帕卡 (PCAR) 2003 Q1 法說會逐字稿

Good morning, and welcome to PACCAR, Incorporated first quarter earnings conference call. All lines will be on listen only until the question-and-answer session. This conference is being recorded. If anyone has any objections, you may disconnect at this time. I would like to introduce Mr. Andy Wold, PACCAR Treasurer. Sir, you may begin.

Thank you. Good morning. I'd like to welcome those listening by phone and those on the Webcast. My name is Andy Wold, Treasurer of PACCAR, and joining me this morning are Mark Pigott, Chairman and Chief Executive Officer, and Mike Tembreull, Vice Chairman. As on prior conference calls, we request that if there are any members of the media participating, they participate in a listen-only mode. Certain information presented today will be forward looking and involve risks and uncertainties, including general economic and competitive conditions that may significantly affect expected results.

Now, at this time, I'd like to introduce Mark Pigott.

Good morning. Well, PACCAR recorded a strong performance in the first quarter of 2003. Our focus on profitability continues to result in good earnings in a difficult market. PACCAR achieved a 6.1 percent return on sales after tax. PACCAR remains a leader due to many proactive steps regarding new product development, investment in facilities, information technology, our dealership network and certainly people. And our business model of ensuring we produce high product quality, excellent after-market customer support, extensive financial services and innovative technology all contribute to excellent results.

Taking a look at the market, the industry new truck inventory is about two month's supply, so that's close to normal range. Used inventory that we've talked about over the last several years is really no longer an issue. Used truck prices are stable to up, and Kenworth and Peterbilt are maintaining their used truck premium of 10 to 20 percent. Fuel prices, which spiked at close to $1.80 a gallon, have subsided to the low $1.50s, but fuel prices continue to be an issue with many operators. Brake tonnage has shown a slight improvement in the last quarter, though the Purchasing Managers Index fell in February to 46 percent, the lowest reading since the end of 2001.

Taking a little deeper look at the market, the truck purchase cycle has continued to lengthen. In fact, the average age of the truck fleet is now 5.8 years. Now, this is a real benefit to PACCAR and our customers because of the reliability and quality of our vehicles.

Industry orders in quarter one, 2003, improved to a more normalized level, and industry build rate has really been steady since October of last year. In fact, the industry backlog has increased a little bit.

Looking at PACCAR, we continue to focus on reducing our costs, and our SG&A expense was a little bit lower in terms of percentage. In fact, it's one of the lowest in the last several years. Our finance companies, which are doing an excellent job around the world, have seen past dues improve after peaking in the first quarter of '01, and we consider our finance portfolio to be in better shape than many of our competitors.

Manufacturing gross margin of 12.5 percent in quarter one was one of our best results in recent years, and I would just point out, for those of you that track the industry, that our gross margin includes engineering and R&D expenses and any retirement benefit expenses, which is unlike other companies when they report their gross margins.

Geographic diversification, PACCAR has about 50 percent of its revenues generated outside of the U.S. Our BS remains very strong and after we invested $169m in cash last year, we really do not have any pension issue.

With that, let's open it up to questions.

Thank you. At this time, we'd like to begin the question-and-answer session. If you'd like to ask a question, please press star one. You'll be announced prior to asking a question. To withdraw your question, you may press the pound key. Once again, to ask a question, please press star one. One moment.

Our first question comes from Joel Tiss of Lehman Brothers. You may ask your question.

Good morning. How's it going?

Good morning, Joel.

I just wondered if you can give us a sense financially of what impact the lockout had on the first quarter results.

No impact.

OK. It didn't hold your SG&A down at all?

No impact.

OK. And can you give us a sense of why you're overproducing retail? It' seems like a fair amount in the first quarter here.

I'm not sure I understand the question.

It seems like your production rates were up a lot higher than your order rates in the first quarter.

I didn't see that.

OK. Well, the...

You know, Joel, you've been tracking us for years. We get orders in, we build the trucks. That's how we do it.

All right. Last, can you give us any sense of the impact from currency translations?

I'd say it's slightly positive. You're talking about euro to dollar?

Right.

