帕卡 (PCAR) 2004 Q3 法說會逐字稿

Good morning and welcome to PACCAR's 2004 3rd quarter earnings conference call. All lines will be in a listen-only mode until the question-and-answer session. This conference is also being recorded. If anyone has any problems or objections to this, you may disconnect at this time. I would like to introduce Mr. Andy Wold, PACCAR's Treasurer.

Thank you. Good morning. We'd 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 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. More information about these risks and uncertainties is contained in PACCAR's filings with the securities and exchange commission. At this time I'd like to introduce Mark Pigott.

Good morning. PACCAR announced great results for the third quarter and 9-month periods ending September 2004. And, as we noted in our press release, everybody at PACCAR is pleased that the company set a new annual net income record in only 9 months and a new quarterly income record. After tax profits were a record $246.7 million for the 3rd quarter. 86 percent above the same period a year ago. Earnings at $1.41 compared to 75 cents last year.

Revenues in the quarter were 2.92 billion, 42 percent higher than a year ago. PACCAR's global truck, parts, financial divisions are all experiencing broad-based demand for their products and services. I'd like to point out that the 8.9 percent return on sales after tax is an excellent achievement. A question came up, clarifying the tax rate, and it's really very simple. DAF and Leyland are growing and doing well in the European market, as you know. And their positive performance has resulted in increased recognition of the future benefits of the Leyland net operating loss carryforward in the UK, which PACCAR assumed when we purchased Leyland in 1998.

PACCAR reviews annually, the estimated benefits and makes adjustments as required. And the last time that PACCAR made an adjustment was in the third quarter 2000. And the amount was 12.4 million at that time. Gross margin percent is also excellent.

The third quarter was slightly impacted by the normal three week summer shutdown at DAF. Increased fleet business, as Kenworth and Peterbilts have now achieved record retail sales market share, and some supplier cost increases. A wonderful job. PACCAR is an exciting, high quality technology company with an impressive long-term track record, strong cash flow and excellent shareholder return.

The company has established itself as one of the global leaders in the financial services and capital goods and industrial businesses. 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. To further enhance the company's competitive position, PACCAR is increasing its substantial technology investments in all facets of the business. Including -- product development, customer after-market sales support, supply chain management, manufacturing, finance, leasing, and the list goes on.

PACCAR's long term agreements with many of its suppliers are excellent and we're working together to meet increased market demand. DAF's suppliers in Europe are meeting increased demand with no issues. In addition, PACCAR is actually increasing its investment in suppliers for capital equipment. Probably one of the few companies that is actually investing in its suppliers, and that's going very well. For the ninth consecutive quarter, PACCAR Financial Services posted record profits. Earnings before tax were $44.1 million. And total finance and leasing assets have grown to over 6.3 billion in the quarter.

You may have noticed in the press release during the third quarter PACCAR Financial Europe launched a EUR750 million medium-term note debt facility. And this capital market program will provide cost-effective funding for PACCAR Financial Europe.

As we've talked over the last number of years, PACCAR continues to set the quality and financial standards equal to or better than many of the companies identified in the S&P 500. And I note that the S&P 500 has an average PE of 20, and I'm sure you would agree that PACCAR's PE should be above 20.

Taking a closer look at the market, freight tonnage around the world is strong. Even at record levels. And in North America, the new inventory, typically on dealers' lots is about 36,000 units for the industry. And that's 30, 40, 45 days of supply, which is actually maybe a little bit low. Used truck prices are in excellent position. In fact, they're above the 10-year average, and Kenworth and Peterbilt and DAF are maintaining their premium of 15 to 25 percent, which is terrific value. With that, let's open it up to questions.

(OPERATOR INSTRUCTIONS) Thank you, Gary McManus, your line is open. Go ahead.

Hey, another great quarter. Hey, if I look at the third quarter versus the second quarter, you had about 120 million or so revenue growth, but the operating income declined slightly. So can you talk about comparing the third quarter versus second quarter? Is it mix? Is it rising component costs or steel costs? Just kind of compare third quarter margins versus second quarter margins.

