帕卡 (PCAR) 2003 Q4 法說會逐字稿

Welcome to your conference call with Mr. Wold. I would like to remind everybody that today's conference is being recorded. Thank you for using Sprint conferencing service and I am going to turn that call over to you, sir.

Thank you. Good morning. I would like to welcome those listening by phone and those on the webcast. My name is Andy Wold, Treasurer of Paccar. Joining me this morning is Mark Pigott, Chairman and Chief Executive Officer. As with prior conference calls we 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 involve risks and uncertainties including general economic and competitive conditions that may significantly affect expected results. At this time I'd like to introduce Mark Pigott.

Good morning. Paccar had a wonderful year in 2003 as it reported it's second best profit year in it's 98 year history. For those of you who have read our press release it was our 65th consecutive year earning a net income. Speaking of net income as the general economy begins to improve, I've noticed that more and more companies are starting to revert back to the days of discussing operating profit and EBITDA. But I know that the analysts are too clever to fall into that trap again. Paccar has industry leading products and services, an impressive long-term earnings record, strong cash flow, a double A minus credit rating, and a comprehensive capital investment program. The company's annual EPS growth rate of 14% over the last ten years is above the average S&P 500 growth rate. Paccar's regular dividends have grown 125% over the last six years. Paccar continued to perform well compared to our benchmark group of G.E., Microsoft, Dell, Illinois Tool Works, Citigroup, Wal-Mart, and Toyota.

In fact, looking at the shareholder performance for the one, five and ten-year time periods, Paccar, once again, exceeded the S&P 500 results for all three of those time periods; and comparing ourselves to the benchmark group, Paccar outperformed them all in the one year time period and the five-year cycle. In the ten-year cycle with the exception of Microsoft, Dell and Citigroup, Paccar had better returns. Even with this in enviable track record and strong competitive position, Paccar surprisingly trades at a discount to the average S&P company using the standard measurement of the P/E ratio. The industry truck retail sales in 2003 for North America and Europe, combined, was the seventh best in history. Many of Paccar's divisions established new profit records including DAF trucks, Paccar Financial, PacLease and Paccar Parts, for the 11th consecutive year. These profits, in combination with rigorous cost controls and increasing capital investments in all aspects of the business, firmly established Paccar as one of the global leaders in the finance and transportation business. Speaking of investments, because of the continued profitability of Paccar, we've been able to invest over the last five years, more in capital projects than the previous five years, which I believe is a bit of a rarity in today's world.

With the result of that our information technology performance, our low cost of manufacturing, our finance companies, and our research and development programs are leaders in each of their respective fields. In today's turbulent world it's pleasing to note that Paccar's pension funds are essentially fully funded, and that we have no overhang of retiree healthcare costs. Many of the companies in our industry are still burdened by billions of dollars of excessive costs which are crippling their ability to invest and perform, although it hasn't seemed to hurt their stock performance. Paccar's goal for 98 years is to produce the highest quality products, deliver superior profitability, have an excellent balance sheet, and provide shareholders with a return both in appreciation and dividends that exceeds the market. This continues to be the main tenant in our daily approach. Looking at the marketplace, it's anticipated that the class A truck market for North America could increase 10 to 15% this year while the European truck market could be slightly better than last year.

Paccar is growing it's market share due to the high quality of it's products. Wasn't it wonderful for Kenworth and Peterbilt to win every single J.D. Power award in class eight this year. I'm not sure of many other industries where a company has won every single J.D. Power award. Many customers are realizing that top quality, in products and processes, actually delivers low cost operation for them; as opposed to competitors cheap pricing and guaranteed residual values. Because of Paccar's quality and ongoing performance, more and more major fleets are coming back to Paccar for discussions about purchasing our products. Paccar's build rates are increasing this quarter 3 to 5% to meet the uptick in demand. The strength of the Euro has had a positive impact on companies revenues of about $130 million for the quarter, and net income of about $10 million for the quarter. We appreciate those of you that have had the opportunity to come out and visit us in Seattle; and hope that you've enjoyed the facility tours, including our manufacturing operations, technical center, electronic dealership, and customer call centers. At this point we welcome your questions.

Thank you for holding. We will begin our Q&A session. Anyone who wants to ask a question, please press star 1 on your touchtone phone. Our first question is from Gary McManus.

