帕卡 (PCAR) 2005 Q2 法說會逐字稿

Good morning and welcome to PACCAR's 2005 Second Quarter Earnings Conference Call. I would like to introduce Mr. Andy Wold, Treasurer of PACCAR Inc. Sir, you may begin.

Thank you. Good morning. I'd like to welcome those listening by phone and those on the Web cast. Again 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 any members of the media participating that they do so 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 effect expected results. At this time I'd like to introduce Mark Pigott.

Good morning. PACCAR was founded 100 years ago and we're celebrating our centennial this year. As you know PACCAR is known as a leader in product quality, corporate integrity and balanced global diversification. It's an exciting global company, delivering industry leading products and services through our expanding network of over 1,800 independent dealer locations.

PACCAR announced outstanding operating results for the second quarter and first half of this year. Revenue and pre-tax profit performance for the quarter, which are detailed in the press release, were both at record levels, including a strong 8.6% return on sales after tax and over 30% return on equity.

During the second quarter, PACCAR had a one-time income tax charge of $64 million or $0.37 per share, associated with the previously announced repatriation to the US of $1.5 billion of foreign earnings. PACCAR's worldwide truck parts, finance, leasing and information technology division businesses are all experiencing broad based demand for their products and services.

Total revenues were $3.6 billion for the quarter and $6.9 billion for the first half of 2005. Year-to-date, revenues are 30% higher than a year ago. Gross margins continue to be very strong, in fact, in the top several quarters in our 100-year history, which we think is excellent especially considering the company is 28% larger than a year ago. The result, excellent profitability.

As many analysts who cover the company know, one of PACCAR's key goals is to provide shareholders with a return that exceeds the market. PACCAR's return has in fact regularly outpaced the S&P 500 broad market average.

PACCAR has repurchased 2.83 million shares in the first half of this year, reiterating our belief that PACCAR is an outstanding long-term investment. I think what's especially pleasing to the PACCAR team is that we are accelerating the market leadership. PACCAR's development of leading technology in every element of the business, including research and development, sales, manufacturing, finance, lease and after-market support. PACCAR Technologies give employees, dealers and customers real competitive advantages as witnessed by the following actions.

PACCAR has increased its non-US revenue to over 50%. A key to this change is the positive impact of DAF trucks in Europe. Following PACCAR's acquisition in 1996, nine years ago, DAF has increased its market share from approximately 9% to nearly 14% today, the strongest gain of any competitor in the marketplace. And we're very proud that DAF is the quality and resale leader in Europe.

Medium Duty vehicle sales have increased from 2% to 18% of PACCAR's unit production over the past decade, a point that can slip by people who are not following the company. Sales of after-market parts have grown at an average of 12.5% annually for the past 10 years and now represent a $1.5 billion business for PACCAR.

PACCAR financial services earned $168 million profit last year and is one of the most successful commercial vehicle finance operations in the world. Speaking of the finance companies, the finance and leasing groups have now grown to over $7.5 billion in assets including over 20,000 PAC lease trucks.

SG&A as a percent of revenue is under 3.5% versus 8% 10 years ago. Even while we continue to increase investments in people and programs to grow the business. The company has invested over $1.4 billion in capital projects over the past decade to enhance PACCAR's position as a global leader in manufacturing, logistics, financial services and technology. And we continue to invest at strong levels in factory enhancements, new parts distribution centers, upgraded financial service tools, state-of-the-art logistic systems and, of course, new products.

Taking a look at the industry, our customers continue to perform very well and many are also achieving record profits. Fuel prices, which are in the news, are typically passed through to customers via surcharges. Raw materials, which many industries are talking about in their quarterly releases, are beginning to soften slightly. The European heavy duty truck market should be about 5% stronger this year as we outlined in our press release. And retail sales in the US and Canada should be up from last year by about 20 to 25%.

We appreciate, as we read the comments from analysts around the world, that the Street sets a high bar for PACCAR. We set a high bar for ourselves. And we look forward to the day when our PE is also set at a high bar, in line with our peer group of Dell, Microsoft and ITW. Thank you very much.

Now we'll begin the question-and-answer session.

(Operator Instructions). Our first question is coming Gary McManus. Mr. McManus you have the floor.

Good morning Mark.

Hey Gary.

Just looking at this second quarter gross margin, while it's very strong it is down a bit from where it was in the second quarter of 2004, and that's despite 27% revenue growth. Can you comment on why it's down a bit? Is there higher steel costs? Is there -- is it geographic mix or anything that would -- that's causing the margins not to improve on strong revenue growth?

We're just getting to be a much bigger company worldwide, as you've indicated, 27, 28% growth, and the margins continue to be at very strong levels. So, Gary, the bottom line is tremendous profitability, great percentages, return on sales, return on equity and I think we're -- we're all saying it's very strong results.

