帕卡 (PCAR) 2002 Q3 法說會逐字稿

Good morning and welcome to the PACCAR fourth quarter earnings conference call. This conference is being recorded at the request of PACCAR. If you have any objections, you may disconnect at this time. I would like to introduce Mr. Ron Ranheim.

Good morning. Joining me this morning is Mark Pigott, Chairman, CEO and Mike Tembreull, Vice Chairman and Andy Woltz, Treasurer. If there are any members of the media participating they participate in a listen only mode. Certain information presented today will contain forward-looking and involves risks and uncertainties including general economic and competitive conditions that could significantly effect expected results. I wish to now introduce Mark Pigott.

Good morning. PACCAR had a excellent year last year 2002 and a very good 4th quarter. Income for the fourth quarter was $122.2 million. And PACCAR earned $372 million for the full year. Operating income was $574 million for last year. or 2002, on an after tax basis return on equity was 16.5% and return on sales was 5.5% for the year. I would point out that for the fourth quarter, return on sales after tax was 6.8%. 2002 PACCAR paid dividends of $174 million which included a special dividend of 70 cents and it's good to see that dividend seemed to be back in favor. Stock equity increased at $2.6 billion and our credit rating is AA-.

Looking at the company, nearly every division within PACCAR contributed to the good results. Peterbilt, Kenworth, DAFF, Australia, Mexico all did well. PACCAR parts set records. PACCAR Financial and PAC Leased set quarterly income records. Information technology helped to improve efficiency throughout the company. And our dealer networks continue to be the strongest in the industry. We are pleased that DAFF Berlin, our dealership opened up last year. The condition of the global truck market continues to be challenging. Many of our competitors are struggling. [INAUDIBLE] lost over $500 million in the last year. Most European competitors are losing money with the exception of SCANIA. The Japanese OEMs continue to struggle and experience losses. PACCAR continues to generate growth and increase its market share in the north American and European markets to record levels. We jumped to 23.7% retail market share for class 8 in the U.S. and our products are just doing great. We earned the JD Power Customer Satisfaction Award for our class 6-7 products for the fourth year in a row. We also achieved a 6.7% U.S. and Canadian class 6-7 registration record. DAFF is also doing well and achieved 12.2% market share in the above 15 ton market. DAFF CF won the British 2002 Motor Transport Fleet Award for an unprecedented 5th time in a row. Versus you recall the DAFF LF was voted the International Truck of the Year 2002. The new DAFF XF was second in the voting for the 2003 International Truck of the Year. PACCAR continues to invest in its facilities, its products and information technology.

Major capital projects undertaken last year include the development of a new parts distribution center in the UK., the expansion of our Atlanta parts distribution center, installation of new DAFF engine, assembly and machining lines and new paint robots at Denton. I'm really pleased with the number of analysts that have taken the time to tour our customer call center, our telematics lab electronic dealership, our parts distribution centers and our truck factory. I think that helps you understand why PACCAR continues to generate excellent returns to its shareholders. Certainly there is much in the business news nowadays but nothing more so than pensions. A strength of PACCAR of course, is its conservative business approach. PACCAR invested $169 million in cash to fund its pension plan obligations last year. The funded status is better than a year ago. Our pension plan return on asset assumption is one of the most conservative in the automotive industry. PACCAR continues to demonstrate a consistent record of earnings as we've achieved annual net profits for 63 consecutive years. Shareholder return for 2002 was 9% exceeding the S&P 500 for 1, five and 10 years. PACCAR's business model a very high product quality, after market customer support, excellent financial services, the strongest dealer network in the industry and the use of innovative technology have all continued to these excellent results.

Taking a look at the industry, new truck inventory at 23,000, 24,000 units is similar to a year ago for the U.S. and this represents a two-month supply. The used truck inventory which we've talked about for several years, continues to improve and I would say it's not an issue now. Used truck price prices are stable to going up and Kenworth, Peterbilt and DAFF trucks are now achieving a premium of at least 10% and 15% and sometimes more in the used truck markets. Fuel prices have jumped within the last few months and are now about $1.50 and that's an issue for many trucking fleets. Freight tonnage is section essentially flat year on year and it will be one of the factors we will be looking at to see how this year progresses. With that, I'll be happy to answer any questions.

Thank you. At this time, we're ready to begin the question and answer session. If you would like to ask a question, please press star one. If you would like to withdraw your question, please press star two. One moment, please. Our first question comes from Andrew Casey of Prudential Securities. You may ask your question.

