoff. This month, October, typically is the kickoff to order season, right. So, I really don’t want to get – without getting into details and stuff like that, but from an overall perspective, customers are fairly bullish on next year when you talk about fleets. Fleets are bullish on where they are heading.

Rate increases are on the horizon on the TL side. I think that was very – that was a dominant point of discussion here this week at ATA, a takeaway from it. So replacement – there was a lot of activity going on, but I think you will see all that come to fruition here over the next 30 to 60 days depending on which customer and working out the details. And everybody is out – all OEMs and every one is out there in the mix trying to get their share of the business and I am sure when it sorts itself out we will get more – we will get our share of the business, but I anticipate – and I think ACT’s at 200,000 U.S. retail next year.

And I don’t see a lot of downside in my mind to that number right now, just a little bit different mix maybe than what this year was with more fleets in the marketplace in 2018.

Faheem Sabeiha: Okay, thank you. I will pass it on.

Rusty Rush: You bet.

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

Your line is now open.

Rhem Wood: Hey, good morning.

Rusty Rush: Good morning.

Rhem Wood: First, congrats on a great quarter here. My first question – Class 8 sales to go back to that were really strong.

Can you give us some more color on that? Just how much was acceptance of the new Navistar product; how much was energy pickup, were there any large fleet sales in that? Just kind of some more color on the segments there.

Rusty Rush: Yes, you bet. Well, first I want to step back and say a minute ago I misspoke. ACT moved their number up since I looked last. I just looked now it’s 218,000 for next year, right.

So probably up a little over 10%, really closer to 15% over this year is what they are projecting for next year. But stepping back and looking at Q3, I mentioned on the release that if you take Q3, I was speaking Q3 last year of ‘16 versus Q3 of ‘17, the uptick in that was basically related to energy. Now, that’s not the whole thing, but the 600-unit uptick in it was related to energy. While I don’t expect that to continue, that explains Q3. We had a lot of vocational involved.

I mean, not just to the energy side, but across the board. That’s why when I mentioned that I expect – and it wasn’t just large customers, it was very broad-based, with small, medium and large customers, okay, but a lot of vocational. We have had a lot of up-fitting, which – so I don’t anticipate as much of that in our mix going forward. So when I mentioned that margins may go down some, they may, but at the same time, business is still broad-based and strong. Vocational is not going away.

We are just going to see probably a little more fleet into the mix – a little more over the road fleet business into the mix and not your smaller vocational stuff, but again, Q3 was again I will say broad-based, but the uptick from Q3 of last year to this year was related to energy, because we didn’t have any energy sales. So, those 600 units or so were energy-related units to the uptick, so...

Rhem Wood: Okay, thanks. That’s helpful. And then the parts and service, obviously it’s – the growth rate has been accelerating for six quarters now.

Can you talk about how we should think about that kind of growth rate in ‘18 getting to your longer term goal in 2022?

Rusty Rush: Well, if there is anything I am excited about it’s – sometimes, you can’t manage the truck market totally, right. The truck market will be what it will be. But one thing we have been working very hard diligently on the last 2 years plus is our strategic initiatives. And we are really starting as I mentioned on the last call – I think I said I attributed some of the growth in parts and service revenue, about 10% to 15% of it, to them. I can pretty much pinpoint that about 25% of the growth in Q3 was attributable to those.

So, we are very excited and hoping to continue to ramp that up as we go forward. Now, it’s a long-term process, but at the same time, when you can start seeing the results of the initiatives and the efforts that are under place, it gets you kind of excited. I mentioned, if you listened earlier in my opening comments, been about 25% attributable to that, about 35% to energy and about 40% really just to overall market growth. So again, we believe we can sustain it. Obviously, the proof of the pudding is in the eating, so we have got to execute on it going forward.

But – and back checking across the country, we just had our annual senior management conference this last weekend for 3 days with all our senior leaders from across the country and everybody’s pulse rate was pretty strong still. They felt good about their areas and what was going on. So, yes, we would like to see – whether we can hit double-digit, we want to be high single-digits anyway, but our goal would be to get to – to get up to double-digits. But if we can get up to high single-digits, especially as we get into next year, because our comps are going to continue to get harder next year, but if we can hit a high single and get to low double, we will be very excited about where we are at. And we believe in our plan from myself on down through all 6,400 employees, I believe we all believe in what we are trying to accomplish going forward over the next 5 years.

So, we are just excited to keep moving forward.

Rhem Wood: Good, yes. And then so SG&A, can you talk – I mean, typically it comes down a little bit in the fourth quarter. And then how should we think about it for, I mean, not specifically G&A. It typically comes down a little bit in the fourth quarter and how should we think about it in ‘18? Is that maybe up low single-digits or should it be flattish?

Rusty Rush: No, it’s going to be up.

Remember, you can’t create parts and service margins without people. I am not loaning money here. I am turning wrenches and I am selling parts and picking them up and moving them and delivering and things like that. So, you don’t create parts and service gross margin returns increased without increasing G&A along with it. It just doesn’t work that way in this business.

Unfortunately, I wish I could, but I can’t. So I would look for Q4 to be like historical. I am going to attack your question a couple of ways. Q4 historically is a – we do a pretty good job managing expenses, right. We are going into the toughest – this is just seasonal, right.

