帕卡 (PCAR) 2003 Q2 法說會逐字稿

Good morning and thank you all for patiently holding. I would like to remind all parties that you are in a listen-only mode until the question and answer segment of today's conference call. At this point I'd like to introduce Mr. Andy Wold. 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, Treasure of PACCAR.

Joining me this morning are Mark Pigott, Chairman and Chief Executive Officer and Mike Tembreull, Vice Chairman. As with prior conference calls, we request that if there are any members of the media participating you are participating in a listen-only mode.

Certain information presented today will be forward-looking and involve risk and uncertainties including general economic and competitive conditions which may significantly affect active results.

At this time I would like to introduce Mark Pigott.

Good morning.

PACCAR as you know is an exciting high-quality company with an impressive long-term track record, strong cash flow, and for the last of decade, earnings per share growth rate above the average S&P 500. A company with a stock price selling at a modest discount to the overall market.

PACCAR has established itself as one of the global leaders in the transportation and finance business. One of the elements in PACCAR achieving strong performance is an extensive benchmarking program, which takes each separate element of our business and compares it to world leaders in different industries.

Some of the world leading companies that we benchmark against include Microsoft, Dell, Illinois Tool Works, Citigroup, Wal-Mart and Toyota. This benchmarking has resulted in PACCAR steadily growing, and strengthening the company in all aspects of the business.

The primary building blocks that we review on a regular basis are design innovation, manufacturing and product quality excellence, financial services, software and hardware development and custom packaging. All of these always with the intent to deliver superior profitability, a strong balance sheet, and provide our shareholders with an excellent return, both in appreciation and dividends.

As we take a look at the markets around the world, and North American customer orders are steady to slightly up. Europe is on track, where we thought they would be earlier in the year and that's the 200,000 unit range.

Tonnage has been flat to slightly up in North America. Insurance rates obviously continue to be impacting many operators as they are quite a bit higher than two to three years ago.

Looking at the industry new truck inventory, certainly in the normal range and used truck inventory is not an issue for most of the competitors. On the used truck side, Kenworth and Peterbilt and DAF continue to enhance their premium image, and premium resale value as they will capture 10 to 25% more value in the used markets.

As the economies continue to progress around the world, we're seeing that the truck purchase cycles are starting to lengthen which certainly plays into PACCAR's strength. The reliability and quality of our vehicles is causing more and more customers to take a very serious look at purchasing trucks that we build around the world.

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

At this time if you would have a question, please depress star one on the touch pad of your phone. That will put you in queue for questions. Your questions will be taken in the order in which they are received. Again, star one if you have a question, please. Our first question comes from Jama Alanti, you line is open.

Yes, given the strength of your strong earnings power and the market enthusiasm based on the new tax treatment of dividends, I'm wondering if the board has considered doing away with the special dividend and increasing the regular dividends?

Well, we've been a leader on dividends for over 60 years in this market, and been a great growth leader in dividends so we continue to take a look at all aspects of our dividends.

Okay. Great thank you.

Thank you.

Joanna Shatney, your line is open.

Good morning, Joanna.

Hi. Good quarter, as always. Can you just talk a little bit about how sustainable you think the North American order rates are. Obviously we've had a couple of months. Is it enough, in your view to kind of say that we've at least bottomed and the question becomes the pace of the recovery, not if there's a recovery?

Yeah, I think we've seen some, you know, slight improvement over the last six months, I would say, and orders are, for the industry, you know, estimated to be, you know, slightly above what they were last year. So I think that's probably a fair comment.

And the customer sentiment is supportive of that, in your mind?

Yeah. I mean, we see a lot of customers and obviously there continues to be ongoing consolidation in the industry, but there's reasonable business out there. And as we mentioned in the press release, finding more and more of the customers are able to get, you know, some rate relief and that's helping their bottom lines.

Okay. Can you guys just provide us an update on the changes in the dealer network in Europe and, you know, has that started to help share at this point or is that something we'll see later in the year and what's the update on the strategy?

I think the strategy has always been very consistent for 100 years basically, and that is to have, you know, the best, most profitable dealer network in the industry, and we continue to have that.

I just meant the change in the laws in Europe that now you can have some dealers multi branded. Is that in the process now, or something we'll see more in the fourth quarter, or?

Okay, that started really earlier this year, and will continue all the way until essentially the fall of next year, so '04. And that seems to be proceeding, you know, very well, right on target.

