帕卡 (PCAR) 2004 Q2 法說會逐字稿

I'd like to thank everyone for holding, and welcome you to your conference call today. We have your host, Andy Wold, and I'd like to welcome you to PACCAR's second-quarter earnings conference call. All lines will be on listen-only until the Q&A session. This conference is being recorded, and if anyone has any objections you may disconnect at this time.

I would like introduce Mr. Andy Wold, PACCAR's Treasurer. Sir, you may now begin.

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 Tembruell, Vice Chairman. As with 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.

At this time, I would like to introduce Mark Pigott.

Good morning. PACCAR delivered excellent results in the second quarter of 2004. Both revenues and profits increased to record levels. For the quarter, after-tax profits were $236.5 million, 91 percent higher than the same period a year ago. Earnings in the quarter were $1.34 per share. Revenues jumped 39 percent year over year, as production rates increased in each of PACCAR's global markets. Worldwide demand is increasing. Sales growth at DAF, Peterbilt and Kenworth reflect their quality leadership in their marketplaces. PACCAR's quarterly return on sales was 8.9 percent, a record for the Company. Annualized after-tax ROE for the quarter was a strong 27.9 percent. Through aggressive cost control and ongoing Six Sigma and efficiency improvements, manufacturing SG&A reached a new record low of 3.5 percent of revenue, even though we continue to add more than any more employees to staff new product programs.

PACCAR's financial services segment earned $41.3 million pretax, its ninth consecutive record quarterly profit. Assets in PACCAR's finance and leasing companies have steadily grown to over $6 billion, due to new business volumes.

Worldwide, PACCAR works with about 800 supplier partners who we believe are the best in their respective fields. PACCAR has efficiently raised bill rates by investing in and working with our supply base. Now, many of you listening today understand that we have trained many of our suppliers in Six Sigma, which they are using to help their own companies. There are indications that some of the powertrain suppliers could be capacity constrained later this year. We do have legal long-term agreements with a number of these companies, which we are confident will ensure that we will get a steady supply of product.

As we've talked in the last several years, PACCAR continues to be an exciting, high-quality company with an impressive long-term track record, strong cash flow and, for the last decade, earnings per share growth of 14 percent per year versus the average S&P 500 of 8 percent. The Company has established itself as one of the global leaders in the financial services, transportation and capital goods businesses.

A lot of people say PACCAR has done so well for 99 years. How do we do it? Well, one of elements contributing to our 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 Toolworks, Citigroup, Wal-Mart and Toyota. And this benchmarking has resulted in PACCAR steadily growing and strengthening the Company in every aspect 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 -- all of these with the intent to deliver superior profitability.

I know many of you are always interested to know how many years has PACCAR made a profit in a row. We are currently up to 65 consecutive years. We also have an extremely strong balance sheet, and provide shareholders with an excellent return, both in stock appreciation and dividends.

Now, a local company in the Seattle market made quite a splash with a dividend announcement, and I see that, very similar to PACCAR's long-term strategy of having a very excellent dividend and, on a regular basis, a year-end special. You will note that PACCAR's regular dividend has increased 200 percent over the past six years. During the second quarter, PACCAR repurchased 2 million of its common shares, an investment of $108 million.

In April, PACCAR was recognized by Fortune Magazine for being a leader in delivering superior shareholder returns for the past 50 years. In fact, an investment of $1,000 in PACCAR in 1954 has grown to over $5.2 million today. Of all the companies in the Fortune 500 operating since 1954, PACCAR's return to shareholders is number two in that list.

Business Week has an industry composite for what they call their machinery category. There are 33 companies listed. Now, of those 33 companies, the average P/E is 22. Now compare that to PACCAR's P/E of 15. And I know many of the bright industry analysts are probably scratching their heads, saying, how can then be? PACCAR has stronger sales and profit growth than the vast majority of those companies, and we are confident that our P/E should be at least 22. Thank you very much.

(OPERATOR INSTRUCTIONS). Gary McManus.