Sure. Well, the 3rd quarter margins were obviously excellent. The -- the second quarter was certainly bumping record levels. But I think as we discussed, you have a shutdown, so we're not getting as many products out because you've got a shutdown for three weeks in Europe, and that's a normal summer vacation time.

As we've grown the business, and DAF is at record market share levels, and Kenworth and Peterbilt at record market share levels, you're getting a little bit more of some lower margin fleet business, which has an impact. And as I know you've listened to a number of different suppliers around the world talk, cost increases are going up, particularly steel, aluminum, petroleum products, and that has a -- has an impact.

Just as a follow-up, do you think pricing that you are able to get is fully recovering the higher material costs and higher component costs?

Well, I think we're -- we're protected to a large degree by the long term agreements that we've -- we've had. But there are surcharges that a number of suppliers are putting on, which -- you try to work with suppliers, some of it is pass-through, others you have to absorb. But, I think that's part of the -- the commodity cyclicality and in the future prices will probably go down and that will be a benefit. So I think we're doing an excellent job on that.

Okay. And -- and last question, you threw out '05 projections, both for North America and Europe. North America gets -- taking the midpoint -- up around 20 percent, Europe up 4 percent or so. You know, I would assume you would expect higher margins under those kind of conditions.

Well, you know, we're always looking to maximize the margin. And being the -- the premium producer, we -- we do a good job on that. I think the margins should be -- should continue to be good. We're -- we're looking to maximize the margins in all segments of the marketplace, and it is going to be an exciting year next year, as usual.

I'm just -- I guess the spirit of the question is, that if volumes are up another 20 percent in North America, you should get absorption benefits by running your plants at higher levels or are we starting to get inefficiencies or diseconomies of scale because of how strong volumes are right now?

No. We've -- as you're -- as you're aware, continue to invest in our facilities, not only in the capital side but things like six sigma and just how we approach the business, so we're continuing to get improved economies and efficiencies. And that is very much one of the operating tenets of the company. So, in terms of running more product through our factories, our teams are -- are excited about doing even a better job next year than they -- than they did this year.

Right. Okay. Great. Thanks.

All right. Thank you.

Again, please remember to state your affiliation before asking your question. The next question is from Brian Rayle, go ahead, sir.

Good morning. First question, bookkeeping, if I could get the financial services cost breakdown.

Sure. For the quarter, interest and other was 74.1 million. SG&A expense, 20.3 million. And provision for losses, 4.6 million, for a total of $ 99 million even.

Okay. As we think about the -- the financial business, going forward, have you seen, as demand has come back up, for overall units, have you seen more competitors get back into the market and may cause you to see your margins get compressed a little there? Or do you feel pretty comfortable where they're at?

Well, typically, what we see is that as business improves, some of the -- the banks and others get into the finance business and -- and go after that. But I think with PACCAR's customers, they see that we're in the business for the long term, it is the core strength of the company. And so our market share has held at about the same level it's -- it's been in the past. But it -- clearly it is more competitive, especially for some of the fleet business.

Okay. And then, finally, on the financial services, if I think of a truck entering the lease fleet, versus going to, say, an end customer, there's no preference one way or the other? I mean, you don't -- I do not want to say starve, but keep trucks away from the lease fleet for a couple of quarters to satisfy customers or anything like that? There is no change that way?

No. The -- PACCAR leasing continues to grow and is at record levels. It continues to grow every year. And they've been able to increase their market share this year.

Okay. But you wouldn't take, or delay a purchase that was planned for the lease fleet to satisfy an end customer? You would still continue to grow that.

We work hard to take care of all of our customers.

Okay. Thank you.

And PAC lease is at record levels.

Joel Tiss, your line is open, go ahead, please.

Tough game, HUH?

Yes. I'm glad to hear your unbiased opinion of your company. It is refreshing.

Thank you, Joel.

On the second half of '05, can you also just try to dig into some of the issues that we're hearing other companies having on the components side and raw materials? Is it fair to be thinking about rate of growth, slowing down noticeably as we get into the second half of 2005?

The second half of 2005?

Yes. Because if seems like the run rate today is sort of 290 or pushing as much as you can out to keep up with your strong demand. And as -- as we get into '05 it seems like it is going to be a little bit harder for some of the component suppliers to ramp up as quickly as the demand is ramping up, so the comps are going to start getting tougher. Is that a fair way to think about things?