Good morning. How are you, Mark?

Fine, thank you.

If we could look at the near term there is some head wind that in other circumstances might affect the industry but given your outlook for kind of a flattish year in North America, the recent industry data indicating sequential improvement for orders for class 8. In your increased market share, do you think it's possible that you could have a flat production or something close to flat production schedule in North America for Q1 '03.

Our build rates currently are about the same they were in the November and December time in North America. So --

Okay and then in terms of the financial if we could get housekeeping out of the way up front. Ron, could you go through the cost items there.

Sure. For the financial services expenses in the 4th quarter, interest expense is about $59 million. Operating expense about $18 million and the loss provision of $9 million.

Thanks. I'll get back in cue.

Thank you.

Our next question comes from Gary McManus of JP Morgan.

Good morning. And congratulations on a very impressive quarter. I think it surprised everybody here. On the January orders, they were around 15,000 units for the industry which is kind of a nice uptick from what they've been in the fourth quarter. Are you seeing the same sorts of things. Are you seeing increases in the orders for January and can you give a flavor on which types of truck customers are stepping up with orders?

Well, what we see in the field is there is certainly some quoting activity going on. And certainly for the last year or two a number of customers from small to large have -- will try to see how the economy is going to unfold and as we've said consistently, eventually people do need to buy trucks to replace their older vehicles. Yeah, I saw the results for January and just have to see how that shakes out.

It is it fair to say that your production now includes all of the post mandate engines?

That's happened you know a while ago.

Okay. And I would love to hear your insights on what you're hearing from the customers in terms of how well accepted those new engines are performing as I'm sure you're aware there's a lot of concern on fuel economy and performance. I'm curious as to what your -- you're hearing out in the field and how they are performing?

I think they are performing as advertised. Every manufacturer has taken a slightly different approach and doing what they are expected to do. And we've been working with a number of the engine manufacturers and the power train manufacturers and we've invested many millions insuring that the engines do well and maintain the efficiency that our customers expect. So I think it's just business is normal now.

Right. And just the last thing is if I look on the full year basis, your revenues were up 20% but your SG&A is down 3%. That's pretty amazing. Can you talk on exactly how that was done and if you do get another 20% revenue growth hopefully in the future, can you keep the SG&A cost kind of flattish?

We've always taken a very proactive approach on cost whether they are overhead costs or manufacturing costs and we've been doing that for 98 years and I know you cover a number of other companies and they are asking the same questions. We'll just keep working it as well as we can.

Let me ask it another way. Your operating margins from were in the neighborhood of 9% and 10%. Would you expect to have better margins or the same?

We keep working as hard as we can to make the best products and provide the best returns to our shareholders.

Thanks a lot.

Thank you, Gary.

Our next question comes from Joanna Shatney of Goldman Sachs.

Good morning.

Great quarter. Can you talk about what you're seeing in terms of demand in Europe or would you say they are better or worse than they are here in the U.S. Some of your competitors have raised their forecast from '03 from a decline to more in line of what you guys have said to a flattish. Do you think it's going to be better than flat or can you talk about that? And where do you think you can continue to get share in Europe? Which regions are most attractive.

We're very proud of the job the whole DAFF team has done throughout Europe. We feel like were just in the early phases of continue to grow that company. We've launched three new products in really the last few years. And we're opening up new dealerships. PACCAR Financial has been in place for about a year and a half and that's really starting to gain traction. And then there is leasing opportunities so I think although we're the market share leader in the UK and Holland and Belgium and I think every other country in Europe presents some great opportunities as do those three continue to grow and I think the market will be relatively flat. Although it's still a good market in Europe. And as you follow the European competitors, you know that each of them are struggling to one extent or another and I think we'll see some opportunities to increase our share as a result of their struggles.

Mark, how is pricing for DAFF last year? Were you able to keep prices flat in Europe?

I think prices were very good, in fact prices went up. I think you asked me a question a few quarters ago on some information you gleaned from the competitors which was not accurate and of course we're the premium vehicle in Europe in the small, medium and the large categories and we continue extend that premium focus.

Great. Last question. Couple of quarters ago you talked about Sig Sigma and how it's saving you money but I think it's showing clearly now in the SG&A. Can you talk about what scope that ended the year at in 2002? Is it fully rolled out through all of PACCAR and when we do reach maturity do you think the annual savings rate can be?