Congratulations, another impressive quarter. I sound like a broken record here, but good job. I expect you guys to produce in the second half of this year pretty close to what you did in 1999, in terms of North American heavy truck production volumes, and yet you talked a little bit about some supplier constraints in the powertrain sector. What do you thank your full capacity is? How much additional production volume do you think you could get going forward, as most people expect the truck market to continue to grow in the next several years?

Gary, are you still there?

Yes. Did you get that?

Yes, we got it. We are going to continue to meet our customer demand and grow the Company, as we have for 99 years. That's all we can really add to that.

So is it reasonable to expect -- I mean, most people expect the truck market to peak somewhere in the 320, 330, maybe 350,000 unit area. And if you continue to get your 23 to 24 percent share, you're going to have to produce maybe 80,000 units. Do you think you can do that?

I think, as you look back on history, Gary, you will know as well as any that I think we have consistently delivered product to our customers. Of course, we are one of the most efficient manufacturing companies in any industry in the world, and continue to make large investments to ensure that it's the highest-quality product being delivered, at whatever level is appropriate for the marketplace. So we are always looking forward to it, and the customers really seem to be pleased with the product.

As you are saying, some of the other industrial companies have been impacted with higher raw material costs, or supplier constraints or manufacturing efficiencies. Did that bother PACCAR in any way in the second quarter?

You know, it's just part of doing business, and I've read with interest many companies around the world that seem to be raising that to the forefront. Of course, they've got their own challenges. We continue to work with our supplier partners, and there's always opportunities out there.

One last question. Can you talk about currency benefits, both on the revenue and the earnings side in the second quarter?

It's been very minimal.

Andy Casey.

A couple of questions, and congratulations on your quarter, as well. The potential powertrain supply constraints -- is that related to suppliers you deal with, or is that somewhere else? And if it's kind of in general, what's the bottleneck? Is it their component suppliers, or is it something else?

Well, we have long-term agreements with many companies which are to the benefit of all involved. I know different companies have talked about issues with perhaps some of their suppliers. All I can really indicate is that we are confident that we will continue to get the product that we need; and, as you know, we are probably the only company in several industry (ph) that pays on a regular basis. And I'm sure there is a great enjoyment by the suppliers of working with PACCAR, and knowing that it's going to be a quality product at the end of the day. So we are confident.

And then, I guess, in North America, have you -- well, given that demand running as strong as it is, have you seen any relaxation of some of the extra incentive that others have been putting on their truck sales?

Well, as we've indicated many, many times around the world, particularly in Europe, selling the Rolex of the truck industry, there are many others that are selling a lower-quality product that customers are becoming increasingly unhappy with, even at giveaway prices. But once you've established a cheap marketplace impression, it takes decades to turn that around. And at this time, we find many of our competitors continue to give away the product because, essentially, the products don't last very long, anyway.

And then, I guess, on the financing side for Mike, have you continue to see increased liquidity from kind of the external suppliers of financing products coming back to the market? Or is that still relatively stable?

Products are highly regarded in the marketplace with our customers, but also with the finance sources. So yes, we see a lot of activity with various organizations wanting to finance PACCAR products. That said, PACCAR has maintained its high level of -- and increased its market share worldwide, because we stick with these customers throughout the business cycle. But yes, there are other finance companies jumping in to finance these fine products.

Okay. Last, Andy, could you give the breakout of the expenses for the finance-up?

82.1 is comprised of 69 million in interest and other, 19.4 million SG&A and 3.7 million provision for losses.

Joanna Shatney.

Mike, can you just talk about how the PACCAR financial offering is going in Europe on a stand-alone basis? Especially with the recovery we are seeing, are you getting the penetration levels that you are getting in North America at this point?

Yes. Are you talking about Europe, Joanna?

Yes.

Europe continues to grow. It's growing faster than the rest of the world, because it just started in 2001. We are seeing increased market share, increasing earning assets and increased business, and we are adding -- going into additional countries, and our products will be in 11 countries by the end of this year. So there's plenty of opportunities there, and financing by PACCAR is welcomed by these customers.