In our business, November between February – November to February are usually the toughest months just given especially in Q4 you have got holidays; you have got less working days. I mean, when you are putting out about every working day, you are putting out about $0.03 of earnings and you have got less of them, when you look at the gross margin that comes out of these stores from a parts and service perspective, you have less of it and then you are paying people to be off for holidays. Our revenues will probably be down, but our expenses should be pretty solid and down also in the Q4, but we will have as I said just seasonal. It’s just seasonal. It’s like it is every year.

This is not going to be any different than any other year. Going into next year, Q1 is always the biggest ramp we have in expenses, because you have got – you have a lot of – you get hit with a lot of stuff in the first quarter from a tax and an employee perspective. And then if we continue to ramp up parts and service gross profits, we are going to get some more G&A expense. But at the same time, if I am keeping as much as – keeping half of it as we go forward from a company perspective, that’s what we are trying to do. So, I mean, it’s hard to keep G&A flat in this industry when you are growing your parts and service business, but we – and so as long as we are doing that, we are keeping our share of it, we will be excited about where we are headed.

Rhem Wood: Great. And then last one – Steve, the tax rate was down a little bit, what should we use going forward on that?

Steve Keller: Yes, operationally continue to use 38.75%. If you recall, I explained to you guys the last couple of quarters, there was a GAAP accounting change in how you have to account for the tax benefit on the exercise of equity options that runs through the P&L beginning in ‘18 – I mean, sorry, beginning in ‘17 when it did not in ‘16. That contributed about $0.05 to EPS in the quarter. That number is not predictable, so we continue to use 38.75% operationally and we will just update you on what that delta is from quarter to quarter.

Rhem Wood: Thanks. Keep up the good work.

Rusty Rush: Thank you.

Operator: Thank you. And our next question comes from Neil Frohnapple from Buckingham Research.

Your line is now open.

Neil Frohnapple: Hi, congrats on a great quarter and Rusty, congrats on a big win last night.

Rusty Rush: Well, you know I am going to get something in about those Astros, Neil. Thank you. Yes, it was a big win.

Neil Frohnapple: Are they going to win in 5?

Rusty Rush: If they are, I will probably be there Sunday night, but I have got plans to anyway. But I will tell you this, I am going to step back a minute and we’ll talk plenty of business here, but for the city of Houston, it’s really a big deal. We were – Hurricane Harvey was pretty – I was born and raised in Houston for you folks that don’t know. So I have got a lot of ties to the city. Even though I have been in San Antonio for the last 30 plus years, I was born and raised in Houston.

So, going down there after Hurricane Harvey was – I have never been more proud of a bunch of people than I was when I went through those dealerships. I have got 6 facilities down there and I toured them all and saw every employee there. And it was just – it was really unique to see the way folks came together to help each other out and take care of each other and also to the rest of my organization, who donated immense, as I said earlier, goods and money and stuff and we were able to help out our fellow folks that had to suffer through it. So for them, with the Astros doing what they are doing, that town is abuzz, trust me right now, so...

Neil Frohnapple: That’s great to hear.

So, you guys delivered impressive SG&A leverage in the quarter with total SG&A flat versus the second quarter despite the significantly higher gross profit of truck sales. I know we need to separate the S from the G&A, so the performance would imply there was a sequential step down in G&A. So, I mean, could you guys – could you talk more about what drove this? Was there anything one-time that benefited the quarter from a G&A perspective?

Rusty Rush: No, not really. I wouldn’t say anything really drove it. It was just good expense management, right, by all of us and that’s – we have got – in spite of a lot of investments we have got going on at this time, right.

We are investing a lot behind the scenes and have been for the last 2 years regardless of the market to drive our strategic initiatives, right. But no, G&A was pretty much flat from Q2 and I expect Q4 to be in good shape. Now, it was always – okay, it always goes up in Q1 as we start the year, but that’s just typical. If you go back and look at our 21 years of being public, that’s pretty typical of every year, right, that we have been doing this. So no, there is nothing in particular, just pretty good management and hopefully we can hold on there.

I just – but it does – as I have said earlier, you can’t continue – we would already pretty much increased our level of people a lot from end Q2 to – from Q2 and didn’t ramp that much in Q3, but we are adding. I am telling you that, I am adding outside sales people in the parts and service business right now. You can’t achieve those goals that we have without adding a few people and we just went through our annual raises in September. That will – they go throughout the company, so that will make – we will probably get a little bit of uptick from that, but nothing dramatic. We have just got to stay on top of it.

We have just got to continue to do a good job of managing while growing our revenues, broad-based and redefining ourselves not just as a truck dealer, but as a solutions provider across the board through our customer base, while widening our customer base and widening the breadth of product that we bring to the marketplace. And I feel very good that we are getting – as I said there is about 25% of that growth, which isn’t a lot, I guess. It’s been 11.7% – about 25% of it I can attribute to our initiatives. And I hope to be able to continue to tell you those kind of stories as we go forward. And so from a G&A perspective really, I know it’s the question you asked, but you know me, I always get to rambling about it.

I get excited. There is really nothing significant in one – we kept it flat.

Neil Frohnapple: Okay, good to hear. And then maybe a follow-up to Rhem’s question, I mean, for aftermarket revenue, how much longer can the strength in the energy sector continue at these levels? I mean, is there a lot of like one-time rebuild activity or pent-up demand that will tail off at some point?

