帕卡 (PCAR) 2002 Q2 法說會逐字稿

Good afternoon and welcome to the second quarter earnings conference call. All participants will be able to listen-only, until the question and answer session of the conference. This conference is being recorded at the request Paccar, if anyone has any objections please disconnect at this time. I would like to introduce the host for today's conference, Mr. . Mr. , you may begin.

This is . I'd like to welcome those who are listening by phone and those listening on the webcast. Joining me this morning is Mark Pigott, Chairman and CEO of Paccar. As with prior conference calls I request that if there are any members of the media participating, that they participate in a listen-only mode. Certain information presented today will be forward-looking and involves risk and uncertainties, including general economic and competitive conditions that could significantly affect expected results and now I'll turn this call over to Mark Pigott.

Good morning. Paccar had a very good quarter, in the second quarter, improved margins and sales and had good cost control.

Excuse me. are you online? are you online?

And we anticipate that orders for the industry, for this year, will be between 150 to 165,000 units, that compares to 120,000 last year. Paccar continues to focus on profitability, as we have for 97 years. A number of our competitors continue to lose money. Paccar's business model of high product quality, superior after market customer support, comprehensive financial services, strong dealer network and the use of innovative technology, all contribute to our results.

Looking at the industry, interest rates continue to be low, but insurance rates are high, which affects the operating costs.

Paccar's market share in the U.S. has increased to 23.2 percent year-to-date, and in the market we've grown to 6.2 percent year-to-date, compared to 4.7 last year.

In Europe, the market will be about 15 percent down, versus last year, about 210,000 units.

DAF continues to increase its market share and is at 13 percent year-to-date, and production remains constant between the first and second quarter.

Our SG&A expenses are similar from first to second quarter. Two items which we highlighted in the press release: Paccar made a contribution to its pension plans of ...

Mr. ? Mr. ? Is anyone on line?

... have improved. We believe our portfolio to be in much better shape than our competitors, and we are maintaining the loss reserve constant in dollars.

With that, let's open it up for some Q&A.

Thank you. At this time we are ready to begin the question and answer session. If you would like to ask a question, please press star one. You will be announced prior to asking your question. Please state your company name. If you would like to withdraw your question, press star two. Once again, to ask a question, please press star one. Our first question comes from . Please state your company name.

From Lehman Brothers. How are you doing, guys?

Can you give us a little bit of a sense of the outlook for third quarter orders -- like a run-rate versus second quarter's? And can you give us just a characterization of what kind of internal manufacturing efficiency we may see third quarter versus second quarter - you know, more efficiency, less, et cetera?

Well, as we talked for the last six months, I guess, in the industry, I think essentially everybody is sold out in the third quarter, due to the accelerated . For efficiency ...

Is anyone on line?

... up, so I would anticipate there be definitely some improvement in efficiency. Paccar certainly works very hard to be the low-cost producer in the world for our industry, and we anticipate that we'll continue to see those type of benefits in the third quarter.

OK. Also, can you talk a little bit about how much on price increases were pushed through in 2002, and give us an idea what the industry thinking is for price increases for the '03 model year?

Well, the price increases we don't typically discuss. I would just say that looking at the commercial vehicle industry over the last 20 years -- certainly there's been not very much of a significant price increase, and when you compare that to the car industry, so pricing is always challenging, in good markets, or in more difficult markets.

Can you make a comment about the average age of the fleet that's out there? Give us an idea what you're seeing?

For the industry, I think the average is probably in the five, six year range.

Okay. And last, can you talk about the mix of your pension investments, how much in stock and bonds and cash and all that, so maybe we can make a guess how much this ugly market could force you to contribute in the future?

No, we don't break that out.

All right, thank you.

Thank you.

, you may ask your question.

Good morning.

Morning, Andrew.

Just a couple of questions. On the--I guess knock out the housekeeping first--the cost items in the financial services, could you break those out a little bit more, ?

Sure. Interest expense about 59 million dollars, operating expense about 17 million dollars. Loss provision, 16 million dollars.