Is that what's behind your market share gains or do you think it's the product? What is driving the change?

Outstanding products and great backup.

Meaning service?

Meaning every element of the business, leasing, finance, service, information technology, you know, customer call centers, parts side, just leading in every element of the business worldwide.

Okay. Can you just talk about pricing in North America, and pricing in Europe, please?

For the retail customer?

Right. Are you guys getting price increases is what I'm trying to get at.

No, I think it's been pretty steady for the last year or so. And certainly we have -- we get the highest prices in the industry because we deliver the best product. I see that number of competitors who you track are really trying to figure out if they should remain in the business and they are doing everything they can to get orders, so they continue to sell at a loss.

Okay. Is there anything that's new -- that you could talk about on dealer perception of ACERT, dealer or customer perceptions of ACERT?

No, I think, you know, every engine company has their own strategy and is following that pretty much as they have laid out in their own conference calls.

Okay. Thanks.

Thank you.

Andy Casey, your line is open.

Good morning.

Good morning. Nice quarter, Mark.

Thank you.

Question on SG&A, I think I asked it the last conference call and the SG&A continues to go down, and can you talk to the driving factors behind that? Is that the new IT processes that you have, or what's kind of driving the decrease against increasing sales?

I think, you know, just every element of our company continues to focus its resources on implementing new ideas, certainly IT is a good contributor, but I think we continue to review how we do business, and we've got 16,000 employees that are very committed to producing the best product and to being the most efficient they can be.

So as I mentioned in my sort of opening comments, we benchmark very rigorously against, you know, what are some of the very best companies in the world in their different industries and we're just always looking for ideas and putting those ideas into motion. So that's -- but I don't think that's anything unusual for PACCAR, we've been doing it for decades.

Okay. Thanks. If we could turn to Europe a little bit. It would appear as if the mix of different demand levels in the countries that you serve may have helped the market share. Do you agree with that? I mean, just in the quarter.

Well, DAF just has outstanding products, and it certainly is a low cost manufacturer now in Europe, and has established itself as the very premium products and for the last 30 years they've always been number one in terms of the customer support, and 24-hour call center. So I see that people are just finding that DAF products are what they want to be running in their vehicles.

As far as each individual country, we continue to grow. We're market share leaders in a number of countries and we're the fastest growing in many other countries. So it's a very exciting time for the DAF group. They are doing an outstanding job.

Okay. I guess if I could ask it a different way, one of the opportunities for DAF seems to be increased penetration in a market such as Germany that's weakening. Can you talk about used truck prices specifically in that country and is that giving you an incremental benefit in terms of, you know, the value proposition?

Well, Germany, for the last decade or so has been the largest truck market in all of western Europe. DAF product has been selected for the last few years as the leading import vehicle into the country, and we have the highest residual value for our trucks in -- well, pretty much every country.

So we started out ten years ago, certainly with lower market share, but as we have grown our dealer network, as we've developed new product, I think Germany, Italy, Spain, France, are all saying, boy, these are the products and the companies to be with and this is the company that's going to be around for a long, long time. And taking a look at some of their in-home truck manufacturers, there's lots of question marks about what's going to happen to them. So there's a lot of different factors contributing to DAF's success. But overall, great product and great support.

Thanks. Last one. Just housekeeping. Andy, or anybody, can you run through the expense items in the finance services?

Sure. Well there was 52.1, SG&A, 17.8, and the provision was 8.4 for the 88.3.

Thanks a lot.

Thank you.

Chuck Harris, your line is open.

Good morning, Chuck.

Good morning, Mark how are you? I'm doing okay. How are you?

I'm doing okay, thanks. Would you be able to do a couple of things? One is, can you give us a little bit of color, strength of Europe. I mean if you have overall sales here up about 12% which did better, Europe or the United States? One more time with the question.

Manufacturing sales, truck sales were up 12% this quarter. Which did better, European truck sales or North American truck sales?

In terms of units?

Unit sales, you choose. Year-over-year.

Well, North American truck sales are higher. That's -- you can just see that on the relative market shares. So I don't know if that answers your question.

Okay. Second question is, when the North American truck market really starts to accelerate, I mean your market share tends to fluctuate and you don't typically chase business. So as I look at your market shares, should I think that your market share probably is already peaked in that some of the incremental demand is going to go towards the other guys who typically chase business and that's going to be okay with you? Or are you going to be more at the margin, a little bit more aggressive on market share in this upturn as we see it coming over the next couple of years in the United States, in North America?