So the fact that Europe is really growing because Eastern Europe has kind of taken off -- you are still able to participate on the finance side of that, because you are opening in more countries?

Yes, there's a lot of room for growth in Western Europe, and that's where PACCAR Financial is concentrating right now.

I know you guys have wanted to stay away from the SG&A breakdown, but I was hoping you could at least talk a little bit about what is different on this SG&A cycle, as the sales revenues gets higher versus previous cycles. And the dollar numbers have actually gone up, which I guess is reflective of the people you mentioned, Mark, in your prepared remarks, that you actually have added some people to support the higher revenue base. But why isn't it ramping as quickly?

Joanna, if I recall, in the last couple of meetings, you were wondering what we were doing and when we were going to get our gross margin up. So I thought you would lead with that as a question.

Let's just point that out, that the gross margin percent was 15 percent, and return on sales after tax was 8.9 percent. I don't know; maybe that's what software companies do. I'm not sure, but it's pretty exciting.

So we are adding a lot of people, certainly, as we go up in billed rates. But also we have many, many programs -- and we always do, every year -- new products, finance company, leasing companies, moving into new countries, information technology. Every element of the Company is becoming increasingly more efficient, and we are the most efficient company in this manufacturing/capital goods sector, and our goal is to continue to be and have our SG&A percent at a low level. So I guess I'm not understanding your question.

Well, you never want to answer the question. So I don't know a better way to ask it, except that in the last cycle, clearly, the growth rates in the SG&A were higher. And I'm guessing that it's Six Sigma or whatever cost reduction program you're doing. But let's move to a different question, if you don't want to answer that one.

Could we just talk about if there's any significant changes happening at this point in the dealer network in Europe or -- because I'm guessing that, as we get closer to year end, that opportunity is going to become something you can exploit fairly quickly.

I'm not sure about year end. What does that mean, as far as the dealers?

Well, when you can go with the co-branding, so that will be a full year.

Oh, the block exemption?

Yes.

That is going fantastic.

So what exactly are you doing, Mark, to address that at this point?

Well, co-branding -- for us, of course, one of the great elements of PACCAR's strength around the world is we have approximately 1,800 service and parts sales locations, and virtually 100 percent of them are independently owned, unlike all of our competitors, who are owning more and more. In fact, a number of the Europeans pride themselves on owning essentially entire countries' worth of dealers. And as they will tell you, perhaps off the record, that is not working.

Our strength, and I think we've indicated that even in our press release, is in locally-owned entrepreneurs that are dedicated to serving and growing in their marketplace. So that's one element, a great group. That is one of the strong balance-sheet factors that I think the analysts can get a better appreciation for.

Second, we have a constant theme that we want our customers to be profitable, we want our dealers to be profitable, as opposed to many of our competitors, who -- I'm not sure if they want their dealers to be profitable. Of course, when they buy them out and take them over as company stores, I'm not sure they are making any money. So we have many of our competitors' dealers who are eagerly approaching DAF and saying, "We want to take on DAF product." And it's the highest-quality product, it's the best margin for the dealers, and it provides the best return for the customer.

So the block exemption is very exciting for PACCAR and DAF.

Have you guys signed any competitor dealers at this point?

Many.

You mentioned powertrain supplier constraints. Are you seeing anything else in terms of supply issues? One of your competitors mentioned things like seatbelts. I was just curious if it was showing up in other areas, as well as powertrain.

No.

Tom Giovanni (ph).

I guess my question, again, relates back to your capital plan. I was very happy to hear you cite Microsoft as making a big splash with their special dividend. And I guess one of the frustrations on our part, still, is that you have a capital structure that kind of doesn't really reward shareholders. And it's a question of if you feel like you want to husband cash for a great accretive acquisition one day, that's great. But it just seems to me that shareholders don't really know what the capital plan is, with regard to with the cash on the books. And maybe can you shed some light on that? And does Microsoft's move maybe make you guys rethink that, or can you maybe just help us out a little bit on the capital plan?

