帕卡 (PCAR) 2005 Q1 法說會逐字稿

Good morning and welcome to PACCAR's 2005 first-quarter earnings conference call. (OPERATOR INSTRUCTIONS). I would like to introduce 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. As Gina mentioned, 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 are 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 is celebrating its centennial this year, and it is wonderful to start the year by announcing the best quarter in the Company's history. I would like to express my thanks to the wonderful employees we have around the world. They truly are setting the standard for so many industries.

As many of you know, Powercore is an exciting global Company delivering industry-leading products and services. PACCAR's intense focus on operating excellence has resulted in a number of performance highlights during the first quarter.

In the first quarter, PACCAR achieved an annualized return on equity of 29.1%, at or near the top of our industry's universe, and the Company delivered an industry-leading return on revenue of 8.2%. Both of these are after-tax measurements.

In addition on a longer-term basis, PACCAR has delivered an earnings growth net income of 16.1% compounded growth over the last 10 years. This is sort of reminiscent of many technology companies.

In addition, this is our 66th year of consecutive net profits and excellent dividend growth. The Company has essentially no manufacturing debt, fully funded pension plans and no retiree health care issues. Reading the Fortune 500, I note that PACCAR is now the 188th largest company based on revenue, which could be an all-time high for the Company. But more importantly to our employees and shareholders, we are ranked 152nd in profits, which is going in the right direction. And even more importantly, we're ranked 21st out of the Fortune 500 for the 10-year shareholder return.

PACCAR continues its rigorous benchmarking with leading companies in the industries in which we compete such as Microsoft, Dell, Toyota, Illinois Toolworks, Wal-Mart and Citigroup, and the results being delivered to our customers show how PACCAR has transformed itself from a fine industrial company to a leading technology Company serving the capital goods and financial services sectors. I'm confident that many of the financial analysts covering the Company are observing the evolving business thrust in PACCAR's performance.

Many people ask how has PACCAR become one of the finest companies in any industry, and one of the answers has been the Company's effective use of technology in every element of the business, including research and development, sales, manufacturing, finance and leasing, and aftermarket support. PACCAR's technology investments, which are increasing, give the entire logistic chain from our customers to distributors to employees to suppliers, a real competitive advantage in the markets.

I would also like to thank many of our dedicated long-term supplier partners. PACCAR is increasing its investment in suppliers so that new technology can allow them to continue to deliver the highest quality components to us and collaborate with us on exciting new designs.

In addition, PACCAR has trained many of our suppliers on Six Sigma including excellent partners such as Caterpillar, Cummins, Eaton, Dana and the list goes on. Obviously those companies have also benefited from the adoption of Six Sigma. As the industry's quality leader, PACCAR's premium products and services are being purchased by an increasing number of buyers around the world, and we're building on the 100-year tradition of being the quality leader in every industry in which we serve.

Our shareholders recognize the Company has again beaten the S&P 500 results one, five and 10 years, and I think you will be pleased to know that PACCAR is working hard on making the next 100 years successful. I would be pleased to answer any questions.

(OPERATOR INSTRUCTIONS). Peter Nesvold, Bear Stearns.

Great results, guys. It looks like the inventory turns slowed a little bit year-over-year in first quarter. Can you elaborate on that? Was it supply chain related, or was there something else happening?

You are reaching on that one. That is really not anything significant. Of course, we have increased production between 30 and 40% over the last 12 months. Our inventory turns have actually continued to set the industry benchmark around the world. Our inventory turns have increased dramatically. And boy, I think we're in excellent shape.

Okay. Well, what about on supply chain side? We heard a number of companies throughout first quarter incurring problems with axles and tires. What was your experience?

We had a good experience. I think as you heard in my prepared comments we have got the best relationship with our partners, and that is really the way we approach the business. Everybody is working together, and for us it has been very much business as normal. We continue to work with excellent suppliers, and I cannot really comment on what is being impacted to our competitors.

Okay. On the incremental margin side, I mean it was up from fourth quarter, but perhaps not as high as it has been in first quarter in the last couple of years. Albeit it is still a very good incremental gross margin. Was there anything else that might have been contributing to that, or is this sort of the incremental gross margin we should expect going forward?