Rusty Rush: I checked and let me break it in two parts. I am going to answer one of the things.

I don’t have a lot of truck deliveries anymore for that sector, but at the same time, there are some it won’t be as strong as it was in Q2 or Q3 from a truck, but hi, who knows? We are still working deals and stuff on the truck side now from a parts and service perspective, I have spoke to the areas the regional managers of those areas and if right now we don’t we haven’t our customer base is not set we are pretty strong, right? It seems to be pretty strong pretty steady let’s just say steady as we go, from where we have been the last 60 days, 90 days, from a parts and service perspective, on the servicing our energy customers but rig counts if you look at rig counts, they have remained pretty stable actually down a little bit get to 900, and then trickle back down in the 800s and that’s a good thing I don’t want to see it back up to 1,500 units again, or something that’s not good okay it’s just like I like a truck market that stays closer to 200,000, because most of the projections out there have it for the next few years, step bumping up in 2020 prior to ‘21’s engine EPA initiatives to be pretty flat but I would tell you that, right now, we just keep that rig count steady, and I think business will stay steady with it.

Neil Frohnapple: Okay, great. And one last one, can you talk more about Hino’s decision to expand into Class 7 and Baby 8s in early 2019 you are the largest Hino dealer, so I am assuming you will support that product and benefit, no?

Rusty Rush: Well we are yes we will support the product we do have I think 22 franchises, I believe, something Hino franchises across the country, and we have always been their largest dealer and we look forward to supporting the product they have I remember when we took on the franchises, 14 years ago or so, when they were just getting into the market, and they have steadily progressed and become a stronger market share player along the way, and I am sure they will be successful, and we look forward to supporting them in their initiatives going forward.

Neil Frohnapple: Great. Thanks a lot.

Operator: [Operator Instructions] And our next question comes from Mike Baudendistel from Stifel. Your line is now open.

Mike Baudendistel: Thank you. I just wanted to ask you, if we do get a big shift next year from the large fleets returning into the marketplace, can you just help me think through the impact that should have on your business? I gather that it will be a gross margin headwind, and I guess a market share of new truck sales headwind, but any other impacts on your business, maybe on parts or service or other things?

Rusty Rush: No, I don’t see first off, I don’t know look, I play in that market too imply that we are not in the mix with large fleets is a little is not accurate now is it could it be a margin headwind sure if I am not doing as much small business small, vocational-type stuff that we have been, if there’s a hopefully I am doing just as much of that; just adding on the more fleet business to it, which can affect the margin but as far as it being a headwind towards me selling trucks, I see nothing there we are involved heavily with many customers it’s not just this is not OEM direct I think I noticed in your note, by the way, you wrote this OEM direct stuff. Well, OEMs don’t touch the customers dealers do and we have always they still go through a dealer network, right? And so it’s a combination of above with dealers and OEMs together, especially when you are a network the size of ours, who service customers differently than a typical 1 or 2 or 3 store dealer would right so we are not written out of the equation by any stretch in fact, we are needed in that equation so yes, maybe a margin for sure I made notes, and I said it this morning and I said it in my release, there can be some margin headwinds, obviously.

But as I said, hopefully I maintain the volume on one side, get that volume and do a lot more going forward but we are right in the middle of that season so it’s hard for me to sit here and say, this is going to be our numbers I couldn’t have told you in January that the year was going to turn out as well as it did we have picked up a lot of business in Q1 last year so we will be selling into next year for the next few months in fact, if you would like a truck before the end of the year I could probably build you one right now so that’s I still we are right in the middle of all that we are working closely with all our customers and trying to get new customers, like we do every day so the only thing I would say may be a margin but I am not giving up on market share, I am going to tell you that right now.

Mike Baudendistel: Got it. That makes sense. And then I also I ask you, on used trucks, you have talked a lot in the past about you think there is still an overhang of used truck with supply coming on, and I just wanted to get your sense do you think that the new truck sales that are picking up is there always a trade associated with those new truck orders or some of that to grow the size of fleets?

Rusty Rush: Well, what I am hearing is mostly it’s going to be replacement right? I think that most over-the-road customers right now, coming out of ATA now that’s what everyone says they are going to just do replacement right? Why because they don’t want to run too fast there will be probably some growth, but it will be mostly replacement, and sometimes some of that growth comes from areas you don’t see that midsize person that’s under the radar that may that’s not a large public carrier too, so that’s what you have to watch for as rates increase next year, increase opportunities for people right so you will probably see some growth from some of the large carriers, and you will probably see some midsize growth that you can’t track, that will come into the market that’s typical when rates increase it creates an opportunity to make more money, right? So that kind of has always worked in the past, so we will just have to watch out unfolds but as far as trades, most of the business is going to come with trades, just because that’s the tone I am hearing but I wouldn’t be surprised to see a little growth here or there, especially if rates do if contractual rates if they get the large contract rates get bumped up as much as some people think they might.

Mike Baudendistel: Got it.

That makes sense. And then I also just wanted to ask you, do you have any recent thoughts on ELDs? And I think you have said in the past you didn’t think it would be a big impact, but could you just maybe put some numbers around them? Do you think that what proportion of your customers already have the ELDs in place, and do you still think it’s not going to be a big impact on your business next year?

