帕卡 (PCAR) 2004 Q1 法說會逐字稿

Good morning and welcome to PACCAR's 2004 first-quarter earnings conference call. (OPERATOR INSTRUCTIONS). I would like to introduce to Mr. Andy Wold, PACCAR's Treasurer. Sir, you may begin.

Thank you. Good morning. We 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 are Mark Pigott, Chairman and Chief Executive Officer, and Mike Tembreull, Vice Chairman.

As with prior conference calls, we request that if there 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 would like to introduce Mark Pigott.

Good morning. PACCAR delivered record performance during the first quarter of 2004. The revenues were at an all-time high of $2.5 billion, and for the quarter, after-tax profits were $182.2 million, which is also a record. In addition, return on sales was 7.7 percent, which is a record. I know a number of the analysts like to track the percentages.

At $37.5 million pretax, PACCAR's financial services segment earned its eighth consecutive record quarterly profit. Finance and leasing companies have grown to $5.7 billion in assets. The Euro had a minimal impact of about $10 million on the income line versus a year ago, and our investments in all phases of the Company over the last five years continue to generate positive results. In fact, all PACCAR divisions are seeing increasing demand for their products and services.

To meet the growing demand worldwide for trucks, PACCAR build rates rose 7 percent during the first quarter and will be increased again in the second quarter. Our market share is growing or stable in every key market around the globe. The North American truck industry demand will most likely grow 20 to 30 percent this year, while European heavy truck demand should be up slightly.

Our manufacturing SG&A fell to record levels of 4.1 percent of revenue due to sales growth, aggressive cost programs and Six Sigma. Our balance sheet continues to be the best in the industry, and stockholder equity is $3.4 billion. In addition, PACCAR invested $45 million in cash in its pension plans during the first quarter of 2004.

Taking a look at the industry, the ATA truck tonnage index has been on a steady increase for the last six months, which bodes well for our customers. Fuel prices obviously are high, particularly in North America, compared to historical standards, and that is a concern. Although typically most of the trucking companies try to pass about 80 percent of those fuel prices along to the end user.

Interest rates are low, which has benefited many elements of the economy with the likelihood that there will be some increase later on in the year.

Inventory, which we have talked about off and on for the last four or five years, is really broken into two segments. The new truck inventory is about a two-month supply, which is very normal, and used truck, I am pleased to report is not an issue. In terms of used truck prices, Kenworth and Peterbilt, in fact, are above their historical premium range, and if you are looking for used trucks, great to see if you can find a Kenworth and Peterbilt one out there.

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

(OPERATOR INSTRUCTIONS). Gary McManus.

Good morning, Mark. Great quarter once again.

I know you are one of our biggest fans, and we appreciate it.

You said second-quarter production rates will be rising. To what extent will that occur? Do you have any sense on that?

Not that we can really talk about. We just keep meeting demand.

Assume if one had a forecast higher than yours in North America heavy truck more than 20 to 30 percent, you would have to raise them further; is that a fair assumption?

Well, I think that we are doing a great job meeting of our customers' demand, and as you see in the industry press, there is more and more fleets that are requesting PACCAR products. So we just keep raising our production to meet that demand. That is about all I can really say.

You said in your prepared remarks that the Euro helped earnings by $10 million net income. I know you sell trucks in a lot of other areas. Does that capture the entire impact of the weaker dollar, or what would that be on net income?

It is the vast majority. Absolutely.

Okay, but not necessarily all. Last question I have is, on the financial services side -- help me out here -- in an environment where presumably truck demand is hitting higher here for the next couple of years or so but interest rates are going up, can we expect that kind of profit growth in financial services that we saw in the first quarter?

Well, there's a couple of elements in the financial companies first of all. All of the different companies we have around the world are growing. In Europe, which we started a few years ago, PACCAR Financial Europe, that is just early days, so you are seeing some pretty good growth there, pretty rapid increases. In North America, where we have been established for quite a few years, that tends to track along with the industry increases. And then our PacLease, which is now the third-largest commercial vehicle leasing company in North America, is making some excellent strides as you know and continues to be very profitable. So we are seeing around the world every element of the finance company just doing a good job.

It sounds like this is kind of sustainable at least from where we were in the first quarter?

Well, compared to some of the companies that you track, I would say we are probably is sustainable. You bet.

(OPERATOR INSTRUCTIONS). Joanna Shatney.

Could we talk a little bit about Europe because the industry data actually has a slight decline? It looks like it is mostly due to Southern Europe. Can you talk about what you are seeing by each of the different regions so far in terms of order intake? It sounds like the production increases are global. Are you actually producing more DAF than you were year ago?

Yes, we are. In market share, well, it is always a month or two behind in Europe. But it looks like it is about 13.7 right now, which would be probably an all-time historical high for DAF.

Europe is generally about where it was last year. As I mentioned in the opening comments, we look for a slight increase, but certainly DAF should continue its strong program.

Okay. Just talking to people in the used equipment market, it sounds like the guaranteed buybacks are coming up at your competitors. Can you talk about how that is impacting your business if at all in North America either from both the equipment side of the business and also from the finance side? Are your customers asking for that in the finance side of things? Thanks.