We don't break that out. It's just part of the way that we do business as so many other elements contribute to PACCAR's success. We've got many thousands of employees trained on it. You've got hundreds of projects going on at any one time. But it's just another element of how we do business. Just like we push very hard to be the technology leader. And I think when you were out here for one of the tours, you saw a lot of things that we're doing and we really don't break it out as such.

Okay. Thanks.

Thank you.

Peter Jacobs of Regan McKenzie. You may ask your question.

Good morning. We lost him.

Our next question comes from Robert Toomey of RBC Dain Rauscher.

Good morning.

Congratulations on a very solid quarter. Just a couple of questions. I wonder if you had the Cap-X and depreciation numbers for full year available?

Sure. $79 million for capital expenditures. Depreciation and amortization was $218 million.

And do you have any sense at all what those could be for '03? For Cap-X I would say.

I think on the Cap-X side we've got so many exciting projects going on, it's probably going to be a little bit higher than that.

Okay. I was wondering if I could touch again on the question that that was asked earlier about production levels. It sounds like that you think production is going to be held relatively flat in the 1st quarter?

We always match our production levels to meet industry demand and so we do and have done and plan to do. So right now, there seems to be a lot of interest by customers throughout the world for our products. They recognize the advantages of having a PACCAR product. And production seems to be relatively steady.

Okay. Great. When you talk about gaining market share, you may not want to comment on this but I'll ask it anyway. Do you have some sense of where you're taking shares, what companies I mean?

It's really a broad group of customers. Everyone from the very important customers that have one or two trucks to those that have many hundreds of trucks.

So you're seeing some inroads in of the large fleets as well?

Absolutely.

Great. The question was asked earlier about your gross margin in the quarter, it was very strong, a lot stronger than I had projected close to 13.5% which I think the last time you were at those levels was '99. Do you think you can sustain those margins in 2003?

Well as I've indicated on a number of occasions, we work very hard to try to deliver the best results to our shareholders and we've got a number of factors coming into play, obviously the general economy here and in Europe and around the world and so we want to make sure that we have a very progressive focus on our cost control and try to deliver the best margins we can.

Great and one last question. What products and markets do you think hold the most opportunity for you in 2003 or will be the most promising area in 2003?

I think you know, 2003 will be challenging as I've indicated. You've got a lot of uncertainty in the economies around the world. You've got the issue of possible military action. And what effect that will have, not everybody is sure. So I think as far as our products, we work very hard and making sure that our products are the best in the industry so I say there is opportunity across the spectrum of our products.

Great and one last question. It has to do with off road, Mark. How do the off road applications do and would you see some potential for growth in off road configurations particularly in the oil patch as well. It is there anything going on there in the oil service area that has changed or new?

We've been a consistent supplier to oil services for decades. And in fact, it might be fun for you to come out to one of our factories and get into one these big rigs.

Okay.

We're supplying a very excellent product to those companies. They are sometimes operating in difficult terrain and we find it to be steady business.

Thanks a lot.

Thank you.

Mr. Peter Jacobs of Regan McKenzie.

Peter, you're back.

Sorry about that. I think I made the mistake last time and hit the wrong button. Very nice quarter. And secondly, to get more to the questions, Ron, could you talk about the trend in the loan loss provisions in the financial services business. We've seen a very nice decline there over the past year and it looks like at least the credit issues could probably be behind you and I'm just curious if it's now at a state that you expect it to stay or do you think there is more room for that percentage of revenue to decline?

This is Mike Tembreull and I can comment on that. Yes, we've seen I'm but there is still uncertainty. With the fuel prices up 35% in the last 12 months. That's a concern. So we have seen some improvement and the indicators through the 1st quarter were good as far as past dues and losses were concerned. But this is a business with a lot of uncertainty going forward and we'll have to see what happens.

Okay. Great. And secondly, Mark, as I look at the dynamics of your market share throughout 2002, we saw your market share get as high as 27% in late summer which is a number that I can't recall ever seeing. That is a tremendous market share and it subsided somewhat towards the end of the year finishing at about 22% so I was just curious, can you talk about the dynamics that you saw there and what implications there are perhaps going forward.

I have got to get those reports from you. I don't recall 27%. I can get you in the marketing department with reports like that.

I can send the data over. But it's based on new builds.