Rusty Rush: Well, first off, all the large customers already ELDs, right? They already do I am sure there are smaller ones that are just getting it, waiting till the last minute to do it but I when you say I don’t think it’s going to have a huge impact upfront they have already given, what, till April, before they start enforcing it? And then there’s enforcement, right? There’s always laws, then there’s enforcement so I have watched how this country works a lot of times it takes a little while sometimes to get it you can implement what you want, but then you have got to enforce it so but I am sure by the end of the year end of next year, that we everything will be ELDs will be being will be enforced but there are easier it’s not just dramatic I think you there are small solutions for folks besides large, expensive answers to this there are small opportunities it doesn’t take thousands of dollars to implement ELDs it just takes people that want to do it and if it’s required by the large carriers, then you are going to see the small carriers that lease onto the large carriers do it, if they want to stay in business look, will there be some attrition? Of course, I am sure there will be but we are talking in my mind, its low single digits I don’t see any 10% fallout in the marketplace I just don’t and if you did see something like that, well, it’s going to be replaced by somebody right now because the market’s pretty tight so that means someone would be buying something to replace whatever goes out of the market, especially with the freight market as tight as it is right at this moment, if it remains that way and most people perceive the freight market to remain pretty tight going forward.

Mike Baudendistel: Great, thanks very much.

Operator: Thank you. And our next question comes from Joel Tiss from BMO Capital Markets.

Your line is now open.

Joel Tiss: Hi, guys. How is it going?

Rusty Rush: Hi, Joel. How are you? I am fair.

Joel Tiss: Surviving.

Rusty Rush: Oh that’s all.

Joel Tiss: Yes, I feel the good day. So coming out of ATA, do you feel like with better fuel efficiency coming out of the trucks and a little bit of rate increase and all that, that the risks for between here and the end of 2019 are more to the upside, or do you think people are doing a pretty good job of capturing the mood kind of, this moderate recovery over for the next 2 years?

Rusty Rush: Well, moderate recovery means upside to me so I think everybody feels pretty good about their business, right? And as I said, its ATA was broad-based optimism, and I see that still across most sectors I am touching both coastlines the only drag is the driver situation but from a but most of the companies what most everybody said at ATA was that that driver the labor market’s tight it’s tight for all of us right now, so and especially if you are in the truck business over-the-road business and the driver situation is would probably be the only deterrent but other than that, Joel, I can see I am hoping we have continued steady growth, right? That would be nice not to see some huge spike, but some nice continued, steady growth that’s what we have been experiencing and I think that’s what most of our over-the-road customers as I said, the freight market’s tight and as they negotiate their contracts I am sure they are all looking to get most of them, from what I hear, mid-single-digit rate increases on their on the large contracts and obviously, the spot market’s been a little better than that, but I at this moment, I don’t see anything negative to say about most of the industries we service and that goes outside of just ATA as this goes across the whole economic sector, as I have said on the it’s just pretty solid let’s just hope it can we it stays that way and most importantly, I have got to just focus on our own initiatives, and that’s what we are doing, and trying to take advantage of the decent market that’s out there right now and I think you can see that in the numbers we have had and we will manage through the seasonal things like we always do, and just keep trying to stay focused on our strategic growth initiatives and if opportunities come up, we will try to fill out some more in our markets; some other markets but nothing really to talk about right now but just, it’s pretty solid, Joel. It’s I am just I know I am just I am answering more than you wanted, but you know me; that’s the way I am but I just see I just feel decent about it, right? I don’t see anything here to talk I don’t see a lot to talk be negative about at this moment.

Joel Tiss: Is there enough strength that you think the OEMs can get a little bit of pricing? Seems like they are struggling a little bit on the pricing side?

Rusty Rush: Yes.

I don’t know because that’s that push and pull, right? They like volumes, and then they like margins, and sometimes if you want volumes it hurts your margin because customers are pretty savvy, right? Customers these customers are very sophisticated and savvy these days no one in the old days, customers ran one brand, right? You don’t see that any more people go back the last 20 years that has changed over time you don’t see a lot of one-OE customers and they just they are pretty savvy, they are pretty smart and they balance it pretty good to manage to keep price increases for everyone flat so there’s and OEMs will say it, but then when they get down to it, working with the customer will leverage one OEM against the next and if you want the business, sometimes somebody steps up and wants it so I don’t know if there’s a lot of price increase to get for me, them or anybody out there just I think just recovery of what we are getting any increases they get, I would hope would become because of increased production and efficiencies inside their plants, would be my thoughts.

Joel Tiss: And is there any sign that one of your brands, Navistar, worked through their used issues and they are ready to start putting some market share points on the board, or still early for that?

Rusty Rush: I don’t know I think you will start seeing some market share, but it’s going to gradual but there’s no question it’s bottomed they are not going to jump up to 15% tomorrow or the next 2 years probably but they are going to gradually start pecking away at it and as I have said before, the good thing for us is that, weather the storm it’s been over 4.5 years since the MAXXFORCE engine was built they are not we are not all the way through them all, but I would tell you we are over 2/3 through it, a lot of it, to where they have depreciated down enough on people’s balance sheets to where you can work your way through most of them it’s not always straight up, but you can work your way through it their alliance with Volkswagen I am sure will allow them to continue to gain strength, and from many areas I don’t want to speak for them I know a lot about what’s going on, but it what they have got going on makes me feel good and if they grow market share back, I would expect to grow with them at the same time so that’s a good thing for the organization and hi, look, on the Peterbilt side of the house, both sides are doing well they have got record market share on the Peterbilt side of the house this year, and both brands on the Class 8 side have great products and more on the way. So we feel very good about the alliances we have with the 2 OEMs we have going forward.