You guys should write a book on this one. For the guaranteed buybacks, they never went away at our competitors, and that is just the operating program that many of our competitors have in order to be able to sell their products. For us, it is not a factor.

Okay. Last question on steel costs. Can you just talk about availability and costs and how you are passing that along to the customer?

Well, you know all of these commodities have a cycle and have had for decades, so right now steel is the one that people talk about. But before that, it was petroleum or copper or aluminum. So we tend to have very good contracts with our suppliers and steel impacts and we work with them, and we deliver our products out in the field, and we cannot be changing pricing after we arrange to sell it to a customer. So we just work with it.

Steel is the item we are talking about this year. Next year it will be some other commodity. That is just the way of the business.

Are you able to take the prices up year-over-year to compensate for it because you cannot see it at all in the gross margin?

Well, you know some is passed along, some is absorbed; some is our very bright engineers working with the engineers, and the suppliers are seeing what they can do to mitigate some of that effect. But as I say, there is always cost pressure in one form for one type of commodity every year. A year from now we will be talking about something else because steel is already starting to decline as I am sure you have seen in your industry publications.

Andy Casey.

Good morning, Mark. To keep in line, Prudential Equity Group. On financial services, can you go through the expense items please?

Interest was 67.4 million, SG&A 19.4, and provisions for losses 2.7 million for a total of 89.5.

Thank you. Within North America financial -- well, actually the financing end -- it looks like liquidity has come back to the market at least on a regional basis. Have you seen any of the irrational behavior that you saw towards the peak in previous years?

We are seeing a lot more interest in financing our products, which is typical. Some of the -- maybe a fair weather finance company that jump in times like this and then get out of the business, but our market share has stayed high and our customer recognize that staying with PACCAR will be with them through all parts of this cycle. But there is increased interest in financing our products that is for sure.

Thanks, Mike. One last question I guess on the truck and other line. When you look at Europe, is there any revenue mix shift working in your favor in terms of heavier equipment being sold in prior years, or is it just pretty much constant? Thanks.

It is pretty much constant across. We are seeing improvement with all our product lines.

Andrew Oben (ph).

Merrill Lynch. I was just wondering in terms of the revenue upside, and maybe I am just forecasting it wrong, but looking at the strength of Europe and North America, where did the revenue strength come from? Was Europe unusually strong in the last month of the quarter? Was it Australia?

Actually I think we have seen good revenue growth in all segments of our business in all parts of the world.

The second question I have is, as you are ramping up, are you experiencing problems with your supply chain, and are you guys thinking that supply chain might be a constraint next year and the year after that, especially with smaller suppliers?

Well, we have a very good relationship with our suppliers, and one of the few companies that actually encourages them to improve their profitability because that allows them to reinvest in their own company, which we find results in higher quality and more cost competitive programs. So we have been through this business for over 50 years, and I think for the most part, most of the suppliers have also, and they are usually in pretty good shape.

So you don't think suppliers will be reluctant in order to invest in order to ramp up come '06?

Well, I don't know about '06. I am not sure what it is going to happen in '06. But I think typically the suppliers are interested in growing their business, and they read the same publications that we all do, and of course, we are in daily contact with them. I think they are very much a hand-in-hand relationship with them. So I would say for the most part they are in very good shape.

So nothing different this cycle versus previous cycles from your standpoint?

No. Very normal.

Joel Tiss.

Hi, Joel. Did you see these guys when they were back in New York?

No, I did not.

Well, we missed you.

I missed you, too. I am still at Lehman Brothers by the way. Can you explain why the receivables are up so much in the quarter?

Receivables are up just because of the higher business levels that we are seeing, higher sales.

So there isn't anything unusual in there?

No. Actually day sales outstanding are down, but receivables are up because of business activity.

Okay. Can you also give us a sense of why you need to contribute to the pension fund? I think I asked a question a couple of quarters ago about the pension liability, and you said we do not have one.

Right. We just want to continue to make sure we are one of the companies that is fully funded in all markets around the world and we are.

Can you also give us a sense of what is going on in terms of market share because there was a fair amount of marketshare moving around as Caterpillar had their bridge engine available while others were changing their strategy on the engine front? And my sense is that some of that has gone back toward more normal. Can you give us a sense of what is going on there?

Well, I think in North America the marketshares are pretty constant. I don't think it had anything to do with engine movement though. For the time being, a few of our competitors' marketshare went down as they stopped giving away product. But then they did not like that, so they needed to start giving away product again, so their share went up. In Europe, our share continues to climb as it does in Mexico and Australia and other parts around the world.

So I think the good news is for our industry and the consumer in general is that there continues to be more and more customers that understand that quality is what will generate the best revenue for their own companies, and PACCAR is the beneficiary of that.

Robert Toomey.

Good morning. RBC Dain Rauscher. Getting back to your global forecast, Mark, for retail sales up 20 to 30 percent.

I think that was for North America.

For North America, right. Do you have the capacity to meet an increase like that available to you? In other words, are there any capacity constraints that you would foresee for PACCAR?