Hi, Mark.

Good morning, Gary.

I guess we have to reflect on how good the quarter was here, right? Anyway, you said build rate up, first quarter build rate up 3 to 5%. Are you comparing versus fourth quarter or versus first quarter a year ago?

Fourth quarter.

And that's just North America, right?

No, it's North America and Europe.

So it's total world. Okay. Could you split that out between North America and Europe, would it be about the same or is there any?

No, we can't split it up.

Okay. Did you use any cash to repurchase stock during the fourth quarter or during all of last year?

No, we did not.

Okay. Last question. You saw that, I assume you saw that December truck orders were very strong. What are you seeing thus far in January?

Well, I think we are going to take a look at a market that's 10 to 15% up for the year.

You think the orders are consistent with that forecast?

Well, so far they seem to be. December had a lot of pre-buy for one of our competitors who will no longer be able to offer their engine as such.

So it sounds like there was a bit of distortion in the December numbers, in your opinion. Is that correct?

That is correct.

Thank you.

Thank you.

Our next question is from Andy Casey.

Good morning, Andy.

Could you give the break down in finance, please?

Sure. The finance cost breakdown, interest and other, was $65.5 million, SG&A $19 million even, and the provision for losses $4.7 million, for the total of $82.2 million.

Great. Thanks.

Thank you.

Our next question is from Joanna Shatney.

Could you talk about what happened in the gross margin flat year over year? Can you just talk about what production did overall through Paccar in the fourth quarter and why we didn't see a little bit more operating leverage? I mean admittedly it's a great operating margin, but why we didn't see any sequential year over year real improvement?

Our gross margin is great. Is that your question?

No, just basically flat with where it was last year with your production, I'm assuming your production is up between 5 and 10%. Is there just a cost, an input cost difference that makes, that took away the operating leverage? Meaning did you make more money on the engines last year so you didn't have an incremental leverage into this year's number? Historically when you take production higher we see some operating leverage flow through in gross margin, I'm just curious what happened this quarter. Admittedly great number, I'm not saying that, I'm just wondering year over year why we didn't see higher leverage.

I thought we did. Yeah, a year ago in 2002 you had some benefit of the pre-buy, which you didn't have in 2003. On the other hand, continued reduced costs and comparable build rates contributed to some outstanding margins.

All right. So your production as a corporation was pretty flat year over year?

That's correct.

Okay. Second question. If you look at Europe, are you basing your outlook for slightly higher registrations year over year on economic stability? What are you guys thinking about on I guess the economic front and then secondly what benefit do you think you get? It looks like eastern Europe and parts of the former Soviet Union are actually buying a lot more trucks which helps '03. Doesn't that have some impact in '04?

We don't see any impact from the CIS, or eastern Europe when we look at our registration data. It's western Europe. The economies are now a little more stable than they were last year so we see a slight improvement. Remember, they've had a couple of slow years, too.

Okay. Just last question. You talked about guaranteed buybacks and lower prices from some of your competitors. Can you characterize, was the market where it was in the beginning of '03, so we didn't really see any change? Or would you characterize it as getting a little bit more aggressive on price? Or is it opposite of that where we are actually seeing some price increases because the market has gotten a little bit better?

I think there might be some improvement on pricing throughout the industry. I think as I mentioned in my comments that many, many more fleets are starting to realize that for the ongoing performance of their own companies they just can't afford to get into that guaranteed buy back program that may or may not actually transpire at the end of the time period; and we are seeing a lot of people saying, I want to deal with a company of high integrity and great product like Paccar. So it looks very promising.

Great. Thanks.

Our next question is from Brian Raille.

Good afternoon. First off, I was wondering if you can at least comment as to whether or not it's safe to assume that profit improvement is at least accelerating faster in Europe than it is in North America, given the fact that you did purchase some of your assets there as they were emerging from bankruptcy and you have done some thing to improve there. Is that a safe assumption?

We can't really comment on that.

Fair enough. Another question was, one of the keys behind growing the European market share was expanding market share in some of the more traditional continental markets like Germany, Italy, Spain and France, to an extent as well. Any comments there as to where-- if you are making any headway in any of those countries?