Joel Tiss: Alright, great. Thank you very much.

I am not getting back in the queue.

Operator: Thank you. And our next question comes from Shawn Kim from Gabelli. Your line is now open.

Shawn Kim: Thank you for taking my call.

So look, there is a lot of discussion on auto 2.0 in the light vehicle pass car side, but wanted to talk about truck 2.0 for a little bit as we get this continued proliferation with connectivity and telematics, can you potentially size up the opportunity for you guys in telematics, especially as it relates to capturing some of that business on the parts and service side?

Rusty Rush: Well, we have been investing in our own telematics for a while in joint venture with our OEs, right, and Cummins so we sell, oh, quite a few systems every month in our own we have we manage fleets with our own call center, right? We have a lot of stuff going on in conjunction with the OEs so we feel very good about where we are at in that space connectivity there’s no question, connectivity with the customer is the key to the future and we like we have been out ahead of it, I think, for about 2.5 years now we like to think everybody’s on it everybody’s chasing it but we feel very good about our position in the marketplace and what we can do what folks don’t know is I have got a very large call center here in New Braunfels where our headquarters are that we help that help we manage a lot of customers thousands of customers thousands of customer trucks so we are right in the middle of the space, working with everyone in there we are open architecture, so we are not we can work we can blend with anyone and with the customer; provide a solution, right? We are about we are really open about, provide us a solution that fits your needs and it’s just it’s a lot of data, right? Integrating the system with data and stuff like that and we are all over it I can tell you that so that connectivity, keeping people up and running and helping them produce haul more freight and be on the road and made more efficient, whether it’s and look, it’s not just on the over-the-road side it’s in the vocational businesses too, right, where we can help manage your truck fault codes; this tires; this, that and the other we are we have got a lot of stuff going on in different locations too, with different companies you would be surprised about so we are right in the middle of the space, and we are excited about it, and we are excited about using our network and leveraging off our network because at the end of the day, the OEs don’t own the dealerships those are owned by many private individuals, and we have the largest network for dealerships, we think that we fit we are a perfect fit in that space for just about any customer out there.

Shawn Kim: Got it. Thank you for that. That’s very helpful. Actually, on that note, just a quick follow-up regarding dealer consolidation just across the industry, yes do you expect that to get stronger? Is there going to be a situation where it’s only going to be a few players that have a ton of scale that’s going to survive out there, or you still see, I guess, a niche for some of the smaller and midsize dealers?

Rusty Rush: There will still be a niche, because there’s certain areas of the country, which you probably won’t get you probably wouldn’t get me to go to, right? It’s a large country, right? So there’s still going to be a room for some small dealers in some small areas but I would imagine that most of your large metropolitan dealerships will be owned by larger dealer groups, right? They are we are not the only large dealer group out there we are just the largest, that’s all but and that’s which we like to play off as our differentiator, is our service.

Regardless of what brand we are, I have got 106 or so 8 locations out there, right? So we can we have a broader network and it’s tying that network together and leveraging it, no matter the brand we represent, to help keep our customers up and running we have been focused on that for years but I don’t expect to see but as far as the large areas, large metropolitan areas, most of those are going to end up probably being dominated by larger players I would tell you that.

Shawn Kim: Got it. Okay. And then, last question. You guys are on the front lines in the industry you guys are talking to the customers every day there’s been a lot of discussion you mentioned Cummins earlier a lot of few companies are coming out with these concept electric vehicle trucks I know you get asked this question a lot, but just wanted to get an update; maybe get your comments on what’s the time line? Realistically I think we could all agree that we are probably a few years away, but are customers inquiring about it? Do you see this as a 5-year opportunity or is this not going to happen for a decade? Love to hear your thoughts there, Rusty.

Rusty Rush: Okay, here we go. The most surprising thing about this morning is that’s not the first question I got. I have been to a few conferences here this summer, and oh my goodness I just open it up and say let me get this electric talk out of the way first because that’s always the first thing, right? And what’s good about this morning is we have talked about my business our company’s business so that’s been kind of exciting so that but I knew I couldn’t go the call with getting an electric question everybody’s got an opinion, right? So here’s mine here’s my take on it. Alright. Look, does electric have a place? Yes it does, but don’t – but everybody had to come out – it’s a buzzword, right?

Shawn Kim: Right.

Rusty Rush: If you didn’t come out with anything, if you were going electric – everybody has come out, I have got electric coming. I’ve got – well, everybody has said it, because you had to, or you guys would take the stock down to 0 in 15 years. So everybody has to say it. And now – and my – from my point of view – I’ve always [indiscernible]. From my point of view, it – look I see is the long way for me to see it is in the over-the-road Class 8 business, I’m going to be honest with you.