Okay, thanks. And then, in terms of the DAF investment in infrastructure, you made a mention of the continuing investment there. Did that accelerate in the quarter, vs. the first quarter, or kind of same run rate, and if possible, could you quantify it?

I think the run rate is pretty similar. Of course, we've completely updated all there major products, as well as our two engine lines in the last five years, so there was significant capital investment, not only in product, but also in manufacturing and design capability. Right now, we're working on the next five-year program. The run rate in terms of investment is pretty constant right now.

Okay. And then, Mark, could you comment on the market share in 2Q, '01 for Europe. Is that 11, 12 percent?

Well, year-to-date, in Europe, we're at 13 percent, year-to-date.

Yeah, vs. last year of what?

Oh, I see, vs. last year. Last year was in the 11 range.

Okay, thanks.

You bet.

And then, lastly, on the engines, how has your experience been with the engines that you've received, so far as packaging in the trucks going fairly smoothly, or has the design not yet set for you to do that?

Well, we've been working with the three major engine suppliers for the last several years on the packaging aspects, and I think it's going relatively well with all three.

Okay, thanks.

You bet. Thank you.

Miss of , you may ask your question.

Thanks, CIBC. I was just wondering if there was any anecdotal information that you might be able to pass on to us from your customers in regard to the new engines that are coming out?

Well, the new engines that are coming out will be more expensive, but you're talking about performance?

Yes.

I think it's still early days, obviously all of the engine companies are in different stages of either introduction or design. We've been working with all three of them, as I mentioned earlier, and I think in order to meet the emission regulations, we are working very hard to ensure that the performance is comparable to the engines that they have been sending out before. It is an ongoing engineering exercise.

Do you think there is a potential for some of your customer base to change to a engine, the cat engine, isn't going to be able to meet the standard post October 1st?

Well, one of the wonderful things about working with our customers and having them purchase Paccar products is that we offer a variety of engines and have a great relationship with all the engine manufacturers and will put whatever engine in the customer would like.

Okay, I must say, will you have any insights on the latest political posturing in regard to pushing off the October 1st EPA standard deadline?

I don't have any comment on that.

Okay, thank you.

Thank you.

Mr. Robert of RBC Dain Rauscher Corporation. You may ask your question.

Good morning. Do you have a forecast, if you would, of capital expenditures and depreciation for the full year?

Not for the full year that we are releasing.

Okay, so three, six months, do you know what it was?

Yeah, the six months cap ex was 23 million dollars.

How about depreciation?

Depreciation was 100 million dollars for the first half.

100 million in cap ex of 23.

Correct.

Okay. You indicated in the Press Release that you thought that fourth quarter sales could be unfavorably impacted as a result of the accelerated buying. Do you have any sense for being to quantify that at this point in terms of production rate?

No, we don't.

Okay. Can you comment on your activities relating to new product development? Is there anything notable that you can say about, you know, 03 models that are, you know, significant?

I think the focus certainly within our industry and it has been asked in a previous question, is to ensure that the new engines are packaged to deliver the best performance they can. I think a lot of people are working on that. I mean, I know we are.

In terms of ongoing enhancements, that is certainly something that we, you know, have been doing for decades and will continue to drive to ensure that we have the best product in the marketplace. We don't typically breakout a prototype vehicle and share those, we just, when they are ready to be delivered to the market, we bring them out.

Great. You obviously are doing very well in Europe and I am wondering if you could comment on the competitive situation there. gaining share you are doing well against your competitors but could you talk a little bit about the status of some of your competitors in that marketplace right now?

Well, I think all those competitors probably have their own analyst call which they will be able to share their thoughts much more clearly then I could.

Okay. And then finally, I am just wondering if you could a little bit about your dealer operations in the U.S. I know that during this recent difficult period for the industry that you have had an interest in a lot of dealers in moving over to Paccar products and I wondered if there is any significant changes there that you could talk about.

yeah, that's one of the real strengths of Paccar is the strength of the dealer network around the world. We've got 1,700 dealer locations to service our customers and the dealers in Canada, the U.S. and Mexico continue to go from strength to strength. Obviously it's been a challenging couple of years, but working with our parts operation, our finance and leasing and information technology divisions, they've been able to formulate packages that provide some great services to the customers and a number of dealers continue to add locations. In terms of competitors, dealers approaching us; we continue to see that on a regular basis and I would expect that would continue into the future. So the dealers are doing well, a number are having record years, others are having good years and of course there's always a few that want to do a little bit better. So, overall an outstanding dealer network group.