We, -- well, our approach has been for 98 years to really supply the very best products in the industry in which we compete and we keep reinforcing that so we do want to achieve a reasonable level of share and that keeps the growth going which allows us to reinvest. But I think where we are is certainly a reasonable range and we would like to continue to grow. Certainly, it's a very competitive market and competitors who may not be delivering profits at all but are more intent on retaining market share will certainly be examining the situation. So, you know where we are is certainly a great accomplishment for the teams and very, very proud of them. We'll just keep working hard to make sure we retain as much of it as we can.

Great. My data for Europe is not as good as that for the North American market and I was wondering if you could give us some numbers on where European sales finished the year?

Well, for, there are so many different numbers, but for Western Europe above 15 tons, the sales are about 215 to 220,000 units.

So that end ended up better because in the second quarter I think you talked about 210 in Europe so it looks like Europe had a nice little upside.

Kind of in the range that we talked about.

Okay.

I think we were talking 210, 215 and they ended up 215, 220.

That's all I have.

Miss Karen Nebblehart of the Government of Singapore Investment Counseling, you may ask your question.

Hi. First of all what is your tax rate for next year?

The tax rate is always a function of our business mix. We were pretty steady this year or averaged about 34%.

So, should I use that for next year?

It's a function of our business mix and that's about all I can say.

The -- on the pension side, I know you put a lot of cash into the pension. Do you expect any increase through 2003?

Not really.

Okay. And then I don't know if you answered this or if I missed the answer. On the credit losses, you gave us $9 million for this quarter. Can you tell us what it was in Q3 and also a year ago for comparative purposes.

The loss provision in the 3rd quarter was a little over $10 million and the loss provision in the fourth quarter last year was $23 million.

Okay. And then you talked about build rates being fairly steady. Can you differentiate between U.S. and Europe? Is it fairly steady in both regions?

Yeah. I think it's fairly steady in both regions.

Okay. Thanks a lot.

Mr. Andrew Casey of Prudential Securities.

Hello, again. Can you comment on the North American lead times. Are they contracting, expanding or kind of flat?

You mean from order to customer?

Yes.

Well I think that really depends on which manufacturer you're talking with. I think ours are reasonably steady and some competitors have had or are planning factory shutdowns so I don't know what their lead times are right now.

I was asking about yours and you answered it. In terms of the engine designs that are still out there. Are they causing to you change anything in your truck design or are they pretty much set?

Well, I think as we mentioned, we've been working with different engine manufacturers for about three years now on making sure whatever designs they come up with do fit in our chassis and do deliver good results to the customers. So it's been a very much of a partnership and seems to be going well.

And then one last question on the balance sheet, you have a -- continue to have a relatively huge cash position versus others in your peer group. In giving your growth goals, you talked about DAFF growing probably better than the market going forward, some of the finance and rental and parts business has grown better than the market. What do you envision would be the priority in terms of cash usage going forward? Thanks.

Just make a note on cash. When you earn a profit every year, it usually has a positive impact on your cash. And some of our competitors have not seen that. In terms of our usage of cash obviously we continue to pay an excellent dividend to our shareholders. I think that's very important. And we also have a very proactive and comprehensive capital investment program to make sure that our products and our facilities and information technology and all of the elements that contribute to our customers receiving the very best services keep getting funded so those are really where we look for cash usage.

I guess if I could ask a follow-up to that, Mark. The capital investment you have planned for next year is not even going to come near what your cash position is. Is there anything out there that would be attractive in terms of expanding your reach or is it just the time to focus on your own operations and grow them internally?

That's a two part question and I'll give you a two part answer. We're always focusing on growing our own company internally. Through the decades, PACCAR has grown internally and through acquisition with Kenworth, Peterbilt. DAFF and the list goes on and on. So with very few competitors remaining in the industry, there are probably limited opportunities but area always reviewing the situation.

Thank you.

Thank you.

Mr. Joel Tiss with Lehman Brothers.

Great quarter. I was just wondering, what percentage of backlogs are for the second half of the year as opposed to the first half?

We don't break that out.

How about margins? Your margins were strong. What percent of that came from the old engines pre-October?

I'd say a very, very small percent.

Okay. That's it. Thank you.

Miss Janella Liddy of McAdams, Wright & Regan. You may ask your question.

Hi. Most of my questions have been answered but what is the current lead time for both Peterbilt, Kenworth and DAFF trucks if you were to order a truck right now, when would you see them coming off the production line?