That’s probably going to be past my career, if it comes to bear. Does it have a place look we’ve already got electric buses and stuff, I mean everybody’s out testing stuff. Does it have a place in cities and maybe small – I think it’s in the medium-duty side, I think it’s down in your smaller Class 4, 5 stuff maybe some 6 stuff, down the road as they perfect it, right? But people say, what’s going to happen, Rusty, they’re not going to need your dealerships. Electric’s going to come, I said no are you kidding me? Electric is just going to be a part of the offering. There will be a natural gas offering, there will be an electric offering and diesel will still be the dominant [indiscernible].

You – and there might be some other hybrid stuff coming, right? But 10 years from now, we are going – it’s going to still go through OEMs, and we’re still going to service it and they’re still going to break at times. I don’t care what - they won’t break everybody says, that said you’re kidding me. I’ve never seen anything that would, but I don’t see it – I just see being a part of an OE’s offering going forward. There’ll be a multi-platform – there will be a multi-platform. But only in – I don’t see it in Class 8, I’m sorry.

If I do, it’s going to be in – it’s going to be really localized stuff. I just – everybody can say what they want, that’s my opinion. You’re going to see it in the smaller stuff to begin with. And then in the next 3 or 4 years you might see it – you could see it in stuff or something like that bigger stuff, but not over-the-road at least not in my career maybe 25, 20 years from now. But there’s a lot of hills to climb before you go 48 states – 48 [indiscernible] in United States from an infrastructure perspective look, it takes just as much carbon footprint to create electricity right now as it does, as clean as these engines run.

And with all the – with all the – with technology allowing us to find oil so easily, I don’t know when we ever see $100 a barrel oil again, right, so see I don’t know if you’re going to have the huge spikes in diesel that you had in the past either. So I just see it in the small stuff. That’s really just what I see – really more in the small Class 3, 4, 5, 6 stuff, but hey, it’s not going to be a 50% player in there either. Maybe in 10 years it’s a 15% player or something like that. That’s where I see it.

And they’ve still got to have a network, we’re in the commercial business. People will say, well, Rusty, it’s going to – you don’t need your shops, I say come on man, I said, look, this is not consumer, I’m in the commercial business, trucks are there to make revenue. So I don’t care what sector you’re in. I don’t care if you’re the refuse, if you’re in the oil and gas, if you’re in the beverage business, if you’re in the over-the-road business whatever business you’re in, you’re in crane business, they have crane truck-mounted cranes, there for that. So they will need to be serviced to keep them up and running so they can produce that revenue.

You can’t load them up on the back of a flatbed like a little electric car that breaks and haul it over [indiscernible].

Shawn Kim: Okay.

Rusty Rush: I’ll stop.

Shawn Kim: I appreciate your comments, Rusty. Thank you so much, and we look forward to seeing you a few days out in Vegas.

Safe travel.

Rusty Rush: Tell Mario I’ll see Monday. I guess I’m on Monday afternoon there, so I’ll see him.

Shawn Kim: Yes. You got it.

We’ll see you there. Thanks, guys.

Rusty Rush: You bet.

Operator: Thank you. And our next question comes from Brad Delco from Stephens.

Your line is now open.

Brad Delco: Rusty, Steve, good morning.

Rusty Rush: Where you did show up. Hello, Brad.

Brad Delco: It’s a busy morning for transport, but…

Rusty Rush: I know we [indiscernible].

Brad Delco: [indiscernible] to my favorite CEO.

Rusty Rush: Congratulations by the way [indiscernible] but I heard that after having triplets last year you’ve got another one the way now.

Brad Delco: 4 under 14 months life is currently performing, I want to make it more interesting.

Rusty Rush: As I told you what causes that no, never mind. Okay, go ahead.

Brad Delco: Another time, Rusty, another time. Rusty, I did jump on a few minutes late and apologize if you address this.

Rusty Rush: That’s okay.

Brad Delco: But I do know there were kind of multiple drivers or facets to the all-makes parts initiative. And from the release, it sounds like you’re seeing and – or you’re starting to see some good traction there.

What parts of that initiative do you think are really starting to gain traction for you?

Rusty Rush: Well, it’s the parts business, right. We’ve really have just route focused – put a service strategy – I think that was one of the fallacies of what we did. When we started thinking about there’s a couple of years ago, we sort of left the service piece out and we thought – if we said – we woke up here about, a few months ago, 6 or 8 months ago, and said what are we doing here? This is a mistake on our part. So I would tell you that, when we break it down into its pieces – and you guys you don’t have time to look into all this, but we break it down into – it’s really the parts business, whether it’s the effectiveness of our sales teams, have a channel we call it omnipresence, which is being all things around there part of that’s attributable to that, part of it’s the availability of product and expansion of our product lines, okay. Part of it’s about sourcing, and part of it’s about pricing I mean there’s so many enablers.

I don’t have – you don’t want to sit here. I just went through 2 days of this with my regional managers this weekend, drilling in this and getting more into the weeds with it than you want to get right now, you want to sit down with me when I see you next time and I’ll walk you through it all. Plus, I don’t want to tell everybody what I’m doing. I just want to produce results. At the same time, we feel that we’re on the right track.

We’ve got to – you’ve got to – we’ve just got to – can’t be just a truck dealer, and that’s one of the keys to the future. We’ll be a truck dealer, but we’re going to be other things too. The market – this – the future to me is continuing to leverage off of that network. It’s using that network and then leveraging with strategies such as these – and hey, I’m planning on having more strategies. We’re working behind the scenes right now coming up with other strategies that we can leverage the network and the quality of people we have across this country to continue to drive more revenues out of these facilities.