So are you picking up new dealers?

Yes we are.

You are, OK. These would be dealers coming over from other brands?

That is correct.

OK and one more question, if I might, and that has to do -- there's been some discussion about truck fleets and truckers extending the lives of their current trucks and I'm wondering, have you given any thought to that and can that potentially, you know, slow the recovery -- the upsides of this recovery going into this next economic improvement, whenever that occurs?

Well, one of the wonderful attributes about our products is they typically have a much longer life-cycle than any of the competitive brands. As you know, a number of the competitors have really focused on a three-year product. Our trucks are designed for 12 to 15 years of life, so if truckers do decide to extend the operation life of their vehicle this is going to be a real positive for us and Kenworth, Peterbilt, brands will certainly benefit from this because we've already seen some of it. Truck operators who may have a competitor brand are finding increased maintenance and breakdowns, where as the people that operate our vehicles continue to enjoy the same excellent performance year after year, so if they do extend -- if anything it should make more and more customers look very favorably upon the Paccar products.

Great, thanks very much.

Thank you.

Mr. , , you may ask your question.

Morning .

Good morning, a couple of questions. The $5.1 million write down on the equity investment that you noted, what was that for?

Well quite simply, Paccar along with many other companies, over the years, has made investments in technology funds and that type of program. We've got about an $18,000,000 cost basis and we're just writing it down $5,000,000 to get it to market value.

OK, so you have about $13,000,000 left?

$13,000,000 left and ...

Oh I'm sorry, that's what you're carrying it at.

That is correct.

OK, great and then the other question was, in the release you made a comment about the slowing growth in general freight, I was wondering if you could expand on that a little bit? You know, what are your customers telling you?

Well I think it's -- basically freight year on year is essentially flat, it might be up a point or two that seems to vary almost monthly right now. So, there's a lot of variability in the marketplace. You know, a number of our customers are saying -- they're doing an excellent business right in terms of freight. Others are saying, "boy, freight's pretty slow." So, sometimes that comes down to the general operator's approach to business. But, overall, the industry freight levels is flattish. So, that's what we're saying. Until we see a pretty strong pickup in freight, we don't anticipate a big, strong demand for more trucks.

OK. But it seems that the credit quality of a lot of these customers has gotten better, or you aren't running into some of the problems that were showing up six/nine months ago.

Well, certainly over the last few years there's been -- for the industry -- a record number of bankruptcies, and that's been detailed pretty well, I think. We're seeing less of that, so the trucking companies that are operating are certainly the ones that are doing a better job of managing their business, or have, perhaps, better customers that continue to need those freight services.

But, overall, it's gonna be challenging to get more trucks ordered until that freight increases, which is certainly a function of the general economy.

Right. OK. And then, just lastly, in terms of the used trucks, with the engines -- new engines -- there's been some reports that the number of used trucks available is dropping. Is that your impression as well -- the availability?

Right. The number of used trucks -- or let's call it "excess" used trucks -- has dropped in the industry, which is healthy for the industry. And, certainly the dealers in the fourth quarter who have, you know, a Paccar product, late-model, should do fairly well, as we think the demand for those trucks will continue to increase.

And, do you have an estimate of what the used truck inventory is?

Well, right now, you know, for the last year or two, the industry's been talking about 100,000 excess used trucks. That's dropped probably in the 55 to 65,000-unit range. So, it's coming down and that's healthy.

Yes. OK. Thank you.

Thank you.

Ms. of , you may ask your question.

Hi, .

Hi. How are you?

One -- a couple of questions. First of all on build rates: could you give us -- I know you were building -- ramping up during the second quarter, but could you give us some color on what average build rates looked in the second quarter versus the first quarter? And then, I assume the third quarter on an average basis will be a little bit higher than the second quarter. But, can you just give us those numbers?