Yes. I think as we indicated in our press release, and obviously a number of other companies, suppliers and industrial companies have indicated, I think the suppliers are taking a slightly different approach to this market than they have in the past, and that is, they are looking at what is the -- the most beneficial approach for them in terms of capital and human capital investment. And in the past, they might have been a little bit more willing to expand a facility or take on a lot more people.

But, I think they've decided that's perhaps not the ideal way to run their company, so there's a little more reluctance. And we're seeing some stiffening with some suppliers. As I mentioned, with our long-term agreements, we seem to be in excellent position.

You mentioned a figure of 290. I think you might be looking at some order intake. Because the production is quite a bit different than the order intake, as -- as people can't build everything they're -- they're getting in. And the backlogs are now to a point where essentially delivery for North America is in the late February time frame and in Europe it is probably middle of January, I guess.

And then, just a quick follow-up, as -- as we move into -- into the sort of scenario that seems like it is setting up in the later part of 2005, and maybe into 2006 as well. Can -- can you -- can you give us just a sense of how PACCAR thinks about continuing to maximize profitability in that environment? Some of the different levers that you can push on to -- to keep the profitability improving? Thank you.

Sure. Well, II mentioned the ongoing investment, and the increase investment in -- in every aspect of the business. And you are seeing that even starting to be reflected in this quarter. With the dramatic jump in -- in capital expenditures, and technology.

So, really looking at Europe first, very solid growth opportunities, and DAF, Leyland, Foden are in excellent position, have the highest reputation, and highest quality product in the marketplace and in North America continue to drive the -- the costs down. In fact, you know, SG&A percent at 3.4, that's an all-time record for PACCAR. And looking at offering our customers more and more in terms of bundled services and whether that is on the finance side, or the technology side or the logistics side, in addition to a wonderful truck. So, I think there's a -- really an exciting future.

John McGinty, your line is open. Go ahead, please.

Mark, the -- if we look at your sales of -- of truck and other, they were up 43 percent. I know you don't like to break anything out lower than that. But if we just look at your forecast for the industry in '04, you've got US and Canada for the industry up 35 percent in Europe up I think, 10 percent in '04. And can -- can we -- are we looking at -- are we looking at the sales gain being substantially greater in Kenworth and Peterbilt than in the -- than in the -- than in the Europe -- than in DAF and in the European companies in the third quarter, or could you comment on that at all?

Well, the good thing is that, actually, every one of those groups is at record market share levels, and growing. So I -- I think that's really the way we look at it. I think as pointed out in the press release, the goal for DAF is to get to an equivalent position as Kenworth and Peterbilt, so that's in the 20-plus percent market share and DAF's at 13. And so that -- that is going to take some time, but that is certainly a goal and people are working hard to achieve it.

And Kenworth and Peterbilt are now sort of in the high 24 percent retail sales market share which is -- I think most likely a record. So, we seem to be continuing to pick up more and more business. There have been recent truck shows here in this country, and in Germany, and in the last month or so and many, many excellent customers are saying, "I really see the benefit of working with PACCAR, not only do you have the best truck product, but just the way the company operates, and the aftermarket support, the strength of the dealer network." Are things that are becoming increasingly attractive. And these are customers that, in the past, may have never purchased our product, and so there's some great opportunities.

Okay. Let me then go back, if I can just for a second, to the sequential discussion you were having earlier. Clearly, as you said, there's more fleet business. But was there more fleet business in the third quarter than the second quarter? In other words, was there -- that much of a change sequentially? I'm sure there was year-over-year but was there a change sequentially as well?

You're talking about --

Talking about the third quarter versus the second quarter. You said one of the reasons that the gross margin was down in the third quarter was that fleet -- obviously so I assume there was a step up in the fleet business sequentially in the third quarter versus the second?

Well, it -- it -- like every industry, there is a certain seasonality in terms of ordering. And, I think many more fleets are coming back off -- maybe a slower summer ordering time. They're getting in the fall, they're looking ahead sort of for the next year. And you also have certainly the -- the construction companies.