But no, our parts initiatives right now are taking hold, and our service I’ve got a goal to grow 473 technicians in the next 5 years right now, okay. I’ve got some strategies out there to get that done. We’re continuing to grow our mobile fleet on the service side. But really, the growth you’re seeing is the parts pieces that we’re starting to gain traction on, okay. The all-makes parts business.

Brad Delco: Let say, let me try to ask that differently, because I – well, the question I kind of have was, the market sort of understood as you laid this out that you were maybe to some degree a little bit disadvantaged when it came to sourcing parts, and that was going to be a key component of your strategy to lower your cost. Do you think that’s the main driver of what you’re seeing, you’re having success there or do you think the sales force is really driving this?
RustyRush: Not at all, not at all. I think look, we’re still partnering with our traditional partners from a sourcing perspective, and we will continue to do that, okay.

Brad Delco: Okay.

Rusty Rush: That’s not going to change, are we bringing in other source, we have our own private label line too, right.

We’ve got a lot of things going on. So no, I – that’s not the number one driver behind it, right, but it is a component, okay. And without getting into the weeds and getting into all the details, but at the same time, we’re continuing to – we do have to purchase better, okay. We have to leverage our – the volumes we have. But at the same time, we can drive volumes, right.

So we’re partnering with our – we’re sourcing – still sourcing with the same people we have, but adding other partners at the same time would be the way for me to answer it, Brad. But we feel good about – and that’s just one piece, my friend. We’ve got to get out there – typically, your second and third, fourth – your third and fourth-tier buyers don’t think about coming to the dealer to buy their parts. And so we have to continue to engage our sales force and get out there and reinvent ourselves to those – to that other – those other folks that are out there. And typically that’s probably our fault, because that’s how dealers have historically worked.

And we’re working very hard and training our sales force and working with our people, and changing our – changing way how people perceive us in the marketplace, and broadening the perception of a Rush Truck Center, okay it’s [indiscernible]

Brad Delco: Let me squeeze in one…

Rusty Rush: And I don’t want to get in – I don’t want to get on the call and into all the things we’ve got going on, to be honest with you. We’re just…

Brad Delco: I understand.

Rusty Rush: I know it’s good for our partners and it’s good for us at the same time and for our customers.

Brad Delco: Let me add another one. So I understand you’ve had some strong energy business, and a lot of – I mean these results just – let me just say, these are great results, as you know as well.

A lot of it’s as a result of the investments that you’ve been making to expand capacity with service bays et cetera people. You’ve also made a lot of investments in other dealerships, right, in Navistar dealerships. And I’m curious, how much of these results are driven by, you think, improvements with those dealerships versus energy, and does that mean if – because how close I am to the fleets. That business has to be picking up or should be picking up and does it mean there’s another kind of tailwind on the Navistar side when the fleet business really ramps up? Is that something that will drive some additional earnings growth here in ’18 for you?

Rusty Rush: Well, we’d like to think so. We believe so, I mean if their market share’s going up, mine’s going to go with it, okay.

But I don’t – that’s on the truck sales side. Now don’t forget, the only headwind we’ve got over there. Look, the Navistar piece – as I’ve told people for a couple of years, once it got [indiscernible] in turn, yes, it’s got probably great upside in it, right, because obviously the performance level – it’s been difficult to reach the levels of our Peterbilt stores. But at the same time, the lower market share the last 4 years has less trucks on the road for us to work on from a parts and service perspective, yet we are still growing our parts and service business because of investments in facilities; just not at the rates that we have on the other side of the house, given some headwinds with the other. But we’re working towards raising those rates of growth from a parts and service perspective.

On the truck sales side, as I said earlier, Peterbilt’s at an all-time high in market share and we’re participating with that and our market share is much higher than even their national market share, okay be quite honest I don’t want to give it out, but it’s really high. But that just shows the kind of job we’re doing there. And on the Navistar side, they’re going to get back in the market – and we want to maintain that market share we have on the Peterbilt side, because what that means is there’s more trucks in our territories to work on downstream from a parts and service perspective. On the Navistar side it’s probably – the hidden – what I always tell everybody, probably the more hidden diamond inside the organization. But a lot of this growth also, going back to what you said to begin with.

Remember, in 2014 and ’15 we spent over $200 million in facilities, okay. We built brand-new facilities in towns we already had, but we tripled the size of a lot of them. We’re also seeing the fruition – the growth of some of those, as we grow into those facilities. I’ve always told folks – people say you’re doing really good here, we – but you’ve got a small facility, you’ve got a 25,000 square foot facility. But you look at it and you’re not servicing your customers, right.

So we go build an 85,000 square foot facility. Well, when you move in, your absorption rate takes a little hit, but eventually you grow into it and you’ll grow the overall revenues and get back to that same absorption rate over time, whatever timeframe that is. So we’re seeing some of that, right? That’s some of the growth, that’s what you’re seeing out there. And our strategy, combined with both of our OEMs as partners – and by the way don’t forget all of my medium-duty partners either, okay, I mean what you’ve got to understand, we sell when you go through our shops nowadays, that’s the difference, and one of the big differences [indiscernible] there are so many reasons for absorption rate growth. Some of your folks don’t even remember, 1999, we were running 79% absorption, okay that was a whole lot less than where we are now.