I think the key to increasing DAFs market share is the investment of hundreds of millions of dollars revitalizing their entire product range in the last five years, redoing their manufacturing facilities, adding many, many dealers. So that's why the market share has improved. We've got a great team leading the group there at DAF, and we are probably one of the fastest growing in some of the markets that you've mentioned. It's very exciting.

So you are still growing there and expect that to continue? I was more commenting on the fact that you have lower penetration there compared to some of your other markets.

In?

Germany versus the U.K.

Sure, yeah, well, we're the market share leader in the U.K. and Holland and Belgium. I think we are the fastest growing non-German company in Germany. And great opportunity.

Okay. Thank you very much.

Thank you.

Our next question is from Steven Haggerty.

Hello, Steve.

Good morning. A question for you on the gross margin. I will take another angle on the gross margin. Why was the gross margin so strong? Hello? Hello?

I think we need to do a Six Sigma on this whole conference call.

What I was trying to get at, Mark, was sequentially your gross margin jumped about 100 basis points. Can you talk a little bit about what drove that up from where it had been running in the previous quarters of this year? Also how higher engine costs, how successful you have been in passing those higher engine costs on to your customers?

We will , in terms of the gross margin which probably is the highest in the entire industry worldwide, a couple of things. First, our cost side, the SG&A, is probably close to an all time record low. So it's rigorous management of cost. But we've invested close to, well several billion dollars over the last six, eight years, in every aspect of the business; so that not only are we the low cost manufacturer, but the most efficient manufacturer in every aspect of the business. So as we see a slight uptick in volume, there's just tremendous leverage that we are able to gain. I mean, robotic paint systems, credible inventory terms, logistics systems, it's the way we manage every aspect of the business. I think that's a big contributor to the gross margin improvement.

On the engine cost I think in the third quarter, Mark, that you weren't necessarily passing all those higher engine costs along to your end market customers. It doesn't look like engine costs were a problem in this fourth quarter result at all.

We've been doing this for, say, 98 years. We work with our major supplier partners and the cost from every aspect, whether it's engines or other components, you absorb them and try to work with the partners to minimize the cost impact and, obviously, we have to be competitive in the marketplace. So I don't think that engine pricing as such for the industry is maybe the issue that people thought it was going to be 12 months ago.

Okay. Thank you very much.

Thank you.

Our next question is from Michael Braig.

I'm wondering if you could get at perhaps revenue growth from a differential standpoint. You've got, for the year, roughly 13% increase in dollar revenues per truck against a 1% unit volume increase. Can you perhaps break up that 12% differential a couple different ways, price increase, currency, parts?

No, we don't typically break that out, but I think your good question basically gets at the point of manufacturing leverage. We are able to produce more product through the same asset base, or factories, without adding additional factories or incredibly adding square footage so there's a real volume advantage when you can do that.

Okay. Thank you.

Thank you.

Our next question is from Robert Toomey.

Good morning. Congratulations on a great year. A couple of questions. Do you know, Mark, for my benefit, the base of-- are you using North American retail sales to make that 10 to 15% forecast? Is that the figure you are using in your quote in the press release?

Yes.

Do you know what that number was for '03?

About 165,000.

165. Great. Thank you. A questionary relating to demand. You mentioned earlier in your comments you are seeing more of the fleets coming in and turning to Paccar. Can you comment on where you see the strongest demand for your trucks right now? What sectors, either the market or the economy?

Well, for us it's a wonderful blend, as I mentioned, yes, we are seeing more of the major fleets coming back to us as they did in the 70s and 80s. But we still have terrific customer group buying anywhere one to two or three to 20. So I'd say across the board, of course, construction is a major driver and you've got residential construction still strong, some commercial, and then that drives into the white goods. But just across the board people are saying, I want a Paccar product. What we didn't touch on, I will now, is on the used truck market, and for years we've been talking about there was sort of an excessive amount. I think that's really gone away, but what is wonderful for our dealers and for our customers is that on a three or four-year old vehicle comparable spec to a competitor we are seeing anywhere from $15,000 to $25,000 difference with, of course, the Kenworth and Peterbilt and DAF having the advantage. That's really making a serious impact on, people are saying, yeah, I might be able to buy something at a lower price up front; but first of all it's going to have best better operating cost than a Paccar product, but if I go to sell it or if I want to run it five, six, seven, eight years, there is just real dollars and cents benefit.