Well, in the release we talked about it -- our 75 percent ...

Higher than a year ago, yeah.

And, yes, third quarter might be a few percentage points higher than the second quarter. I think that's pretty much what we break out.

OK. And then, also, on fourth quarter orders -- I know it's early, but can you give us any visibility, I mean, at all, if you're seeing any customers willing to commit orders to the fourth quarter? You know, because everybody knows it's gonna be down, but ...

Certainly we have some excellent customers who are ordering for the fourth quarter, and that's ranging from the, you know, the small owner-operator to the person with a much larger fleet. So, as you have demand from your customers, then the trucking companies need to order trucks, and many of the economic elements in our industry are certainly favoring having Paccar products. So, we're seeing orders coming in. Are they at a lower rate than second quarter, third quarter? Yes.

But it's not like a black hole? So ...

No.

Okay. Okay. And the last question is, I just visited a couple of the European competitors, and got mixed--a couple of them blamed you on discounting, which really, I found strange, because it doesn't seem to be in your character. Can you give me some color on whether you are being optimistic--opportunistic on pricing, or if you're acting the way Paccar acts in North America, in Europe? I think it just could be pointing fingers, but it just didn't fit with what I thought, so--

Well you know--as you know there is very--very few competitors left in this industry, so I hope you gave them my regards. I've--occasionally we get that conversation, but typically, what we are finding is either we are the only company in Europe making money, or one of only two companies making money, so that--that's a fact. Second, in the last five years, we have won Truck-of-the-Year twice, we've won most of the major awards in the UK for many, many years, and we've established ourselves as the premium product in the used truck market in five years, and we've also established ourselves as the premium product in the new truck market. So I'm not sure what the competitors are saying, but I'm very proud of our team at DAF and Leyland, and Foden, and I would say, let the results speak for themselves.

And in Paccar's focus, which you began your conference call, Paccar continues to be focused on profitability, that's a similar strategy in Europe, I would assume?

Absolutely. We only have one strategy world-wide, and that is to be the premium automotive manufacturer in the world, and with the highest return to shareholders 62 years a row, I'm not sure who you talked with in Europe, but I would be hard pressed to believe that they can match that record.

One of them says you are very disciplined, and pleased to have you on board, actually.

Well, that usually means that we're charging a fair price for an outstanding product, and that's usually the way it works out.

And then, okay, just one last question, the tax rate going forward, it jumped in the second quarter. Just assume the year-to-date rate?

Excuse me? I didn't hear you.

On the tax rate, it jumped in the quarter, and I had been using the first quarter rate. What should I use going forward for the balance?

For the tax rate, for the second quarter is very comparable to what we had two years ago, when we had more of a balance between North America and Europe, in terms of tax rates, so that's all you're seeing now, is getting back to what we had several years ago.

Okay, so just use that going forward, it's more typical going forward now?

I think that's--you know, as we go forward, I'd say that's probably a fair comment.

Okay, thank you.

Thank you.

Mr. Peter , of Ragen MacKenzie, you may ask your question.

Hello Peter. jacobs: Thank you. Good morning Mark, Ron. First question is on the loan-loss expenses in the financial services area. It looks like things are starting to taper off there, given the numbers that Ron just gave, it's about 15 percent of revenue, and that would be the lowest in over a year.

Can you give a little more color on that? And then also, , would you by chance have what your provisions are currently for the balance sheet provisions in the financial service area for loan losses?

Well, on the loan -- let me answer that. On the loan losses, yes, there has been some improvement as you've pointed out. And essentially, that's PACCAR financial and our lease groups doing an outstanding job of working with dealers and customers on making sure that they continue to pay on a steady basis. And -- but you know, there's some variability on that obviously, month to month. But generally, the trend seems to be improving, so that's good.

In terms of breaking it out in general, we typically don't.

OK.

It's held in .

OK, and secondly, in the manufacturing side of the business, it looked like the interest expense and other was about 8.3 million this quarter, and that's quite a bit higher than what it had been running. I was wondering if there was anything particular happening with that line item?

Nothing particular happening. ?