The strength of the organization is inside the growth we’ve had in parts and service through multifaceted growth, whether it be through the Hino or the Isuzu or the Ford side, on medium-duty, and the Peterbilt and Navistar medium-duty side, obviously. And then on the Class 8 side with Peterbilt and Navistar and actually, Navistar’s getting in the 4, 5 business coming up, with their partnership with GM. So...

Brad Delco: Well, let me ask – let me ask you this way, if I can. So...

Rusty Rush: You keep trying to ask it, and I know what you’re asking.

Brad Delco: Yes. If you thought about…

Rusty Rush: It’s energy. Go ahead.

Brad Delco: So if you thought about the profit potential of your Navistar franchise, and you made a baseball analogy, are you in the third inning, are you in the sixth inning, are you in the eighth inning in terms of where you think your potential is?

Rusty Rush: We’re about the third inning.

How about that? We’re no further than that, I can tell you that.

Brad Delco: That’s the answer I wanted. Okay [indiscernible].

Rusty Rush: We’re no further than the third inning, buddy. Because we’ve walked the bases loaded a bunch of times here in the first and second.

So they were long innings. That goes for the last 4 years, okay. We just got out of – we had bases loaded, nobody out, and we had to get out of that in the first, and we had to get out of that in the second. The third inning we’re pitching and now we’re striking everybody – we’re starting to strike people out. And then when we come up to hit, we’re going to start hitting here in a minute when it our turn up in the fourth inning, you better look out.

So...

Brad Delco: I like to hear that. Thanks, Rusty. Thanks, Steve.

Rusty Rush: You bet.

Operator: Thank you. And our next question is a follow-up from Faheem Sabeiha from Longbow Research. Your line is now open.

Faheem Sabeiha: Hi, thanks for taking my follow-up. I’m just approaching Joel’s pricing question a little differently.

Navistar publicly stated that they’re raising prices by up to 2% in the coming year, and I’m assuming that’s across their truck product lineup. So I’m just wondering how you view Nav’s competitive position in the market next year if they’re raising prices while others are holding steady.

Rusty Rush: Well, I’m not going to speak for them or anyone else. They’ve spoken. The market will drive all my pricing and all OEMs’ pricing before it’s over.

The customer will drive it, and decide depending on everything. We – I can sit here and say I’m going to raise too, but once I get into competitive situation I might cut back. So I’m not speaking for them, they may not, I just know, when you’re in negotiations, that’s just the way it works, right. And so I – look, you’re going to get some – I’m sure we’ll get some price increase, but it’s not going to be upside of just – I don’t look for any dramatic raises of 3% or 4%, 5% or things like that. Normal – are you getting 1% a year typically, or something like that, and I would anticipate that that’s just inflation and things like that going on.

So I – and cost of raw materials and stuff, filtering through. Look, I’m not sure, it’ll sort itself out and be driven by the market that’s all I can really tell you. I’ve been doing this a long time. And it’ll settle down to – it’ll settle down, but I’m sure everyone will get what their need, from a cost perspective I’m sure. Now if you can widen margins, great, but sometimes markets are hard, the markets don’t allow that.

But we’ll just let it play out.

Faheem Sabeiha: Okay. Fair enough. And while we’re on that topic, just a final question. I mean where do you see Nav’s internal engine share next year in the heavy-duty trucks that you expect to sell? And if you can provide a percentage figure, that’s fine, I understand.

But can you comment on the direction, and what will be driving your outlook like, is it going to be increased fleet acceptance or just wider availability in the different truck models next year?

Rusty Rush: Are you talking about – is it on the Navistar side or the…?

Faheem Sabeiha: Yes, on the Navistar, with A26 engine.

Rusty Rush: Right, I mean hey, they just came out with the engine here earlier this year, right. I know they’ve got – they’ve put – a few thousand, they’re putting out right now, and they’ll just – it’ll – I’m sure it’ll slowly ramp its way – itself up I know from what – talking with them, from talking with their people, that they’re supporting it quite heavily to make sure that it gets out in the marketplace, and then to watch and see how it performs, right. I think we have demos and stuff that we’ve got ordered and putting out, but it’s really a little too early for me to give you a number of what it’s going to be, I’m sure the majority of what we sell will still be coming next year. But I’m sure it will start taking some shares as it starts performing in the marketplace and people as it gets out there.

So I can’t give you any percentage. I don’t know where it’ll end up, and that’ll be driven by performance pricing and a lot of – there’ll be a lot of things drive that [indiscernible].

Faheem Sabeiha: Okay. It sounds good. Thank you.

Rusty Rush: You bet.

Operator: Thank you. At this time I am showing no further questions. I would now like to turn the call back over to Mr. Rusty Rush, Chairman, CEO and President, for closing remarks.

Rusty Rush: You bet. Well, thank you, ladies and gentlemen, and we will I guess talk to you in February with our Q4 release. And in between now and then, I hope everyone has a happy holiday. Thank you very much.

Operator: Ladies and gentlemen, thank you for your participation in today’s conference.

This concludes the program. You may now disconnect. Have a great day.