We've always tried to hold a lead time anywhere from 6-8 weeks. Have used that as a guideline for decades.

Okay. And you did mention that your return asset assumption for the pension plan was conservative. What is that assumption?

We'll have that released in the annual report in the next month or so.

And is the average fleet age about four years?

In that ballpark.

Great. Thanks a lot. Appreciate it.

Mr. Tom Fogarty of UBS Warburg, you may ask your question.

Question about your inventory. It seems like it's come down quite a bit from 3rd quarter and I was wondering what drove that and what we might expect it going forward.

The inventory on the balance sheet?

Yeah on the balance sheet.

We always got very good manufacturing teams that are working hard and making sure that when we build the product, we deliver it to the customer. And I think that is just continued focus on making sure that once we get the material in, you build it and deliver it. And unlike many our competitors, we only build two orders so we don't have lots of trucks hanging around the factory for stock. I guess I'm sort of curious why the inventory built up so much than Q2 to Q3. Well, I think there was a big ramp up in particularly in North America as the emission factor took effect. So the trend would be down then and not back up? Well, I don't know if there really is a trend. We work very hard on this every day. I think you can take a look at the second and 3rd quarter as a bit unusual.

Okay. Thanks.

You bet. Thank you.

Mr. David Zeno with Gabelli Company.

Hi, David.

Hi. How sensitive do you think your customer base would be to an increase in capital equipment tax writeoff?

I think there are certain customers that would certainly benefit from that. Probably not across the board. It really depends on their individual, financial results.

Okay. Thank you very much.

Thank you.

Mr. Michael Brigg of AG Edwards.

Good morning. I wonder if you could comment at all on the cost of expensing stock options as we move into this year.

Yep. We're looking at about $3 million cost.

And as a follow-up just on the accounting questions, was there any change in LIPO reserve as of year-end?

No. Just normal.

Okay. Thank you.

Thank you.

Mr. John Rogers with D A Davidson.

Good morning. I'm curious in terms of PACCAR Finance, what portion of your manufacturing sales now flow through there either finance trucks or leased?

It's around 30%.

30%. Is that true in both North America and Europe?

No it's lower in Europe as we're doing our ramp up there.

But you would expect that over time that would catch up to North America?

That is what we're seeing as the trend worldwide.

Okay. Thank you.

Miss Joanna Shatney with Goldman Sachs & Co.

I just want to follow-up, your old asset return was slightly under 8%, 7.8%. It didn't sound like you're planning on changing that since it's already at low end. Is that right?

A little bit slower. We missed that one.

The long-term return on planned assets on the pension. Your low versus most of the other companies that cover both in discount rate and that rate of return assumption, there is no expected change in either of those in '03?

We're continuing to review that and make sure it's the most conservative and reflective of the industry.

Okay. Just to switch gears to get at the cash question. Can you just talk about the process because I know you were involved in some of the negotiating on how you set the dividends? Why not go to a higher rate since it's a special that doesn't really tie you into any certain level? Since you have so much cash. Why didn't you make it a bigger number? Is it the economic situation or political situation. Or would you rather hunker down. Why not do more than 70 cents although 70 cents was a good number.

Compare that 70 cent special versus any of my competitors.

But you could have paid out substantially more. Just curious why you didn't go larger. Well, we've had an110% increase in our dividends in the last five years. You might want to put that on the board and see how it compares versus the automotive industry in general.

We have a very good payout. Obviously we look at the percentage of dividend payout versus the per share earnings and certainly one of the factors that's considered.

Any thoughts about going into new markets and would you rather go organic or buy up someone else and I don't mean Europe but everywhere else in the world?

You know we are everywhere else in the world except for a few markets in Asia. And those markets for the last decade have been pretty difficult so you know we're growing in our regular markets and we sell into about 100 countries over a few year period so we feel our products are well represented around the globe.

Okay. I know the industry shares statistics for delinquencies and you said that the trend had gotten better for PACCAR. Is that true for the rest of the industry as well?

We're not aware of what some of the others are doing. But our trends have been positive.

Okay. And that's one of the things that you consider a leading indicator in the past.

Yes. But we're cautious about the fuel prices. That's something that is also a leading indicator.

Okay: Thank you.

Thank you.

Once again to ask a question, please press star one. At this time, sir, there are no further questions.

Thank you very much for everyone joining us today.