Well, no, I don't really foresee any constraints. When you look back on the market and the number of units that were produced in 1999-2000, we are still well underneath that in North America. And many analysts and industry pundits would say that this year might be about the fourth best year in the industry's history. So I do not think capacity is an issue.

The other question I had had to do with margins. I believe your truck division margins were close to or at record levels for the quarter. And I was interested, do you feel there is more upside in those margins on higher production volume?

Well, yes -- they were not maybe at record levels. They were very very strong. And typically we find that if you get into the strong portion of the cycle, that there is some margin improvement across the board, and that is really true of the whole industry.

One housekeeping item. Tax rate we should be using for modeling purposes?

I would say the high 34s, 35.

Peter Nesvold.

Bear Stearns. A question on the UAW at CAT. Are customers asking you about your contingency plans? If there is a strike there? Are you seeing any kind of marketshare shift in the very near-term to come in ahead of that?

I cannot really comment on any other companies.

I am just asking what customers are asking you about your contingency plans.

Customers don't really ask that type of question.

Okay. Fair enough. Can you give us the revenue breakdown -- or the revenue was up 32 percent year-over-year. Can you bring that down between currency, volume, mix and pricing?

No, we cannot, but it is an excellent question.

Last question then. Provisional losses for receivables in the finance company is the lowest it has been since '96. Do you think you can stick around 2 percent where it is now, or is that going to have to start coming up at some point?

No. It has been at about that 2 percent level for some time, and we think that is an adequate reserve level.

I have that at about 6 percent for '03 and 12 percent in '02.

We are looking at the reserve ratio over the total receivables.

I am just looking at provision for losses under receivables, the expense line item divided by the revenue in the division.

That will depend on loss levels then because we have in each end of the reserves typically, we have taken the losses to the bottom line in years where it is difficult economic conditions.

As soon as we incur a loss, we take the hit. So the reserve actually as a percentage, and even in dollar amounts, does not really fluctuate.

I am just looking at the provision, not the reserve though. Maybe we can follow up afterward.

Jim Marguard (ph).

My question involved Europe and has already been answered. Thank you. Great quarter.

Brian Raul (ph).

Good morning. Great quarter. Just one quick question, first of all, on the own the foreign exchange. Can you give that impact for the sales?

Yes, it is about 130 million.

Okay.

I have a question for you. What is your thinking on the?

What is my thinking on --

On that particular figure?

I just wanted to try and ex- out foreign exchange going all the way back to see what the margins are going forward.

Okay. Thank you.

My other question was with regards to the European market. The way it looks like now obviously being slightly better here in '04, obviously it is lagging the U.S. market. Is it a reasonable assumption that if we do see the prebuy peak in '06 and the market here domestically starts to rollover in '07, that that would be when Europe is reaching near peak? Is that consistent with what you guys are thinking?

Well, I wish that the markets were that controllable. But in my experience, I have not found that they have been. So it is a great hypothesis, but I could not tell you, nor do I think anybody could in the industry, if that would happen or not.

Andy Casey.

A question on the unit production increase. Are you guys satisfying current demand levels with single shifts at all of your plants, or have you gone to a blend double?

Well, some of our plants typically run two shifts for certain operations, and if the demand continues to increase, we would take a look at two shifts more and more as we have in the past. So I would say on an ongoing basis, there is probably always an element of two shifts at many of our facilities, and so it is a blend.

Robert Toomey.

Just one other question, and I know this is another one of those ones that you probably are difficult to forecast. But if you look at the strength of this cycle, what do you see as -- I know the key drivers are the same. But is there anything inherent to this cycle or what has happened over the last two or three years with the used truck market or anything peculiar about this cycle that is, say, different from other cycles, particularly with respect to the used truck markets and I guess just indigenous growth of your customer base?

I think this cycle is pretty similar to other cycles. As I mentioned starting out, there really is no used truck issue at this time. I think you as you survey the industry have to be mindful that the Company has pretty much approached these cycles in the same way they have approached them in the last 10 or 15 years. And irregardless of what they might tell you, that typically has not changed.

So I think PACCAR because of our global diversification and the strength of our aftermarket, finance companies, that we are taking the cycles more and more out of play. As you have seen over the last five years when for some years we were the only ones making money, I think the competitors are struggling to try to figure out what to do in this portion of the cycle as they have for the last few years. So I think the cycle overall -- I think it probably has an impact more on our competitors than on us, and we just manage our business strongly everyday regardless of what the cycle is doing.

Do you think, Mark, your addressable market is bigger than it was five or 10 years ago?

That is an excellent question. I think it is. And as we discussed earlier this morning, more and more customers from the person that owns one to five trucks to the person that owns one to 5,000 trucks, are recognizing for a variety of reasons that quality pays. And to have a relationship with a company with high integrity such as PACCAR, there are measurable benefits and immeasurable benefits.

And as you saw, Swift purchased 3000 trucks, and certainly that is a nice reflection on Swift and also on Kenworth. But we are just seeing increased interest from across the board, so I think that is a very good question you asked.

Thanks very much and congratulations.

At this time, there are no questions in queue.

Great. Thank you. This concludes PACCAR's earnings call.