There were some, you know, additional corporate related reserves for some working capital loans to dealers, to some of our dealers, we took a reserve on.

OK, because it's been usually running at a plus or minus a million or two a quarter, and I was just a little surprised at that magnitude. And lastly, I'd like to just get a little more color on the new engine emissions standards, and I know we're probably beating a dead horse at this point, but one, Mark, is there anything that you can share with us on what you're seeing in terms of pricing that customers are looking at for a truck for delivery after October, obviously, an apples to apples basising type of configuration?

Yes, you know, we -- that's a good question, it's a question that has come up for the last year, essentially, and the answer is exactly the same. That's going to be in the $5000 range.

OK, and -- I think from a previous question you had said that, you know, as you're looking out into the fourth quarter, you're not seeing a black hole, but are you feeling fairly comfortable and what -- are you willing to even talk about what kind of magnitude of downturn in production rates that you might experience? And what I'm wondering -- are we looking at like a 25 percent potential downturn, or a 50 percent downturn, there's just so much cloudiness, I guess, as we look out there right now.

Yes, I would say that it continues to be cloudy, and at this time we do not have a number.

OK, fair enough. Thank you, and a nice quarter, as always.

Thank you.

Mr. of JP Morgan, you may as your question.

Hello, .

Hey, Mark, how are you doing? You know, you probably are aware that one of your competitors complained of not getting enough engines, and there was shortages of engines that hurt their performance. And I think some of the engine suppliers have said that they've put the OEMs on allocation here with the strong production levels currently. You know, to what extent did you get impacted by not having enough engines, and you know, do you expect that in third quarter?

You know, we continue to work well with all three suppliers and -- you know, that's -- they're great companies and we like working with them and we'll keep doing it.

So, I mean, there wasn't a constraint for you in terms of production? You've got enough engines for -- you're in the second and you expect to get enough engines in the third quarter as well?

We're working hard to make sure our customers are happy and the dealers are happy and people love those Paccar products.

OK, just on another train of thought -- just cash redeployment, you know, question. I mean, historically most of the cash has been used for dividends as opposed to share repurchases, but with the recent, you know, drop in the stock price which is, you know, because of the weak market -- overall stock market. I mean, could -- you know, if there was further weakness in the stock price, I mean, would -- could we see a shift in giving stock back to the shareholders as opposed through buy backs, as opposed to dividends?

Well, you know, we've done both through the years. You can just, easily, look at our record. We have an outstanding dividend and have for many decades and periodically, when it makes sense, we do have a share repurchase. So, we continue to look at all different avenues.

So with a billion dollars in cash at arguably the bottom of the cycle, the stock price isn't low enough yet to get you interested?

Really don't have any comment on that.

OK, just one kind of thought -- on the $5,000,000 write down, should I use a 35 percent tax rate to get an earnings per share impact? Is that -- can I make that assumption?

Yes you can.

OK and one last thing on -- just a couple words on the parts business. You know, what kind of growth -- you know, replacement parts business, what kind of growth are you seeing there this year and, you know, in North America and Europe?

Well we like to see, you know, at least about a five percent growth.

And you're seeing that this year?

Right.

OK, great. Thanks.

Thank you.

Mr. of First Boston. You may ask your question.

Hi .

Hi, how are you?

Good, thank you.

Do you have a -- would you venture a guess as you look at the order picture as to what you would see the industry build being in 2003 compared to 2002?

No guess ventured on that one.

OK, you said you do have orders -- you told Karen you do have orders for the fourth quarter, if you look at the ACT numbers there's a fairly substantial backlog of build that's all in October and then -- presumably with old engines and then it falls off in November and December. Are your orders for the fourth quarter orders that include the new emission engine?

Yes they are.

OK and that is a substantial amount?

It's a growing amount every day.

OK, can you talk about what your plans are in terms of flexing? How flexible are you in terms of your production? Presumably the production will be coming down in the fourth quarter and what you can do about that, what options you have to handle lower levels of build rate.

Well, I think you have just seen the flexibility we've had over the last few years from strong build rates in 99' and early 2000, obviously they were decreased and in the last quarter on quarter we just increased them 75 percent, so I think the past few years vividly illustrates our flexibility.