Well, I think the gross margin was excellent as you commented, and you know we are a Company that is three times the size we were nine years ago and delivering record profits. So I think the margin, as you say, is in excellent position. Of course, we don't forecast about what the future may hold, but we are confident that we continue to make the correct investments to be the low-cost manufacturer in all industries in which we compete with the highest quality product, and think it has been tremendous.

One last question and I will hand it off. In terms of buybacks, it looked like the diluted share count was only down about 200,000 quarter over quarter. You have a pretty big authorized program out there. You know what is happening on that front? Do you see the stock here as attractive, or what is a buy signal for you?

I think we have been very consistent that particularly talking with the analysts that we always seem to be undervalued. And for a fine company like PACCAR, that is probably as much a question mark to you as it is to us. So always a great Company with terrific value.

Yes, but why not pick up the buybacks here given that the stock is down 20% year-to-date?

We continue to have an active program on buying back the shares, and as you indicated, we have an authorization, and the details will be --

SEC reports.

Yes. So we continue to do it, and great great Company.

John McGinty, Credit Suisse First Boston.

Your sales were up I think 33%. Would you be willing to give us any kind of a flavor of how much of that was priced? In other words, are we looking at 5 or 6% on a year-over-year basis with regard to the North American market I'm talking about, not Europe. But can you talk to us about the kinds of prices that you were getting in the quarter on a year-over-year basis?

Well, I will just make two comments. One is, most of PACCAR's business is outside the U.S. as I think you are aware.

Absolutely. I agree totally.

So you're talking about --

The 45% in the U.S., absolutely.

(multiple speakers) -- of our Company now. And there have been price increases. The normal price increases we have because we keep producing a better product, and of course, there have been commodity increases, which I think have been covered well over the last few conference calls. So I think that's really about all I can share with you.

I think the good news is that some of the commodity prices seem to have peaked and are starting to see a few percentage declines, particularly in the steel arena. I think that will benefit not only us, but I'm sure many other industries.

Absolutely. Well, I know that market share is not anything that is a goal for PACCAR obviously. But your market share did slip a bit in the first quarter in the United States -- in the Class A trucks in the United States. And I was wondering to what extent was that any pushback from price versus the fact that at least it has been reported that you had trouble hitting the delivery schedules, not because of you but because of the component suppliers coming into you. In other words, is that temporary related either to pushback on pricing or difficulties getting the truck out the doors, or is that just simply you being a bit more selective and wanting to maintain the profitability and market share being not a goal but a byproduct of the other kinds of things you look at?

Well, you know the Company very well. The market share is certainly in the 10-year range for us, and that is fine. In terms of -- our production set many records during the first quarter. People are eagerly looking forward to our product, particularly the new products that Kenworth and Peterbilt launched at the Louisville Truck Show just a few weeks ago. And so I think it is all very normal.

Okay. Europe, you are forecasting I think up 5% if I'm reading this correctly.

Correct.

And the fact that Volvo, not that that means anything, but Volvo said 0 to 5 and at the lower end, and MAN I think Scania had talked about relatively flat orders. Who knows, it's anybody's guess, but are you guys still pretty comfortable with your 5% forecast?

What I think we are increasingly comfortable with is that DAF has really established itself as the premium quality company in several industries in Europe, not only certainly in manufacturing product design, but now increasingly in the financial services with the growth of PACCAR Financial to Europe.

So we have talked in the last year about the new legislative changes in terms of dealer groups can now select which companies they would like to represent, and we are starting to see just a steady flow of applicants who want to represent the PACCAR product, and we keep increasing our investment in a whole range of elements of the business there, which is very very exciting. And I think people are saying, boy, I'm in Germany, I'm in Italy, I'm in France. I want to get involved with that PACCAR Company and certainly the brand recognition, the product, the aftermarket, the technology side that we are bringing to the marketplace has really got a lot of people excited that, you know, 10 years ago we were not even there. So I think you are seeing people saying, we have a new leader in Europe, and we are starting to get more recognition. And I think the results are really looking very favorable.

A final question. The $70 million plant expansion in Kenworth Mexico, that is a fair amount of money for a plant. Is it a significant increase in capacity? Is it to serve the Mexican market? Is it to serve export markets? Could you just kind of give us a little bit of background on the spending down there?

Well, it is to increase some capacity. And as you are aware, the Kenworth product, which has been in Mexico for over 40 years, is the market share leader with between 40 and 50% market share and continues to have the highest resale value. You have a number of people coming in offering cheaper products, but they don't last in the environment there. So we just continue to see strong demand and growth in the Mexican market. Very very exciting. But we are seeing that around the world.