But mainly the long-haul people are saying," Hey, I've got to take a look at the product." They're -- in North America is more discussion about the increased costs for new engine, to meet the emission regulations in '07. So I think that's starting to percolate through the industry more. The people are saying, "I think I've got to get in the queue and get some trucks ordered." I think that's really been the impact.

Then final question. The fact that you saw, in the third quarter, supplier price increases, can we assume that we will see PACCAR price increases then coming along? I mean, maybe you -- maybe you have to give some price protection to orders that were in hand, but I assume that that is just a lag issue, that you will be stepping up your prices as we go into the fall and the rest of the year.

We are continually really working with our suppliers. I think that is one the real strengths of PACCAR, is the excellent relationship with -- with suppliers. And so a couple things. One, we're making investments by literally putting pieces of capital equipment into our suppliers to allow them to ensure a stream of product availability to improve their quality, and to reduce their piece costs. And this is -- this is an exciting venture that we've been doing for a while now.

Second, we increase prices -- we at least review them on an annual basis. Increase them, perhaps, once a year, maybe twice. So, there's always a little bit of timing and lag issues that you might get some increases. But you can't really jump your prices up for 3, 4, 5, 6 months and then sort of get ahead. So it's -- you know, it's a little bit of a step function that way.

Andrew Obin, your line is open. Please go ahead. Go ahead.

Are you seeing any pushback on your expansion in Europe from other competitors? Particularly in Germany, I would say?

Well, as you go to different functions, there's certainly some wringing of hands that it was a missed opportunity by our competitors, if that's what you mean. I think the -- the way I would approach that is, the customers absolutely love the DAF product, and support and team. And they welcome the opportunity to -- to work with DAF. So it's -- it's very positive, very exciting that way.

The question for me, I guess, is that you are going after Germany, and dominant -- do you expect the dominant German players to sort of stand there? Or are you seeing any actions from them, or so far they've been fairly not active just allowed you to take market share there?

Well, I'm not sure anybody let's anybody else take market share in any industry. We kind of look at -- we earn it. And we have the best products and I think the strongest and most profitable dealer network, and that's a very key differentiator, as you're probably aware, and it sounds like you know the European market pretty well, many of our competitors are actively purchasing all of their dealer networks in many individual countries. We think that's -- that's an approach that does not benefit the customer.

And we're very much a believer in the entrepreneurial independently owned dealer. And so as I've indicated in the press release, we've had many dealers approach DAF, and DAF has taken them on as service and parts points around Europe. So, nobody is letting anybody increase.

The only way you increase is by having a better product. And of course, we also sell at a premium compared to everybody else in all marketplaces, and so you better deliver a product that is worthy of that premium.

So you're not seeing -- you're saying '05 is going to be another sort of good year for growing market share in Europe for you guys.

We're what?

You don't see any specific problems with continuing to grow your market share in Europe next year?

It's always -- every year is -- you know, provides lots of opportunities. We just have to go out and earn it.

Bob Toomey, your line is open.

A number of my questions have been asked. Margins in fleet versus owner-operator. I guess I have a question. Is the -- is the fleet business now quite a bit bigger as a percent of your revenue than owner operators? These days?

No. I -- I would not say that. I would say that the fleet business is growing as a percentage. And we don't break that out. But it's -- it's definitely growing.

Obviously you're aware of the -- you know, the 3,000 unit Swift order that Kenworth got earlier in the year. You don't get too many of those, by the way. But it's growing. As a percent, it's -- it's good, excellent business, and high quality fleets.

What historically has been the relationship of fleet versus owner-operator as a percent of your truck revenue? Can you say that? Have you -- or have you given that information out?

We don't really break that out. But, you know, we're -- -- telling, well, to everybody in the industry, in terms of all segments. And we're also finding that one of the really exciting growth areas is in the vocational and construction market, particularly on the east coast of the United States. But also throughout all of Europe.

With the very excellent DAF CF product. And that's a marketplace that 20 years ago we weren't such a force, but now we not only have great products but we have the dealers in place to take care of it. And our competitors are having some challenges.