OK and used equipment prices, you've said that we -- I think you'd said, at the last call, that we were at -- that we had gone from about 100,000 to 75,000 and we had gone down to 5,560 talking about, kind of, the industry used -- excess used trucks. Where are -- on a comparably equipped, comparably aged Peterbuilt truck used prices - how far up off the bottom have used prices come, and where are they still versus where they were at the peak? Could you give us some ...

For one of our products?

Yeah. Same used product -- whatever, however old it is -- where it was two years ago, where it was a year ago, and where it is now, for, let's say, a three year old in each case?

I'd say for one of our products, you know, has a good market specification, we've seen from the trough to currently, probably 15 to 25 percent improvement in price.

And we're still where versus the peak? I mean, I assume we're still down.

Yeah, we're still down, but closing the gap.

OK. And then, on prices: you all did raise prices in the early spring, and the question is will there be -- as we move into the third quarter from the second quarter -- will there be a -- I know you won't talk about the amount, but just conceptually -- will there be a marked increase in realizations in the third quarter? Because, you know, some of those trucks were ordered to beat that price increase. Presumably you got more of the price increase in the third quarter. Will the third quarter benefit from higher price realizations than the second quarter?

I think it'll be comparable.

Comparable. Thank you very much.

Thank you.

Mr. of Gabelli Company, you may ask your question.

Hello, David.

One question: any evidence that the accelerated depreciation schedules enacted by Congress and the Administration have positively impacted demand?

I haven't seen any, but that's a good question.

So, nothing visible then. OK.

Thank you.

Mr. of Prudential Securities, you may ask your question.

Good morning, Andrew.

Hi, again. Just getting back to one of Gary's questions for the cash on the balance sheet. He asked for dividends and share repurchases. Is there any other usages that you're looking at now that you've paid off all the debt from that?

We continue to evaluate opportunities for 97 years.

Is there any ...

If you've got a good idea, we're all ears.

I don't participate in that part.

In terms of the fourth quarter, if the standards are not delayed, at what point do you have to make a decision what to do with your production in terms of plans going down, or slowing the rate, or whatever?

Well, I think most people in the industry try to work with a four to eight-week visibility window, and that would be true going up or going down. So, you know, we continue to use that as a guideline.

OK. Thanks.

Thank you.

Mr. of Asset Management, you may ask your question.

Hi, .

Hi. I had a quick question. You talked about the industry units for the year. Do you guys have a view or a guesstimate as to how many of those were pre-buy units?

Well, I think as we've indicated in our press release, much of the additional unit sales, compared to last year, we would anticipate were pre-buy related.

Okay, great, thanks.

Thank you.

Mr. of , you may ask your question.

Hi, .

Hello. Regarding your market-share gains in North America, are you--if you segmented the market between owner-operators, large fleet, small fleets, what have you, are you gaining share within some of those segments, or is it more that there is activity where you have higher shares?

We're gaining share in the medium to large fleet segment, and retaining a very high share in the owner-operator and small fleet segment.

Okay, thanks.

Thank you.

And then, on another subject, would you be able to see, within your lease fleet, increased economic activity, meaning, is your utilization higher than in your trucks or trailers compared to six months ago?

Yeah, we track that through our rental fleet, typically, and we're seeing some improvement.

Okay. All right, thanks.

Thank you.

Mr. of Lehman Brothers, you may ask your question.

Hi .

Mr. , please check your mute button.

Hi, this is his associate, Mark Livingston. I just have a quick question, about your market share gains in Europe, in what regions are they growing? And are there any other regions within Europe that you are targeting, to gain share?

Well, we'd like to gain share--profitable share, in all countries in Europe. Where we're seeing growth now would be in Germany and Southern Europe.

Okay, and for your parts business, do you expect further growth in 2003, beyond the five percent you've discussed as fleets continue to age?

Well, we are working hard at it, but I don't have a estimate for you.

Okay, thank you.

Thank you.

Once again, to ask a question, please press star one. At this time, we have no further questions.

Okay, thank you very much for joining us today. Goodbye.