Well, I would take issue with not a reward to shareholders. Maybe you haven't followed the Company very long, but it's one of the best rewarding-to-shareholder companies in any industry that is out there in the public marketplace. The best reward we can give shareholders is to develop and sell the highest-quality products in any market in which we compete, and we have successfully done that for 99 years. The result is an excellent track record for profit in consecutive profits, as we mentioned earlier in the conversation.

In terms of the cash on hand, of course, every company has to make their own approach to the business. We are increasing the cash requirement for investment throughout our entire company. We are growing the Company as has been grown for ten decades, and we have grown internally and through acquisition for many decades. I'm sure that will continue to be the case in the future.

Again, that didn't answer my question. It's very specifically, is that you have at least $12 of cash on the books, and I'm just trying to get an understanding as to, is the plan to, number one, look for acquisitions; number two, to buy back stock; number three, to increase your dividend or to pay a special dividend? I still don't know what the capital plan is after that explanation.

Well, we've increased dividends 200 percent. We, for many, many years have an extra dividend at year end. We have repurchased 2 million shares. We've increased capital expenditures for many years. We have made a number of major acquisitions. So I think we've hit every single one that you've checked off there.

Okay. Well, listen, you are operating great. And just maybe as one last comment -- as you reference Microsoft, Dell, IGW, Wal-Mart and their multiples, I think that what would be helpful, from an investor standpoint, is just to get a little more information in which to chew on and to do our analytical models. I think that those companies that you mentioned provide significantly more data in order for us to do our work.

I appreciate your input, and thanks for your support.

Maybe just something for the Board to think about.

Richard Yamerau (ph).

Congratulations on this quarter here. I just want to know something from the macroeconomic perspective -- your general economic conditions, and where you see the economy headed, the US economy and maybe even North America, if you could, as a whole. Where do you see it heading? Do you see any evidence of a second-half slowdown?

Well, we have the industries in which we, obviously, focus. So for the macro, from what we read and I'm sure what you read, our understanding would be a GDP growth of 3 to 4 percent this year for the US, and perhaps a little lower than that for the Euro zone. But that sometimes doesn't tell the story as far as the industries in which we compete.

You also mentioned, in your opening remarks, you are adding many, many more employees. Exactly how many is many, many?

Well, we don't break that out. But you know each factory, as it goes up, is adding several hundred, and we've got a lot of factories.

Are you getting any reports of order disruptions, any news from clients that have become hesitant with orders?

No, no, not that we are aware of. In fact, I think we're seeing the opposite, that we are finding many great customers who have purchased other brands in the past are increasingly saying, "I want to buy a product that has won all the J.D. Power awards, and is going to have the best resale value in the marketplace." So I think it's really a very positive trend we're seeing.

That is very good news. Any materials shortages, bottlenecks, disruptions, pickups?

No. I think it's just normal business that our people throughout the organization work with these 800 or so suppliers we've got and keep pushing forward.

Keep trucking on.

And financing and leasing.

Yes, that's very good. All right. Well, congratulations again.

Selena Claudio (ph).

This is Joel Tiss from Lehman Brothers. First, I have a comment. I always viewed PACCAR as a company that aimed extremely high, so I'm surprised to see you limiting yourself to a 22 P/E.

Joel, that's probably the highlight of our morning. Andy, make a note of that.

I'm wondering if you could give us a tax rate on the $7.8 million gain on the sale of stock?

Around 35.

And you also mentioned that you're targeting a 20 percent market share with DAF. Can you give us any sort of a timeframe that would be a reasonable expectation there?

Well, I think you could look at the trend since we acquired DAF at the end of 1996, and let's say they were roughly about 8 percent. So it's a little less than 1 percent a year, which is pretty strong growth.

And that's reasonable to expect going forward?

Well, you know, nobody's opening the door, saying come on in and get 20 percent.

And also, is there anything you can share with us, in terms of color behind the 31 percent increase in the trade receivables? You know, where did that come from, and just a little light on what's going on there?

That just goes along with the increased sales. Nothing unusual there.

John McGinty.