Yeah. I think it's, you know, slightly positive.

Joanna Shatney, you may ask your question, from Goldman Sachs.

Good morning, Joanna.

Good morning. Another great quarter.

Thank you.

Can we just talk about what's going on with stock production? I know you don't want to give us the number of trucks that you produce a day, but we can see how you're gaining share here in North America because we've got good statistics. Can you just talk about if you are gaining share, and actually production was up [inaudible] year over year?

Well, our production is, you know, pretty steady around the world and in all of our factories. DAF is gaining some share as the European market is a little bit softer, as we, you know, mentioned in our press release. And medium duty, after winning the JD Powers Satisfaction Award four years in a row, we're very pleased to see that medium-duty share for PACCAR has jumped up.

So you would characterize it as just Europe being better? It's pretty much share gain across the businesses?

Yeah. I think really, you know, our build rates are, and I think for the whole industry, they're pretty steady since, you know, the October timeframe.

OK. Can you just talk about your view of the U.S. market? You guys mentioned two of the things that I've been looking at, the fact that truck rate really hasn't shown the drop off that the ISM index showed or that some of the industrial company order rates showed. Is it your view that things had pretty much bottomed? And what's your view on how quickly this market could come back? Do you think it's something that we could still see this year?

Well, I think that, you know, we're probably, you know, bouncing along the bottom. And that's been an area we've been for a couple of quarters. In terms of any change in that, I think it's just going to be driven by a lot more economic factors. So we'll just have to see how that proceeds.

OK. And one last question and I'll go back in queue. You guys have more cash at the bottom of the cycle than you've ever had before, and although you've always been very generous about how much you pay out, you know, in terms of payout ratio, are you guys, and Mike and I have actually gone through kind of the acquisition candidates out there and there's not a lot that's very attractive at this point, would you be biased to maybe keep the higher end of the payout ratio, now that you do have so much cash on the BS?

Well, you're talking about our dividend payout?

Yeah.

You know, if you look at our, the only thing we really track is our quarterly dividend and that's the only thing that I think most of the analysts really track. And, you know, that's seen some very steady growth for decades.

Yeah, but if you look at total payout, that special dividend can be as much as 50 percent of your earnings. And now that you do have so much cash at the bottom and as the cycle comes back, whenever it comes back, we'll conceptually build cash...

Yeah, I think, you know, it's a good question. But when you look at the cycle for, well, for any industry and when you look at it for us, I think you need to be aware that if you looked at where we were, say, 10, 15 years ago, it's a very different composition in terms of where our business is and the type of business we're in. So of course with so much of our business in Europe, and now we manufacture our own power train, and by that I mean axles and even some brakes and certainly engines, that there are different cash requirements. So it's a little bit of apples and oranges when you're looking at the cycle.

OK.

Good question, though.

Yvonne Varano of CIBC World Markets. You may ask your question.

Good morning. Thanks. It's CIBC. On the financial services, can you break out the expenses between the provision for losses interest expense?

Sure. The interest component was $61.2m; SG&A, $17.6m; and provision for losses, $8.1m for a total of the $86.9m.

Thanks. I know you've talked about your market share in Europe in the past. Can you tell us what it was in the first quarter?

Particularly in Europe, the different countries have different reporting cycles in terms of registrations and retail sales, so it's, you really almost have to wait for the end of the year to get a final tally. But DAF, with the introduction of their XF and the way it compliments the CF and LF it’s a very, very strong product range, the most modern product range of any competitor in Europe. And they keep adding dealers and it's a very exciting time for DAF trucks. They've done an excellent job.

Can you talk about your volumes? Whether or not they were down and the magnitude of the 5 to 10 percent that you expect for the full year?

Well, I can't really comment on, you know, the full year as far as we're concerned. I would just say, as I mentioned to Joanna and others that, you know, our production rates have held quite steady since the October timeframe.

OK. And then just on currency, currency on the year seems to have a 23 percent variance year over year, and you said the impact from currency was slightly positive. Given that variance, I would have thought you would have given a more positive outlook on that.

Well...

I mean slightly, is 23 percent...