That's great. Congratulations. I have a question, also, relating to financial services. You saw tremendous growth in both top line and bottom line in that division. Do you see a similar very strong outlook for '04 in financial services services?

Well, we don't forecast so I can't really comment on that one.

Okay. I wonder if, do you have depreciation and amortization and cap ex in '03? And, also, can you give us any guidance on '04 for those items.

For the fourth quarter the cap ex was $49.2 million, and depreciation and amortization was about $72 million.

72. Okay. Thank you very much.

Our next question is from Andy Casey.

Hello, Andy.

Hello, again. A couple questions. On the statement in the press release about the 23 new locations in '03 for dealers, are those all in Europe?

No, no. They are worldwide. I mean, we are growing Australia, Asia, Mexico, U.S., Canada, throughout Europe, Africa. It's all over.

So I should not look at that 23 number and extrapolate and say, you are penetrating Europe in a bigger way?

I think we are penetrating every market in a bigger way.

Okay. No, just following up on the question I asked last quarter about the block exemption change.

That's essentially complete; and DAF did a wonderful job on that and I would say it's had a beneficial impact for us because numerous competitive dealers are understanding that for them to make good profits; and they just look at the Paccar model, they would like to take on the DAF product line and it's very, very exciting.

Okay. Thanks. Then over on financial services, and with the attractive spreads you've been capturing, are you starting to see any of the external non-captive, if you will, finance companies come back to the market?

Typically in the up part of the cycle, you'll see local and regional finance institutions such as banks sort of tiptoe back into the marketplace. Once again I think more and more dealers and customers of all size, 1,000 to 2,000 to 3,000 to 4,000, our understanding is we want a long-term partner in every aspect of the business. Paccar provides that stability and that quality; and I see that as a good sign when the market starts to decline sometime, of course, it's having less and less of an impact on Paccar, but the customers understand that that local bank or institution will probably depart the market again. So great news for PacLease. Great news for Paccar Financial and North America and Europe and Australia.

Thank you.

Thank you.

Our next question is from Joanna Shatney.

Joanna.

Can you talk about any impact you've seen on the new trucker regulation as of January 1on their driver hours? Have you heard from your customers about what that might mean? Do you think it's pulling in any demand for you guys.

I think it's still early days right now so I don't have much to comment on it.

Can you say anything new in terms of Paccar experience on EGR versus assert?

EGR performs very well, and assert is really early days but we are optimistic. So they seem to be two winning formulas.

There doesn't seem to be any significant issues with either technology, right?

At this point they both seem to be working fine.

Okay. Are your customers aggressively talking about or changing their purchase decisions based on the 2007 emissions deadline?

Not really, no. I mean, it's still three years out. I think they are going to try to take advantage of a gradually improving economy.

Okay. Can you just talk about what you might do with the cash? How you guys think about doing repurchase for 2004? Are you going to try to offset the share creep that comes along with the higher stock price? Are you going to try to redeploy more cash into capital spending? What do you think you are going to do with the cash? I know you are still going to build cash reserves, but just in terms of thinking about share repurchase and cap ex?

Well, we will continue to make all the excellent investments to help every aspect of the business and our suppliers, our dealers and our customers.

Are you going to keep it flat as a percent of sales?

We don't comment on that.

All right. Then what about the stock repurchase? Is the stock repurchase program an attractive option for Paccar at $80 a share, or does it need to be lower?

Well, first we've got a 50% stock dividend this week. So I think as far as the shareholders are concerned with the ongoing increased dividend, and special dividend when that's warranted and our regular pattern of stock dividends, or stock splits, I think the shareholders are pleased with what's going on. I really don't have much else to comment besides that.

Okay. Thanks.

Thanks.

Our next question is from Peter Jacobs.

Good morning, gentlemen. First of all, just looking at the loan loss expense in the financial services business in the fourth quarter, that's down to levels that we haven't seen since '96 and '97, so that certainly bodes well for the health and the recovery in that business, better credit quality. Can you tell me, does that represent a percentage that you think is sustainable now going forward given the current economic climate?