And that's going to, in a sense be derived into some sort of the formula for profitability? Is that correct?

It is more of an issue of, as people look at PACCAR, some people may think that declining market share might be perceived as a negative. Historically you would have turned it around and said that it's a positive, that you are not buying bad business. And so all I'm wondering on a business basis, as you go forward, are you going to be a little bit more aggressive in trying to maintain some of this market share that you've captured or will you give it up to the guys that historically go out of their way to buy it from you?

Well, I think there are two elements to that question. First of all, as you look over PACCAR's history, we have continuously gained and grown market share, once again, for decades.

Right, it ebbs and flows but it's consistently gone up.

It's gone up.

A little bit, yeah.

Yeah. So that is very consistent and certainly will be the ongoing approach within the company. You're also correct that as markets improve, that a number of the competitors who are struggling to figure out how to make money will drop their prices to gain deals that usually come back to have an impact, certainly, on their finance business, and generally their dealers and manufacturing and you are seeing that going on and that has been going on for the last four or five years.

Secondly, what I think, obviously, it's an excellent question, looking back five years, looking back ten years, looking back 15 years ago, the market has evolved, and I guess it's similar to looking back 20 years ago when the PC business, well, there weren't really too many PCs. Now a lot of people have PCs and so it's a little misleading for, obviously the industry to say, well, this is what happened five years ago, this is what I think will happen in the future.

Everybody has changed. We've changed. The markets change. So the market share is actually getting to be less and less an indicator of how PACCAR is growing.

Can you actually expand on that a little because you lost me on that last sentence.

Well, I mean, we look at where the profit is being generated in PACCAR. Certainly truck manufacturing is an important element, but so are the financial services, we just had a record quarter. So is the profitability of our information technology, so is the profitability of our parts business, so is the profitability of our other service businesses. So it's --

But all that's interrelated to selling the truck, isn't it, Mark? Without the truck, you don't get to finance, you don't get the parts, you don't get anything else.

Some is, some's not. I'm just saying market share is becoming less of the driving force than it was, say, 10 or 15 years ago.

Then lastly to follow on Andy's point, can DAF get to a 20 plus percent market share in Europe in the aggregate on its own without doing something material in Germany? In terms of either buying someone there, or setting up shop there, whatever, because that's, I think the way that the math works. You need some much larger presence in Germany, whatever to get to your 20%. That's the goal you elaborate on.

Definitely DAF can hit that goal and they are working hard on it.

Without making any acquisitions or anything like that?

Not, just steady as she goes.

Okay. Thank you.

Thank you.

Robert Toomey your line is open.

Great. Thanks very much. Good morning. Did you indicate in the press release, or could you indicate what your market share is right now in North America?

It's in the 22, 23% range. Okay. Thanks. You also mentioned, Mark, that some customers are seeing some rate relief.

Can you elaborate on that a little bit? Are you seeing freight rates improving, generally among some of your customers?

Slight improvement. Obviously, they are getting some relief with the lower fuel prices, and as you're aware, as fuel goes up, the carriers are very proactive in terms of going back to their customers and indicating that they need some fuel relief, and as fuel goes down, which it has for, you know, the last few months, let's say, sometimes it's a little slower to, let's call it, return to the previous rates. So, you know, they get a little bit of positive uptick that way.

Okay. And so the question on gross margin. Do you -- several years ago were delivering gross margins back in the late '90s in excess of 15%. Do you think, Mark, that you can get back to those levels at some point?

Sure.

So you can?

Yep.

Great. And last question I have is, you continue to build your cash position, can you elaborate a little bit on what you think you might do with that cash? I guess the obvious answer is dividend, acquisitions, things like that? I just wondered if you could talk on that.

We continue to review a whole host of opportunities.

Great. Thanks very much.

Thanks a lot.

Stewart Glickman, your line is open.

Hi, Stewart.

Good morning! Just a quick question on capital spending. I was wondering what your CAPEX was in the second quarter and if you could indicate, I guess directionally what CAPEX spending should be like in the second half.

Sure for the second quarter we were at $20.9 million.

Okay.

I think as far as directionally, we will be looking at increasing the CAPEX, and on the press release, it was -- two projects were identified.

Mm-hmm.