Okay. So mostly the Kenworth Mexico is primarily for Mexico -- the expansion is for Mexico?

Yes, primarily. Yes, just a strong market and the customers really have seen the merit of that product as I say perform over 40 years.

Joel Tiss, Lehman Brothers.

I know last time I was in France and Germany I was thinking how do I get involved with that PACCAR Company, too.

Well, you know we still have your dealer application on file. We are just processing it.

All right. Good. I wonder if some of the other component suppliers in the industry have reported and talked a little bit about the build rates going down slightly as we go through the year. You know, the industry ran about 81,000 units in the first quarter, and people are still forecasting, say, less than 300,000 for the rest of the year. Can you give us a sense of that is realistic, that the build rates sort of flatten out for the rest of the year where they were in the first quarter or if they come down a little bit, or do you think they will keep increasing?

Well, I think the primary consideration for the North American market is the supplier capacity. But many of our supplier partners continue to invest in more efficient processing and increased capacity. I think that has benefited them and also their partners such as PACCAR. So there seems to be strong demand out there. There is strong demand in Europe. There is strong demand in Australia and Mexico as we talked. So I don't know what reports you are referencing, but it seems to be just another good year for PACCAR and also its suppliers. It seems to be quite encouraging.

So you think realistically as we run through the year that we could ramp from the first-quarter build rates to higher levels on a quarterly basis?

It really will depend on I think the relationship that the OEM has with their supplier partners in terms of the amount of product they are going to be able to sort. But I think everybody is doing very well. Another strong market.

Andrew Towbin (ph), Merrill Lynch.

Just a couple of questions sort of more longer-term. At the recent Mid-America Truck Show, Navstar rolled out their European engine, Volvo has its product, DaimlerChrysler has its product in North America, and you guys seem to be the only one that are pursuing a different strategy, not having a fully integrated model in North America. How are you guys thinking given that you have a very good engine in Europe, how are you guys thinking about potentially introducing this engine in North America in the next five years?

You know, some of those companies you mentioned I'm not familiar if they are in our market anymore.

You mean Freightliner, Volvo and Navstar?

I'm not sure. But we've got two great partners with Caterpillar and Cummins. And I guess you just have to look at the results of the companies to see how each strategic direction is actually performing. And no surprise to you, but my money is on PACCAR and the partners we have.

So no change in direction yet?

We are very happy.

Let me ask you another question. We talked about North America, Europe, Australia and Mexico. But what about other markets that you guys serve. It's a fairly significant chunk of revenue for you. It is very profitable for you. What is driving demand in markets like South America, Middle East and Africa? Is it oil and gas, or is it on-highway product?

Well, you are correct. We sell on average into about 100 countries on a rolling three to four year basis. So yes, we have a presence truly all over the world, and I think every region is driven by different economic factors. It may be oil and gas exploration in one area. It may be commodity pricing increasing mining activity in another. It may be infrastructure buildings such as cities and highways in another. It may be logging in another.

So the wonderful thing about PACCAR is with the broadest product lineup in the world and the most profitable company in our many industries in the world and the largest resources we are able to tackle all of these areas and continue to grow, so.

Let me ask you the question another way. If I break out your revenues based on the information that you have provided on the 10-K and this is my breakout, I sort of get a number of around $2 billion for '04 in South America, Africa, Asia and other markets, which would exclude Australia and Mexico and Europe. Are these markets driven primarily by natural resources, or should I be thinking that this is just driven by economic development in these regions?

You know, the mining, you know the logging. Is that what I should be thinking drives these sales, or are these sales just driven -- I don't know Brazil is buying on-highway trucks, but I don't think you sell on-highway stuff in Brazil. (multiple speakers). Do you sell on-highway stuff to these countries?

Frankly, we are a little bit puzzled by the $2 billion number. That is nothing that we know we have reported, and we don't do that kind of international business volume. You know, we do a lot of business in Europe, but in terms of the rest of the world, it is not that number.

Okay, maybe we can take it off-line. Thank you.

Robert Toomey, RBC Dain Rauscher.

Congratulations. I wonder, Andy, if you could breakout the income and interest -- I mean the operating expense and interest expense for the financial services subsidiary?