We’re not in the currency business that way and so obviously we work with whatever the currency rates are. I would just say that with the euro, you know, a little bit higher than the dollar, it's had a positive impact. That's about really all I can say. Because, you know, it swings and roundabouts, and sometimes the euro will be worth less than the dollar. So we just take it as it is.

OK. I'm just wondering why you hesitate to be more specific on currency issues. Most of the companies in the industrial states have been very forthcoming with information on this topic.

Well, it's the way we run our company.

OK, thank you.

Thank you.

John Rogers from DA Davidson, you may ask your question.

Good morning, John.

Good morning. Mark, could you talk a little bit about the parts business? I mean with the age of the fleet growing, and I know that you've invested a lot there, have you seen a significant uptick in that business?

John, you're cutting out just a little bit. Can you ask that...

I'm sorry. I just wanted a little bit more color on your parts business, if I could. I don't know what you can say, but with the age of the fleet lengthening, and I know you've invested a lot in terms of your distribution there, has that had a significant positive impact?

Well, parts has been a real steady business for PACCAR, and as you recall from our annual report, PACCAR Parts had its tenth consecutive year of record profits in 2002, so last year. And as you may have seen in our press release, we put about a paragraph or so relating to electronic dealership and some of the tools that we're developing for dealers to use that will enhance their parts and service sales. So we spent a lot of time and energy and investment working on making sure that our after-market service component delivers the high quality that we expect when we deliver a Kenworth, Peterbilt or a DAF truck.

And in terms of percentage of your business, any sense that you can share with us there?

Well, you know, we talked about sales of parts, it's about $1b. That's all we can really say.

OK. Great. Thank you.

Thank you.

Gary McManus of JP Morgan, you may ask your question.

Good morning, [Gary].

Hey, Mark. How are you doing? And congratulations on another great quarter.

How are you doing? OK?

I'm going great.

All righty.

Hey, just getting back on the currency. When you said "slightly positive," were you referring in terms of the impact it had on the top line or net income or both?

I meant both.

Oh, OK. And, you know, you said you're about half U.S. or half North America, half international. If you had 29 percent sales growth, I'm sure you don't want to give the precise figures, but with a, did they both, you know, equally contribute to that revenue growth or was one region stronger than the other?

I'd say they were all pretty comparable. I mean, you know, once again, as we indicated in our annual report, Australia seems to be doing well. They had a record year last year. We don't break it out on a quarterly basis. But, you know, Mexico has been good. The U.S. and Canada has been, you know, steady for us and steady for most of the industry. And Europe, production is steady and it looks like we might be picking up a little bit of share. So I think it's, you know, it's throughout the whole company.

The 29% growth is pretty evenly divided among the different geographic regions, relatively speaking.

I'd say relatively, yeah.

OK. And in terms of the parts, the parts probably didn't grow 29 percent though, right? I mean was it more on the OEM business as opposed to parts?

Well, if we can get parts to grow 29%, Gary, I've got to get you working here.

Yeah, I know. I mean , so I'm saying that probably your equipment business grew at a faster rate than 29% because parts presumably didn't, you know, last year, it was up 13 percent, so maybe something like that for the first quarter?

Well, I really don't break it out, but I'd say, you know, all elements of the business contributed. So that would be truck manufacturing around the world, parts, finance, lease, you know, even information technology. Everybody was in, you know, working hard and trying to make something positive happen.

Yeah, OK. And capital spending and depreciation, do you have the first quarter figures?

Yes, we do.

CAPEX, $11.2m; and depreciation and amortization was $62.9m.

OK. And do you have, like, roughly what you would expect those numbers to be for 2003?

No. We're just, you know, we're working on a lot of exciting projects so...

I think you said in the last conference call you expect CAPEX to be slightly higher. I mean is that still...

I think that's a fair comment.

OK. Thanks a lot. And again, great quarter.

Thank you.

Steve Haggerty of Merrill Lynch, you may ask your question.

Good morning.

Good morning to you. A quick question on financial services. The swing in profitability quarter to quarter, year over year. How much of that was due, can you give us a sense of how much it was due to the lower credit losses and how much was from increasing contribution of the PACCAR Financial Europe?