I wonder if you could talk a little bit about the issue of your long-term contracts with suppliers, and obviously it was mentioned a couple of times, rising materials costs. And I know there is probably not that much that you can say about that, except I'm just wondering -- I mean, do you feel comfortable that with these contracts that you are going to be able to sustain good healthy gross margins the way you've been delivering?

Well, I -- I think our approach has always been a very positive one towards the suppliers and the dealers. And it is an approach that might be a little different than the -- the rest of these industrial industry worldwide. And that is, we not only want, but we encourage our suppliers, and our dealers to be profitable. We think that if they are profitable, obviously they can re-invest in their business, they can come out with great products, they can hopefully keep costs in line.

But teaming up with them, that's going to be an advantage for our customers. And so, everybody reads about steel increases, and aluminium and petroleum products. And of course when they're not increasing, nobody talks about them because they're saying, "Well, that's just the way the market is." So right now, that seems to be a -- the topical discussion. In the future, it won't be. So it is -- you know, sometimes you've got a cost increase from a supplier. And hopefully we're able to move that along. Sometimes we can't.

But the -- the other scenario is to not have suppliers make money, and you certainly have seen plenty of that. And then pretty soon they're not around or their quality deteriorates, and that's really not a situation that is good for our customers.

Yes. I understand where you're going. I think it's is a great strategy. What was I going to stay here? Oh, you -- you mentioned earlier that you -- there was a question on prices that sometimes you -- you review prices and you may increase them maybe in the year.

Would you see a -- with respect to a step function increase in pricing, do you see -- would you see some positive impact from that in Q4? Is there anything you can say about that?

Well, I really can't say that. Typically the truck manufacturing companies around the world increase prices, sort of end of the first quarter, early second quarter. That's been the -- that's been the historical trend for probably a decade. And there -- there might be some other very small price increase somewhere towards the third quarter, but, like every industry, you just can't keep raising prices because customers don't really get too excited about that. So,we'll take a look at it, towards the -- the first quarter.

Two other quick questions, and I wondered -- do you see higher production levels in the fourth quarter globally and, secondly, can you com -- com -- comment at all on the impact of high diesel fuel prices on -- on demand for trucks.

Let's take the second one first, high diesel fuel. You know, -- well, most people would like to have petroleum products and diesel fuel prices lower. Just about ever industry would like that. What is going to happen, I'm not sure.

But for our industry, the -- the issue is typically the rate of change, not the absolute price. Once you get an absolute price that is steady, then people are able to adjust their operating ratios and the cost that they charge the ultimate customer. The rate of change is always a little bit challenging, because they'll have a contract in place with the people they're hauling for, and they can't just automatically raise or lower it.

You know, sort of on a daily basis, or you'd create a lot of havoc in the marketplace. High prices, everybody would like to have it lower, but those are being passed through for the most part to the end consumer, wherever they are in the world. So, we'll see what is going on with that one. The build rates seem to be increasing, but we really don't break that out too specifically.

Okay. Could I ask one more, Mark?

Fine.

I'm sorry.

That's fine.

Could you just say in -- in your view how much of the demand that you think you're seeing or the strength is related to just pure capacity increase, replacement or buying in anticipation of the new emission standards? Thanks very much. That's my last question.

All excellent questions.

Okay.

It's -- that is an excellent question, as a matter of fact. I -- I think right now, here we are 2004, that you've got strong GDP growth in US well, in North America, so that's -- that's driving demand. You've got record freight tonnage levels. I mean record levels. So, if you've got a lot of things being moved -- And some of that, I think, is obviously -- as a result that things were slower, sort of 2001, 2 and 3, I guess. And so you've got to replacement.

As I think we've talked about earlier, a number of companies have gone out of business over the last few years for this -- so the survivors are usually very well-run companies. So, you've got a combination of fewer trucks chasing huge amount of freight, they've got to get more trucks on order. And we're seeing that even in Europe, even though the GDP is growing at a little slower rate. So -- and the '07, people talk about it. It's still two years away. That's a -- so you're going to run your truck for a couple years. I think it's primarily strong GDP, and replacement and excellent freight tonnage levels.

Peter Nesvold your line is open. Go ahead please.