Sure. For the financial services segment for the quarter, interest was 96.3; sales, general and administrative was 21.5, and the provision for losses 6.3 for the total of 124.1.

Okay. It seemed like the interest expense was a little bit higher than certainly I was modeling. I just wondered if there are any particular issues going on there with either cost and availability of -- not availability, of course -- but interest rate you are paying for -- your money to finance that business?

Bob, it is in the growth in the portfolio, and as you know, PACCAR is match funded, and it is a finance business, so we don't speculate on rates. So it is the portfolio growing, but also the Company did have its 11th consecutive record profit quarter. So, I think the growth interest expense is primarily the growth of the portfolio.

And, Mark, a question for you. Obviously you are still sounding very positive, bullish about the business. Everybody on Wall Street is ringing their hands about a slowdown in the economy, and I'm wondering if you could just comment on your read on the economy here? And if you think a slowing in the economy -- or what kind of impact that might have on your sales and production?

Well, I think Mr. Greenspan and others are much more qualified to comment on that. I would just say, Bob, that you have followed this Company. We are in our 66th consecutive year of net income. I think if we tried to model our business on general economic trends, it probably would not have achieved 66 consecutive years of net income. So we are always positive about what PACCAR can accomplish, and that has certainly been one of the reasons we have been successful. And combined with great employees and investment and high-quality, that is the way we continue to move the Company forward. So I think that is really the fairest way I can answer that.

Sure, that is fine. I wondered also if you could comment on anything that you feel is notable, Mark, particularly since the analyst meeting in terms of your investments in technology that is going to move you further along that you think is really notable?

No, it is just steady investment in all elements of the business, whether it is new systems to process credit applications for the finance people. New ways to diagnose electronically our products in the field. Investments in call customer centers. Improvements in the way we manufacture. More tablet PCs. Partnering with Microsoft and Dell and other fine companies on new software development. You know it is just across the board, and it has been that way for many many years. And that is all I can say, or the competitors will just have their list writing things down right now.

Okay. Thanks very much.

David Bleustein, UBS.

You mentioned you were working on the next 100 years. What do you see as the next major growth platform for your Company?

Well, I think that is a broader discussion that we won't be able to cover in its entirety on this conference call. But I think if you look at the wonderful 100-year history of PACCAR, there certainly has been an evolutionary history in terms of the products and the markets in which we serve.

But what is more important for our 20,000 employees is that the principles of quality, premium products, return to shareholders, continued investment in technology is really the platform that drives us. So when you've got such a strong company as PACCAR you have got many different opportunities to evaluate, and as you look back on our history going from fabricated steel, to construction of steel, to railcars, to trucks, to technology, to servicing, to aftermarket programs, it just -- it is very exciting, and that is the type of foundation we are going to continue to build on.

Let me bore down under one other issue. What did you say was -- I don't think you mentioned -- the average price change in Western Europe?

No, I don't think we ever mentioned that, and I don't think we do mention that.

And could you talk about what percentage of your manufacturing value-added is U.S. dollar-denominated and how much is overseas?

Okay. One more time on that one.

I'm basically looking for the percentage of your manufacturing value-added is dollar-denominated. How much of your costs are denominated in dollars?

Well, it is really going to depend on where we are manufacturing. Obviously once you get out of the U.S., most of it is in local currency. That is just the way we do it. You know if you're in Australia, it is Australian dollars. If you are in Europe, it is Euros. If you are in the UK, it is Sterling. You know? That is how we do it.

Gary McManus, J.P. Morgan.

Just things. One, you said you are investing in your supplier partners and they are increasing in the second half of the year. To what degree is that occurring? To what degree do you think you will be able to raise production?

We don't really forecast that. You know we just continue to work with a variety of suppliers, and one of the services that we bring that most other OEMs do not is we want all of our partners to be profitable, very profitable, because obviously that is going to make for a very strong partnership. And we can train them in Six Sigma or in information technology, or we can invest in specific types of machinery or processes or softwares or systems that can allow them to do their job more efficiently and produce a higher quality product for us. And that is what we're going to do. It has really been a very ongoing and hopefully in the future very exciting approach in the way we do business.