And there, many, many more and PACCAR is in a strong position, as it has been for a long time, and using the cash to enhance every aspect of the business, and that certainly is paying off throughout the business, not only in lower SG&A, but higher quality, better efficiency and ultimately the highest profitability of any manufacturer in our industry.

Okay. Thanks, guys.

Thank you.

Karen Ablehart your line is open.

Good morning. Hi. Two questions, since you discussed CAPEX. First of all what's depreciation going to look like for this year? And then, secondly, on the interest other line, what was in it a year ago? I'm trying to remember because while the current quarter doesn't look that off, last year it was $8.3 million. What was in there?

The CAPEX for the quarter was $56.5.

Okay. What -- are you there?

Yeah.

Mm-hmm. And then do you remember what year ago the $8.3 million what was in that, in the line item interest in other net? There's just a big swing year-over-year, so...

Yeah, I --.

I'll get that. I'll get back. I'll check with you later. And can you repeat the depreciation, because you broke up.

$56.5.

Okay. Thanks.

David Zeno your line is open.

Good morning. Quick question on incoming orders. Are you seeing more strength on the fleet side or the owner operator?

I think it's pretty balanced.

Okay. Thanks.

Thank you.

Joanna Shatney, your line is open.

You may have answered this. Can you just talk about what currency was on sales and what the currency impact was on the earnings per share, please.

Okay. For -- really we're talking about -- primarily the Euro versus the dollar. And for the quarter, the impact on net income was about $10 million.

And on sales?

On $140 million?

Okay. Also in the press release, you talked -- or there's a quote from Mike talking about PACCAR Financial and how large it's grown. Can you just give us some maybe six months ago or a year ago, what the size of those assets were just to put it in some scale? It says it's $900 million in assets now.

Well, assets are about $5.4 billion -- $5.3 billion. A year ago it was $4.8 billion, and six months ago it was $5.1 billion.

What about the European piece? Just to make it equivalent to the $900 million that's in the press release.

Yeah, it's a little over a billion.

And -- was that half the size six months ago? Just to get a feel for the pace.

Oh, no, it's -- it just started a couple of years ago so it's growing at a pretty good clip right now.

And is there a dramatic change in the captive financing rate, relative to six months ago?

No.

Okay. Thanks.

Andy Casey, your line is open.

Hello, Andy.

Hello again. Can you talk about the extent you're willing any change in North America in June, July? Did you notice -- I mean, June we kind of know from ACT, July -- what's it shaping up? Is it kind of flatish with June?

Are you talking about orders?

Yeah.

Yeah, I think you're pretty spot on there. Probably flatish.

Okay. And then -- thank you. And then over in Europe, yesterday kind of had some conflicting outlooks but nothing too different than what you're talking about in the 200,000. Can you talk about booking trends over there? Just kind of qualitatively. Are they kind of flatish? Or are they going down implying second half might be a little bit more difficult than the first?

Well, I think Europe is continuing to have some challenges economically. And you all read that. And that is having an impact. But for us, things are going pretty well. Very well. So, yeah, I saw there was some conflict there, but all of those companies are trying to follow DAF's lead.

Thank you.

Thank you.

Peter Jacobs, your line is open.

Good morning, Peter.

Peter Jacobs, CFA: Good morning, gentlemen. Mark, I was just curious if you think that there's any relationship with some of the demand for the new truck engines and the lower interest rate environment. I mean just roughly thinking about it, that the extra cost of the new engines or the cost of operating the trucks with the new engines could be partly offset over, you know, better financing over a five-year term or something like that in this environment. Have you thought about that? Or is that just something that you don't think that is having any impact right now?

Well, the new engines do cost more, and so that's something that's making, you know, operators think, but I think you have to weigh that, that trucks are getting older. We've had a couple of slower years, so people have extended their repurchases and as I indicated earlier, that is really playing to PACCAR's strength, because, you know, our trucks are running, 10, 12, 15 years, whereas some of the competitors have maybe half of that.

So I think people are taking a look at what it costs to operate a truck for another year or two, versus what it costs to purchase a truck, and what is that annual increase. If the engines have gone up, you know, by X amount, you spread that over a five-year contract, obviously it really doesn't have that much of an impact. But, you know, each operator has to decide individually what makes sense for them.

Peter Jacobs, CFA: Okay. Great. And secondly, do you have your European market share data from year end and then also what it would have been in the second quarter of last year?

Oh, we have that somewhere. I can just basically tell you that it's been on a steady growth path upwards.