PACCAR Financial Europe continues to grow. Credit losses were, you know, about half of what they were in the first quarter of last year.

And in terms of the credit losses, I know it was a tough quarter last year. Is where you're running now, is that kind of a more normalized level or would you expect that it would even continue to decline, probably at a slower pace but slow, decline even from here?

Yeah, a lot of it depends on what happens with the economy and what happens with fuel prices. You know, the jump in fuel prices in the first quarter, you know, caused some problems for some customers and now they're down a little bit, but they're still at high levels. So I'd say fuel, insurance and the economy are going to, you know, affect what happens in the future, here.

And just one last question on market share, the share of the U.S. Class Eight market or sales or share of production. It looks like you guys just had a fantastic quarter of market share. Is the level of market share you attained in this first quarter, is that kind of a sustainable rate or would you expect it to moderate a little over the rest of the year?

Yeah, you know, we don't want to be too focused on market share. You know, our goal is to build the best product in the industry in whatever market we're serving. And I would not really have a comment on market share. You know, I think over the decades we've seen a steady growth/ And I think one quarter or one month, you know, can be, you know, up and down. So it's really the long term that we look at.

OK, thank you very much.

Thank you.

John McGinty of Credit Suisse First Boston, you may ask your question.

Good morning, John.

Good morning. A pretty impressive quarter, to say the least, Mark. One question. On Europe, as you guys are moving to pick up dealers, can you give us any idea of, have you been successful, how many dealers that you are adding over there or any kind of a sense, quantify any of that?

We really can't quantify it, but I can just say in general they've been quite successful in picking up new dealers, and of course we just opened up our own company-owned dealership in Berlin which I invite you to visit when you're over in that neck of the woods. And I think as DAF has got a wonderful product range and such strong support programs and now with PACCAR Financial Europe really starting to get some traction, I think many dealers in many countries that perhaps were not that aware of DAF are now aware of it and excited by the opportunity.

So would you think that your ability to continue to gain dealers, picking up new dealers, it's not a 2003 only? It's a several-year phenomenon?

Yeah. As we look, you know, over the last, oh gosh, 40 years, we have steadily increased the number of dealer locations, and that's certainly one way to evaluate it, in all of our markets.

Right.

So we work very hard and have people dedicated to doing that every day. And so it's not a one-year or two-year or five-year program. It's just, you know, as I say, it's 40-50 years we've been working this and we'll continue to work it very hard.

And in then in the States, in the first quarter, did you still have any pre-October engines? Because you can put them in as long as you've got them. Or were they all used up in the fourth quarter?

Yeah, we used all those up last year.

So they're, all of the engines that you put in were the new, more expensive engines this quarter?

They were the new engines. That's correct.

OK. And in terms of the orders, are you seeing any, as the whole controversy rages, are you seeing any hesitation, I mean since, particularly at Peterbilt that's largely been a Caterpillar preserve, do you see any hesitation in terms of customers, in terms of waiting until the new ACERT engine is available or hesitancy about that? Or are they just - I mean your share would suggest there's not an issue. But I just want to see if what your dealers are telling you in the field, is there any sense of either hesitation or holding back or anything on the part of customers as they evaluate the whole engine picture?

You know, as we've mentioned for the last several years, we work closely with all of our engine suppliers around the world. We have an excellent relationship with them. And we put in whatever engine customers would like.

OK. Thank you very much.

Thank you.

Andy Casey of Prudential Securities, you may ask your question.

Good morning.

Good morning. How are you?

Fine, thanks.

Good quarter. A couple questions. One kind of piggybacks on John's question. If we look at inventories, they were down sequentially from fourth quarter despite presumably an increase in engine prices for parts inventory. Is there something unusual going on or is that just seasonal and we shouldn't get too complicated on that?

I don't think you should spend too much time worrying about that.

OK. And in terms of the commentary around the fuel price spike and other issues, have you seen any sort of contraction in your order board for North America?

Well, I think as we've indicated in the press release and in the opening comments, it's a challenging market. It continues to be challenging. And I think that will be the way going forward.