It's at a level that we have seen in reasonable markets. Something that certainly everybody that's connected with that portion of the business is striving to insure is the correct level.

Okay. Great. And perhaps Andy could help us out on, if you can share with us the foreign exchange contribution for the year in revenue and earnings?

You bet. The revenues for the quarter year over year was $130 million, roughly, and on net income quarter over quarter was $10 million, I'm sorry, year over year.

Do you have that for the full year?

Let's see here, yes, I do. On revenue roughly $480 million, and on net income, $35 million.

Super. And could you also, Mark, you might have this data, European truck sales ending '03, the U.S. and North American data is pretty easy to come by, but I do not have that for Europe. Would able to share those numbers if you have that data?

It's about two to 210,000 for '03 and a little bit, about 10,000 units higher for '02.

And can you remind me of what you finished your market share in Europe at the end of '02?

The end of '02, it was 12.3, and it was 12.8 the end of '03.

Fantastic. And I think that's all my questions. Terrific year.

Thank you. Appreciate it.

Our next question is from Tobias Willow.

I was wondering if you could take a little bit more about class six and seven, in terms of what you are expecting next year for the market. I know you've talked a little bit about Europe and class eight. I don't know if there was a specific reason you didn't address that.

Well, we addressed it in the press release that we continue to be the fastest growing, and sort of bumping 10% now in both North America and Europe; and, of course, our goal is to get that above 20% and that seems to be a very realistic target. So I think for the market, don't really see that much change on six, seven, compared to last year.

Okay. Do you see more incremental opportunity in Europe or in medium duty truck in North America?

More medium duty?

No, no, just overall in terms of your own business prospects.

I think that's a very good question. I think actually there's great opportunities for medium duty in North America and in Europe, and I think there's also great opportunities for the class eight in North America and in Europe. So very exciting.

Looks good. Thank you very much.

Thank you.

Our next question is from Robert Toomey.

Okay, Bob.

Hi Mark, I will just ask my other question in a different way. Regarding Paccar Financial, can you just comment on some of the things that you think you're doing day-to-day in that operation that you think is going to help it continue to grow at a strong pace? Thanks.

That's a great question. I'm not sure I can do that without helping my competitors out, though.

Okay.

Excellent question.

All right. Thank you.

Thank you.

Next question comes from John McGinty. Sir, you have the floor.

Good morning. Back on the currency, the $10 million after tax which I presume would have been $15 million before-tax. I assume that the vast majority, or the bulk of that, would have been on the truck side rather than the finance side?

Yes, that's correct.

And could you help us out in terms of looking at the impact on, I mean both your gross profit was impressive but it was flat year over year. The SG&A was phenomenal in terms of declining, was more of that currency penalty on the gross profit side, or was it also a part of the SG&A?

Well, the SG&A as a gross number declined.

Right. I mean, yeah, but would it have been declined more? In other words was it in fact $2 or $3 million higher than it would have been on a like currency basis? I'm trying to figure out where the $15 million pre-tax of currency was, was it in the gross profit or also in SG&A?

Well, I think more of it would have been in the gross profit than the SG&A.

Was there anything on the SG&A, in other words the SG&A was down kind of almost every quarter, I guess it was up in the second quarter; but it was flatter down and then it really dropped significantly in the fourth quarter versus the year ago. Was there anything unusual in that, are we at a sustainable two, four, two, three, sustainable rate of sales, was that sustainable or was there anything unusual in the SG&A decline in the fourth quarter?

I don't think it's anything unusual. It's Paccar constant focus as build rates increase, there's usually some affect on SG&A and we see many growth opportunities which may take a little bit more SG&A to fully fund and have people working on different programs. So I think we are always working on this every single day.

But would you expect, in other words, you've got--are forecasting a fairly modest top line growth of 10 to 15% in the U.S. and up slightly overseas; and at that time should you be able to, in your mind, to further in absolute terms reduce SG&A, if, in fact, that is the top line that holds?

Well, I think it's important to note that that top line as you mentioned is for the industry. It has no reflection on Paccar. Right.

But I mean, absolutely, but within that environment obviously you'll continue to gain share and so on, but in the environment that you set up would you expect SG&A to at least hold as a percent of sales?