Question about investing in the suppliers. How frequently have you done that in the past would be the first question? And then, number 2, is this something that you -- you continue -- you expect to continue doing for the next couple of years, and do a potential peak in '06?

Well, we -- we don't know there -- if there's going to be a peak. Really, our approach -- it's been very, very consistent for decades, and that is, we want high quality suppliers, and by investing selectively in suppliers, we're able to leverage our technology advantage and leadership in the world to allow them to get tooling and techniques that are really quite leading edge. That many, many other companies either can't afford or don't have access to. And so the suppliers -- not every supplier -- is very excited about it, because this gives them a quantum leap ahead of whoever they're competing with.

So, we really started this about 3 years ago with several hundred of our top suppliers by making the -- the offer to them, extending the invitation. And certainly this year it's coming more into fruition, and I think it's going to be an ongoing way of doing business. It is a win-win for the customer, for the supplier and for us. Very exciting.

Yes. I think it's -- it's fair to say you guys have an advantage on the supplier, or getting the suppliers, you have that relationship. And so it sounds like this is something that's picked up in the last, maybe quarter or so?

I think that's -- it seems to be gathering momentum.

Okay. If I could ask, I guess more of a housekeeping question, on the -- on the tax rate.

Yes.

Now, with the NOL, does that mean that the effective tax rate stays at these levels going forward, or is this more one time, or how should we think about that?

Sure. That's -- that's a good question. And -- no. This is -- it is reviewed annually, as we talked about. But the adjustment, which is a required adjustment, this is not something that you can decide yes or no. It is a requirement. Is done as necessary.

But it looks to be 3, 4, 5, 6 years, depends how the business is going. So, the tax rate for the next quarter will be at normal rates.

Okay. Okay. And then finally, on the investment gains, I guess this is at -- at least the second quarter we've had that. How much more is there that we might potentially see in future quarters? Should we be expecting some of these one-time sales of marketable securities?

No, no, this is -- that really completes that investment.

Okay.

Andy Casey your line is open. Go ahead, please.

A few questions on the finance side and most of the others have been answered. The provision for losses on receivables as a percent of sales was about 3.4 percent in the quarter. And that was up sequentially from 2Q which was up sequentially from 1Q. Is -- can you help me understand why the -- the increase from the last couple of quarters?

Well, the increase -- the portfolio is growing, and as receivables increase, the provision increases. But the losses have stayed at relatively low levels, compared to historical loss levels.

Okay, thanks, Mike. And then on the -- on the spreads, the financing spreads in the third quarter, they look like they increased from the second and third quarter. It -- was there something special that happened in 3Q to help that?

No. There -- you know, things are about the same. We're at -- you know, the same as on the truck side of the business, the finance side tries to maximize the returns that they can get. Based on the opportunities that are available.

Peter Smith, your line is open. Go ahead.

Hello, with Morningstar. Good morning, guys. My question is probably for Mark. You talked a bit about your problems for DAF in western Europe. And I was hoping that you could comment to whatever extent you are comfortable on your longer term global strategic plans. As you know, one of your competitors has entered into JV agreements in China. And I'm just curious if you have plans for the company in terms of either expansion or partnering or if you are going to focus for the intermediate term just on growing share in your existing markets?

Well, the Asian relationship is -- is a long one for PACCAR. In fact, we've got wonderful pictures of executives from PACCAR selling railroad cars into China in 1915. That's 19 one-five, 15. And of course , we also like to say that we're still getting spare parts businesses off of those sales.

We have offices there. We have a joint venture in China. It's a -- very low-key. We certainly look at that market on a regular basis. And with the ongoing investment by China in their infrastructure, particularly their highway system, and now they have many thousands of miles of, let's call it European or North American quality highway system. I think that the freight business, the interstate or interprovince freight business will begin to pick up.

And I think over the next few years, the demand for trucks, PACCAR-styled trucks, if you will, will start to be of interest. Up to this point, I'm not sure anybody's made any money. In fact, I'm -- I know that many companies have lost a tremendous amount of money. But it is something that we're taking a look at.

Okay. Thank you. My other questions have been answered.

There are no other questions in queue at this time.

Okay. Thank you for participating.