OK. Thanks a lot.

Thank you.

Robert Toomey(ph) of RBD Dain Rauscher, you may ask your question.

Hello, Robert.

Good morning.

Good morning.

Great quarter.

Thank you very much.

Mark, I have one question relating to a comment that you made in the press release and reconciling that with sales, and just to make sure I understand this, you said North American industry heavy-duty truck orders were 32% lower in the first quarter versus a year ago, yet your revenue was up substantially. Can you explain to me what's going on there?

Well, that was industry truck orders.

Industry. OK.

And I think, yep, the word "industry" is in there. You got me thinking, there, for a second.

Got it. Industry.

So that's not PACCAR. That's industry.

Great. I'll wake up, here. It's still early. The second question I had was on medium-duty trucks. You know, you seem to be making some headway there. Can you talk a little bit about your successes in the medium-duty area of the market and your expectations for that, longer term?

Well, it's a very, you know, exciting area. It's an area that we have really not been in until, let's say, the last five or six years. We've got great products and we've been fortunate to win the JD Power Award four years in a row. And that's a wonderful accomplishment for all the people at Kenworth and Peterbilt and their dealers. So I think as we continue to evolve in that market and customers become aware that we have a product that can satisfy their needs, we're looking for additional growth.

Um hm. Would you say that some of your market share gains in the first quarter came from medium-duty?

Well, I think the market share is pretty well divided between Class Six, Seven and Eight. So I don't think, they don't really overlap.

OK, great. And then, you said, you mentioned earlier that, when you were talking about uses of your cash, you were talking about further integration of your manufacturing and I haven't really probed that issue too much. Can you just talk a little bit about how you're further integrating manufacturing of components versus, you know, your strategy historically of sourcing components from suppliers?

Well, we certainly source the vast majority of the cost in the vehicle from our excellent suppliers. And I think that was to Joanna's question, if I recall, that if you look back 10 or 15 years ago, at, you know, a different cycle, what has changed is now we actually produce and, you know, engineer and test and develop axles and engines and a little bit of brakes in Europe. And as you're aware, in the industry those require some pretty sizable capital investments. So I think that was in response to that question, is that the uses of cash have, you know, modified over the last 10 to 15 years.

OK. And then one last question, if I might. And that has to do with your growth margin, which was strong, stronger than I expected. Do you still feel there's room for further cost improvement and margin improvement?

It's a challenging market, and we'll just keep working that every day.

OK, great. Thanks a lot.

Appreciate it. Thank you.

Thank you.

Mike Braig of AG Edwards, you may ask your questions.

Good morning.

Good morning, sir. You've spent some time talking about electronic dealerships and expansion of dealers in Europe, yet costs in that area don't seem to show an overall SG&A. Can you explain what's going on there, when even slight expenditures at any combination of 1,800 locations would seem to add to significant dollars?

Yeah. I missed your first name.

It's Mike Braig of AG Edwards.

Hi, Mike. Well, the 1,800 dealer locations, we don't own those. Those are independent. You know, we own half a dozen. So we developed, you know, different tools for the dealer body to use. And these are independent dealers. That's, you know, that's our approach. And the dealers will usually, you know, pay for the tools or offset the development costs. And then of course they use the tools to enhance their business and, you know, take care of the customer and hopefully generate additional profitability. That's really, you know, an independent group of dealers.

So you're inferring that the cost of that program is largely born by the dealers?

I'd say it's a cooperative program, as many, many programs are within our company, and certainly the industry.

OK, thank you.

Thank you.

Alex Farlow of MAK Capital, you may ask your questions.

Good morning, Alex.

Good morning. My questions are actually already asked. Thank you.

OK, thank you.

Congratulations on the quarter.

thank you.

Andy Casey of Prudential Securities, you may ask your questions.

Good morning, Andy.

Good morning, again. Just a follow up on the SG&A. Mark, is what we're looking at this quarter something you would term as a transition with all the electronic communication that you've been investing in plus some of the Six Sigma work in operational improvement? Is this something we should expect going forward, because it happened both in manufacturing and finance?

And you're asking, is it linked to Six Sigma and technology?