Peter Jacobs, CFA: Yeah, I think it was in the 10 or 11% last year, perhaps. I just don't have the specific number at hand. Okay. That's all I have, and another nice quarter.

Great. Thanks a lot. Appreciate it.

Joel Tiss, your line is open.

Hi, Joel.

Hi, how are you? This is actually Mark Livingston.

Well, say hi to Joel.

I will. You said that pricing was steady so far since last year and I believe you put in a price increase around this time last year. Should we expect another price increase when ACERT comes out fully?

When they tell me, I'll tell you.

Okay. Then when do you expect to be in full production of ACERT, like switching from the Bridge to the ACERT engines and when would that ramp up start?

That's completely at the discretion of Caterpillar.

Okay. Should we not expect it in the third quarter as of now? At all?

That's completely at the discretion of Caterpillar.

Okay. And how is the ramping up of production going at the Tennessee plant?

Oh that's very smooth.

All right. Thanks, guys. Oh, wait, last question. Have you seen -- with the orders, have you seen any switch from the ACERT, from the EGR to the ACERT? Or do you think there might have been a pre-buy for the Bridge engine ahead of the ACERT?

As I indicated earlier, everybody's making their own decision and seems to be happy with the decision they've made.

But the market share within your own company, has that been steady? Or has there been a change over the last couple of months?

I think it's pretty steady.

All right. Thanks, guys.

Thank you.

Robert Toomey, your line is open.

Bob? How you doing?

Good morning. Just one follow-up. This is kind of, might sound obvious, but I'm going to ask it. Your demand has been good, obviously outperforming your peers. And do you think if the economy accelerates, the North American economy accelerates above the kind of levels we've seen the last few quarters, do you think that we could see an even stronger acceleration in demand for your products?

Well, you know, typically when you look at the economic cycles, first of all, truck production has generally always been higher than GDP. They sort of decade in and decade out. And if the general economy gets stronger, it seems to follow that truck demand will also be stronger. So I don't if that's answering your question.

Yeah. I think it is.

All right.

Thank you.

Thank you.

David Zeno your line is open.

Good morning, David.

Just a quick follow-up, do you make any of your axles and drivelines in house? In Europe we make axles and used to make transmissions.

You're saying drivelines, you mean actually the drive -- Axles -- we'll say axles and driveshafts. We make axles in Europe. But in North America, it's all from outside vendors? That's correct.

Okay. Any thoughts on Amen and Dana?

Nope.

Okay. Thank you.

Andy Casey, your line is open.

Hi, Andy.

I'm talking to you a lot today, Mark.

Oh, you're a nice guy.

Oh, thanks. In terms of -- you didn't mention it this time, can you give your assessment on what the age of fleet is? Did it come down from last quarter or is it still pretty constant?

Oh, I think it's, you know, pretty steady. It might be going up a little bit. Probably bumping a little less than six years, I guess, you know, a little less than that. You know, it's gone up a little bit. That's just mathematically derived, you know, the trucks that were built in the late '90s versus the number of trucks that were built, you know, in the last few years and, you know, it's all pretty mathematically driven.

Given that, has that helped your part sales? Have you seen any acceleration in that this year?

Well, parts, as we indicate in our annual report have had many, many record years in a row, and we work that portion of the business very strongly. Certainly an older fleet is good.

A larger fleet is good, but what's really good is a very innovative group working at PACCAR Parts that have come up with dozens and dozens of terrific programs and information technology, devices that have helped the dealers just be better providers of parts and service to their customers. That probably -- that's probably more of an impact for us.

Okay. And can you talk about any unusual deals that some of your competitors, without naming the competitor, just kind of looking at the market, is there a return of, you know, kind of incentives out there to try to gain market share?

I think looking at the market over the last 20 years, not much has changed. We continue to sell the premium product worldwide. And a number of the competitors continue to give away the product under different guises, whether it's guaranteed buybacks or just cheap prices. Nothing has really changes year in, year out that way.

Okay. And then last, I promise, have you started to see any increase in multi-year ordering?

Actually I think we've seen pretty constant ordering patterns throughout the whole business cycle for us.

I didn't mean to imply that you guys were accepting multi-year orders. Have you seen any of your competitors do it?

I, they don't send me their sales order information.

Thank you.

Thank you.

We're showing no further questions at this time.

Okay. Great. Of thanks for participating. And we'll talk to you next quarter.