Mark, can you help us at all in terms of the second half? We all look at the domestic -- the supplier issues, and demand is what it is, and you've always said you'll do whatever you can, to meet demand. Can you talk to us about Europe in the second half? Are we seeing increased demand and increased schedules? There's a little bit less visibility that we have; but as you look at the second half, do you see schedules and output rising in the second half in Europe?

John, I think that's an excellent question. For PACCAR, obviously, Europe is an important segment for the Company, with about half the income in sales being generated over there, with the finance and the aftermarket and the truck. So obviously, we focus as much on Europe as we do in North America.

Yes, we're seeing some improvement in the truck market. It's a good truck market. In fact, the retail sales for the industry -- and that's a moving target, I find, about every month -- seems to be pretty comparable between Europe and North America, at -- let's give it a broad range of 225 to 245 each, North America and for Europe. So that's an improvement for both of those marketplaces, compared to a year ago.

And a second question -- the 2 million share buyback that you announced and did in the quarter that just ended -- could you help me to understand what kind of the reasoning for the finite amount, doing it and completing it -- not that that was that important, but as you're thinking in terms of why you might or might not do another one going forward?

I sort of heard two questions in there. The first is, on a periodic basis, PACCAR has repurchased shares. I think we've got a very healthy track record, in terms of that action. Kind of coming back to Joel's comment about we don't want to limit ourselves to a 22 P/E, this company is just one of the finance companies in any industry segment out there, and the stock is low, and we just take it on a --

Opportunistic?

Well, in a bite-size portion. And I think it was important for the shareholder public to understand that we said we're going to do it, and we did it. Many people say they are going to do a thing, but you never really find out if they do them or not.

And then, final question -- on the 2007 engines, and the concern that people have about whether or not there will be a pre-buy or not and so on, I guess my question to you is twofold. One, some of the engine manufacturers have said that they have delivered a prototype for engines to the OEs, and I think they did it in June. And I'm just wondering; as you have seen the engine and looked at it, is it meeting the expectations, essentially, that you had for it? Or is it too early to tell at this point?

Well, you know, we are one of the world's leading engine manufacturers ourselves, and I think it's something that, for people who have followed PACCAR for many decades, are just kind of coming to grips with now. Obviously, with the acquisition of DAF, we manufacture essentially all of our engines for Europe. They are in Mexico, they are in Australia. Well, they are in the rest of the world. Let's put it easy.

And so we ourselves are working on meeting the requirements that the different legislative bodies have set up around world. And there's ongoing progress by all engine suppliers. I think it's premature, at this point, to say whether they meet them or don't make them. It's still early days.

Well, my follow-up question to this -- you led right into it, which is, as you look at 2007 and you look at the DAF engine, are you going to take a serious run about bringing that engine into the states in '07, or is it too early to make that decision, or have you made it one way or the other?

Well, that's a great question. Of course, we call it the PACCAR engine.

Sorry.

There you go. We spent all that money on tooling (inaudible); we want to get credit for it. But I think it's too early. It's a great engine. It's, I think, the finest engine, certainly, in the marketplaces in which it competes. And don't take my word for it; there's certainly plenty of press editorials that could cover that in more detail.

But I think everybody involved with the engine business -- ourselves, our competitors, our independent suppliers -- are working hard. There's certainly no magic formula. Different people are taking different approaches. I'm confident that, at the appropriate time, the engines will be there and delivering good success for our customers. Everybody is working on it, and everybody is working very hard.

Brian Rayle.

Great quarter. I had a question back on the European market. When you guys, obviously, bought DAF, it was not up to your manufacturing standards. And I know that you kind of don't break out the performance between the two. But would you know say that you feel that they are relatively comparable, North America versus Europe, on your manufacturing side? Or do you think that you still have to have more room for that to pick up to reach your North American standards?

That is an excellent question, very insightful. We appreciate it.

Thank you.

We have a very systematic benchmarking process within our own company for every factory worldwide on a daily basis, as you would expect. And using innovations such as tablet PCs and radio frequency and a few other things, the person in any factory can know exactly what's happening in any other factory, which is very exciting, and it brings it home in a hurry.