Well, in a way. But the base question is, you know, you had a significant SG&A improvement. And I realize the revenues were higher. But is what we're looking at in this quarter something that you expect to continue in future quarters? Is this a change in how you do business or is this just better revenues?

Well, if, you know, you look back over the last few years, our SG&A is, you know, I think it's got a downward trend which we've worked very hard on. But it's certainly in line with a few other quarters we've had. So I think it's just an ongoing program within the company, that we continue to try to become more efficient in every aspect of the business.

Thanks.

Thank you.

Eli Lesgerten(ph) of HC Wainwright, you may ask your questions.

Good morning, Eli.

Good morning. I think you got everybody impressed today. I have a question. I came in late. A couple of things. One, you said you held your production, it was relatively flat. Do you see anything on the horizon that would cause you to alter your production schedules over the next three to six months at this point, or do you expect production to be relatively flat over the next six months?

I really can't comment on it. You know, the way PACCAR approaches production, we respond to order intake.

I know that.

And that's how we do it. If orders go up, we'll produce more. If orders go down, we'll probably produce less.

But at this point, you just, I'm just wondering, we're just coming back on the industry conditions and stuff, whether you see anything that would , you know, there's a lot of expectations out there for a stronger second half in the marketplace, things getting better. Do you see anything there that would drive that at this point?

I really can't comment on that.

OK. And just one clarification. Your revenues of fourth quarter, of the first quarter was very similar to the fourth quarter. The profitability was a little different. I don't know whether you mentioned how much is pension or health care costs and, you know, whether there's a mix issue in that.

It was not related to pension or health, we don't, that just is not a factor for us.

Yeah. I mean you may , your truck manufacturing was somewhat lower in the first quarter than the fourth quarter on relatively similar volume. Was that just a mix issue or timing issue, at this point, first quarter of the year?

I think it just continues to be a challenging year, and it's just kind of where we are.

All right. Thank you.

Thank you.

Joel Tiss of Lehman Brothers, you may ask your question.

Joel, welcome again.

Yep. Thanks a lot. When do you guys expect CAT to start delivering their ACERT engines to you guys?

Well, I'm going to make a bold statement. I think they're going to start delivering when they're absolutely ready to be delivered.

Boy, you really are sticking your neck out on that one.

Joel, you've worked with us for too long.

Is there any sense that there's a pre-buy? That the customers are a little bit nervous about whether to go with EGR or ACERT, so they're focusing more on the bridge engine? Is there any sense that that's happening?

You know, we put in the engines the customers request, and that's really the way we approach it.

All right. Last question. Are you guys thinking of accelerating your share repurchase program in the near term?

Well, we continue to review opportunities.

All right. I figured I'd get a chuckle out of that. Thank you.

All right. Thank you.

Joanna Shatney of Goldman Sachs, you may ask your question.

Good morning.

A few quick follow ups, here. It's not unusual, actually, seasonally for the production to kind of outpace the retail sales data, especially if the order rates are a little bit better. But we're all starting to see inventories kind of grow. And you talked about the industry being at about two months of inventory and [inaudible] it's kind of normal. But it is getting on the high end of what we would consider normal. Is there anything that's happening in the retail data that's making you a little nervous, that the inventories for the industry might be getting a little too high?

Well, I mentioned the backlog for the industry had crept up a little bit, which is, you know, for somebody in manufacturing, is usually OK.

OK. So you think the retail will ultimately catch up?

It always seems to even out.

OK. I was at the truck show and I spent some time with both your Peterbilt and Kenworth marketing guys...

Those were good-looking stands, weren't they?

Yes, they were. But they were actually a little bit more worried in the exact opposite of what Joel's question was about the pre-buy ahead of the ACERT engine. They were actually worried that some of your customers might wait to get ACERT. Is there any risk that that happens?

Well, I missed seeing you at the truck show, so I really can't comment on what they said. But I think, I'm sure we're all in agreement here.

On which side? Pre-buy or no pre-buy?

[laughs]

All right. Thanks.

Thank you.

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

Great. Thank you all for participating.

Thank you.

Bye.