But just so I make sure investing in your suppliers, is that just due to having them being able to increase production near-term, or are we talking more of a longer-term investment? When you talk about investment, are we talking about just giving them price increases, or are you talking about actually investing in their (technical difficulty)--

What we're talking about, and of course we have the entire let's call it aftermarket and upfront technology consulting where we are actually helping them understand their business, and then we are also physically, and we are talking about millions of dollars, if they need a new state-of-the-art type of machinery that is going to first continue to drive quality up, and that is the key driver for us, is quality, quality, quality. And you know quality will usually result in more efficiency and a lower manufacturing processing and support costs.

So it is really a broad approach, a broad spectrum. And what is exciting is that PACCAR seems to be one of the few companies to do this in a number of the capital goods industries, and it has been very well-received by so many of our partners who say, boy, I want to work with PACCAR because we are truly involved with each other.

Right, right. Just two other things. One is capital spending in depreciation and amortization in the first quarter, do you have those numbers?

Sure. Capital expenditure is 56.9 million, and depreciation and amortization was 91.4.

91.4? Wasn't -- I mean what was -- that seems high to me. Last year I thought it was only about 190 million?

Well, I think you need to look at the -- in the annual report the D&A is broken down between PP&E and operating lease assets. You need to make that distinction.

Okay. You are doing it on a consolidated basis?

Yes.

Okay. And capital spending expectations for 2005 with the investment in the --?

Well, we don't have a specific number that we release, but we continue to accelerate our capital spending as we have for a number of years and increasing.

Okay. So it clearly should be higher than a year ago?

Should be.

Peter Nesvold, Bear Stearns.

Just one quick follow-up. A handful of the engine guys -- I guess there are only two left -- were saying on their call that they expect pricing, their pricing to the OEMs to go up in the second half of this year. What is happening with PACCAR there? Are you taking higher costs, higher prices from them?

I really can't comment on any individual supplier.

Got you. Okay, it was worth a shot. Thanks, guys.

John McGinty, Credit Suisse First Boston.

Just a couple of follow-ups. Is there a tax rate -- should we use the first quarter rate as the best proxy for the year?

I think we have been in a pretty narrow band, John, range.

So there is nothing unusual one way or another about it?

We're not going to forecast, but you can look back over the last couple of years and see the range.

Okay. And then with regard to the overseas profitability, obviously you're not going to speak to that. But can we at least have some feel for what has gone on in the states with regard to the kinds of pricing pressures or price increases that material that is causing suppliers to do and kind of your ability to respond? On that -- whatever the relative success you have had in the states, which we at least have a little visibility on through dealers and so on, if we go over to Europe, would the cost price situation in Europe be any different, better or worse than it has been in the states?

I think it is slightly better in Europe. You know, it is -- that seems to be our experience.

Okay and then final question. I guess we are approaching June when theoretically both Cat and Cummins have said they are going to give '07 engines -- be able to give '07 engines in trucks to fleets in small quantities so they will have the 18 months to test and so on. Are you at that point where that they are -- those engines are delivered to you, so you are beginning to put them in trucks for the fleets, or have they gotten that far yet?

Well, there are two excellent partners, and we work with them and have for 50 years. We cannot really comment on where we are in the program.

Fair enough, Mark. A very very impressive quarter. Thanks very much.

Tom Giovine, Giovine Capital Group.

Good morning. Can you comment about your leasing activity, your plans for leasing activity and how big we think we can see that business grow?

In terms of number of units?

However you look at it.

Well, we (inaudible) leasing company, PacLease has been growing for many years. The Company started 25 years ago, and it has had steady increases year after year after year and record profits, and there is great opportunities with the dealer franchise operation. There are now over 20,000 units in the fleet. And you know the value of Kenworth and Peterbilt products are just outstanding. And so the future is quite bright for that part of the Company.

My last question is, do you have a capital plan, and if so, can you state what the capital plan is in terms of prioritizing buybacks, acquisitions and other expansion?

It is just a balanced approach like every other company.

Can you state specifically what the capital plan is?

We don't break that out.

Maybe one more last question. I noticed that yesterday Honeywell declassified their Board. Does the Company have any plans to do something like that?

I don't know what Honeywell did and --

Well, let me just ask the question more specifically. Does the Company have any plans to declassify their Board so it is not staggered?

Well, it is a shareholder proposal this year, which we have our shareholder meeting today, and we will talk about it then.

There are no further questions in queue at this time.

Okay, this concludes the call. Thanks for participating.