All of our facilities keep improving, leapfrogging each other. And you are absolutely correct that when we purchased DAF seven years ago, they were at a lower level. They are producing a superior product -- and Leyland, let me put that in -- a superior product for their marketplace. And DAF, Leyland, Kenworth, Peterbilt -- those organizations are working hand in glove every single day, at all levels, and learning from each other in pushing and encouraging each other, and it's very exciting.

So you buy a PACCAR product anywhere in the world, and you are getting the best. Great question.

Thank you.

Robert Toomey.

Congratulations again, great performance. I have a question. Your gross margin was quite high in the quarter, and that's one of the highest gross margins you've been at in quite a while now. Can you give us any flavor at all for how much of that might have come -- the variation relative to price and cost and manufacturing volume influences?

Well, volume has an impact. You have a positive impact if you are able to control your costs. Many companies cannot do that, and we've always been able to. And we don't typically break that out, as you know, so I would just say that there was a positive benefit from pricing. There's a positive benefit from volume. But, as important, there's a positive benefit from the $1.5 billion we've invested over the last 10-plus years on efficiency improvements, whether it's paint robots, redoing assembly lines, working with different suppliers, having better designs, taking hours out, improving quality -- that's all made a big improvement, and will continue to have a positive impact. That's the benefit of these wonderful manufacturing and material and engineering and purchasing people we have, is that you put the benefit in today and it continues for many, many years.

So some of it was from a benefit from pricing?

Yes, but I would just say it's very small. And I don't want to really say that was it. I'd say the vast majority is from the investments we've made.

And the second question is, are you operating any plants on double shifts yet?

(technical difficulty)

Yes. Essentially all of our plants are on two shifts, yes.

And just a couple of housekeeping items. Was capital expenditures and depreciation given for the quarter?

No, no; I've got that here. CapEx for the quarter, 40.8 million. And depreciation and amortization was 75.6 million.

And two other questions for my edification, Mark. What is the block extension you were referring to earlier?

Oh, yes, the block exemption. What that is is the EU out of Brussels promulgated some new legislation which has the intention of allowing, in the capital goods sector -- so let's say cars, trucks, and there may be some other elements -- to be able to be sold by qualified distribution points such as dealers, and essentially eliminate the ability by manufacturers to pick and choose who will distribute the product. Now, you have to meet certain qualifications, but that has really made a system much more like what we are used to in North America, where essentially any distributor can take on any line, if it's done in a prudent fashion.

You earlier said that you see demand increasing. Do you expect that to continue through the second half of this year?

It looks reasonable, yes.

Peter Nesbolt (ph).

Can you add just a little bit of color on what the sale of securities was in Europe?

Not sure about that one. The sales of securities?

The 7.8 million that's footnoted in the --

Yes. Okay, that wasn't in Europe; that was the sale of shares that we had in a US dealer group.

I want to address this buy-backing (ph) one more time. I look at the diluted share count for the last 10 years or so, and it's been relatively flat. So that suggests that you are buying back shares to offset options, which is fine. But if your P/E is too low, and you have the means to buy back shares, isn't this a great opportunity to go out there and buy back 15 or 20 percent of your shareholders?

We, I think, have a very steady program of repurchasing shares. But I think, to your very good question, the Company has continued to be a leader in all those markets, and really has repositioned itself as a company with strong information technology, aftermarket financial services profit contribution. And I think that's an element that will continue to be a strong force within PACCAR, and essentially we're taking the -- diminishing the cyclicality of the truck business, which is an important element. But there are other important elements that contribute to PACCAR's success. So maybe that's really the point of the suggestion.

I guess I just don't understand, still. If the P/E is too low and you have the cash, are you suggesting that you just have other sources of cash in the future to invest it? You know, without beating a dead horse here.

A lot of opportunities out there, and we're looking at as many as we can.

(OPERATOR INSTRUCTIONS).

Operator, are there any other questions?

Still showing no questions at this time.

Great. This concludes PACCAR's second-quarter earnings conference call. Thank you for participating.