I don't think we really comment on it. I think the only thing that we do say is we probably are the low cost manufacturer in every industry that we participate in and we will keep working on that.

All right. Thank you very much.

The next question comes from Fritz Voncarp. Go ahead, sir. You have the floor.

Good afternoon, gentlemen, a quick question, not to beat the horse dead but, FX impact on gross profit. I am trying to think through this and help me directionally, at least, though FX helped both the top line and the very bottom line in earnings, did it by increasing both costs and revenues in some proportion, did it dilute the gross margin percentage, though perhaps helping it in absolute dollars? Do you follow?

Yeah, you are talking about the Euro impact primarily?

Yes, sir.

I would say generally the strength of the Euro, compared to probably a year ago probably had about a 5% impact on Paccar net income.

Right.

And.

I mean, can we think about it as increasing both revenues and cost of goods sold and thus, because of a larger base diluting the gross margin percentage?

Our focus is not so much on the Euro-dollar relationship, because that's going to go up and down over time. I think that it has a minimal impact. So when you see the gross margins increasing it's because we've got very good cost control, and are able to get a higher price because of the quality of products that we are bringing across the range. So the--I know it's topical for the Euro-dollar discussion but it really is not a big driver in Paccar.

Okay. Thank you very much.

Thank you.

Next question comes from Joel Tiss. Go ahead, sir, you have the floor.

Hi. Can you talk about two things quick? One is on the outlook for the tax rate going forward? And the second one is the rationale behind adding to the pension.

Well, Joel, you must not be a Paccar employee because the pension, I guess I would rather work with a company that has a fully funded pension than one that has billions of dollars of unfunded. Certainly our employees and retire he's appreciate that approach, so I'm not sure what you mean by your question on that.

Just that you always maintained that your pension was fully funded, that would imply that there was no need to add to it.

Well, we are always insuring that it is fully funded.

Okay. And on the tax rate?

I think it's going to be in line with what you've seen. 34, 35, 36%.

Okay. There isn't any trend developing that it continue to move down slightly?

No, not really.

Thank you.

Thank you.

Your next question comes from John Rogers. Sir, you have the floor.

Hi, John.

Good morning. Most of my questions were answered but earlier, Mark, you made the comment about expanding and offering your product outside of Europe in the U.S. into developing countries. I know you won't give us a specific, but is there any way that you would look at setting up assembly plants besides those locations?

What did I say?

Talking about offering your product outside of Europe and moving into Africa, former Soviet Union, places like that, I'm just curious what your thoughts are in terms of building product apart from your existing locations?

We sell our products into approximately 100 countries on a three-year cycle. So we've been doing that for decades. So that's worked very, very well. In terms of setting up new manufacturing sites, we are in pretty good shape and we are very focused on enhancing our current sites. Now, if you take a look at our investment in our Paccar parts distribution centers, we've built a new one up at Leyland in the U.K., and we essentially doubled the size of one in Atlanta. Of course, we invest hundreds of millions of dollars in our current manufacturing sites to make them more efficient. So we are in pretty good shape, but through the years we tend to build one new truck factory about every decade.

Yes.

So, but right now we are in good shape.

All right. Thank you.

Appreciate it. Thank you.

Your next question comes from Karen Ubershant.

Hi, two questions, one you mentioned that some of the bigger fleets were reconsidering their purchasing practices. What kind of pricing are you seeing on the volume on the fleet business that you are, that is coming to you? The other question is, can you give us some feel for the percentage of trucks financed by Paccar Financial in the U.S. versus Europe; because I know you are in an earlier life cycle in that business?

I can't really say much about the pricing to fleets. You know, it's.

Do you keep your normal discipline in fleet pricing as you do in the smaller orders?

Karen, how long have you been following us, you know that.

Yes, I do know that, but I want to hear you say that, you still do.

I mean, 98 years.

Okay. That's good.

As far as Paccar Financial, for North America, that would be in the low to mid 30s in terms of percent; and Europe would be about half of that and growing. As you say, we are sort of early on, now we are going into our essential third year with Paccar Financial Europe.

Okay. Great. Thank you.

Thank you.

There are no more questions at this time. Again, if you have a question, press star 1 on your touchtone phone.

Okay, if there are no other questions this concludes Paccar earnings call. Thank you.