Okay. So, so I mean, we haven't hit a ceiling. Do you think there's an ability to improve gross margins near term in the next several years?

We're always working hard at delivering the best results. You can take a look at the -- I mean we've got the strong results in the top end in terms of gross margins, we continued to work the SG&A very strong and achieve another record for the quarter, and also are ramping up investments which have always been significant, but they're even growing larger to develop new products and services. So a very exciting future for PACCAR.

Okay. The second question is, if my math is right, it looks like in the second quarter alone you bought back maybe $165, $170 million worth of stock and I think that's the largest dollar amount of share repurchases in some time, maybe ever. And I'm just wondering is this -- you talk about how cheap the stock is, very low PE and the performance is great, you got a lot of cash, generating a lot of cash. Is this change -- does this signal a change in PACCAR's cash redeployment priorities?

Well we did repurchase 2.83 million shares in the first half and we outlined that on sort of the second page, so about $194 million were invested by the company for share repurchase. Through the years we've repurchased several million shares and I would echo your point that the PE should be higher and -- but I think we continue to invest in a wide variety.

We invest in the company through share repurchase, very strong dividend policy, we have an excellent capital budget program, periodically we make acquisitions. So -- its very much building on the 100 year foundation that's made this company the great one it is.

Alright. This is the last question, I'm trying to kind of do a first half cash flow statement and you generated a net income of $500 million or so, I'm just talking round numbers. The cash balance dropped by $400 million so that means you spent $900 million somewhere, of course I think dividends were at least $400 million and you did the share repurchases of about 200 million. And so where's the other 300 million? What am I missing? Was there any kind of pension contributions, did CapEx increase a lot? I'm just having a hard time reconciling that.

Okay. We had CapEx of about 115 million and there was also an additional about 45 million that went into the pension plan. Gary --

Let me make the final point on that is we're building at record levels for PACCAR in terms of our production so, even though our inventory turns set the global standard for any competitor, you know you need more inventory to generate record production levels.

Andy Wold Right.

I think that should all add up.

-- Excuse me, I'm sorry, the $115 Mike, is that a first half, or -

First half.

Okay, and same thing with the $45 million pension.

Correct.

Okay, great. Thank you guys.

Thank you.

Okay. Our next question comes from Peter Nesvold. Mr. Nesvold you have the floor.

Morning Peter.

Morning. I guess I just want to follow up on the gross margin question because you did 15.8% in 1999 and that was shortly after you bought DAF and you've improved the profitability at DAF since then, so why structurally would we not get back to that margin? Is it just a bigger geographic footprint, I guess I'm just having a hard time understanding -- I mean most companies that we see, as their revenues grow the gross margins increase for more operating leverage.

Well, probably -- PACCAR's by far the most efficient Company in our sector, in a lot of different sectors. We do have a larger footprint as you've indicated, around the world, and also our investment has been huge in all elements of the business. The gross margin is certainly one element that we track, but I think we look at the return on sales, the return on equity, the net profitability and that's what we're working hard at and if we're in the 14, 15% gross margin range that is fantastic and the money drop into the bottom line continues to be very impressive.

Okay. It does. Can you talk a little --

-- Thank you.

Can you talk a little about raw materials in second quarter and sort of net pricing in second quarter versus first quarter I mean --

-- I don't think there's much of a -- too much of a change, you know you guys see the same press that we see. There's some slight softening on steel, after going up 2.5 times compared to 5 years ago its down about 20%. Obviously petroleum derivative products are still going to be at high levels as you can see from the price of a barrel of oil.

Aluminum, copper and other commodities are still at strong levels and we work with our suppliers, probably better than most in terms, of trying to mitigate some of that. Some of it you pass through, some of it you are not able to pass through. I think it should be a slightly better commodity framework going forward but it doesn't really have that much impact for us.

And how did -- how did currency impact this quarter versus first quarter.

Not really anything.

Okay, and if I can ask about the repatriation, $1.5 billion, that's a lot of money. Seems like a lot of other companies are looking at greater growth opportunities overseas. What do you see here in the US that has you bringing back that much cash?

Well, first of all, I think its important to recognize this is not additional money to our balance sheet. This has always been on our balance sheet.

Correct.

So, there's some people that seem to think this is found money. This is money that we've worked very hard to earn over the past 10, 15, 20 years. Well, one of the drivers is the ability to bring it back because of President Bush's program at a 5% tax rate instead of the over 30% tax rate. And there's a bit of a tax holiday, as you know, for a year or so. And we continue to generate strong profits around the world, but our business is over 50% outside the United States. So we're going to generate over 50% of our profit outside of the United States and we have an opportunity to bring it back at a low attractive tax rate, we'll take advantage of it.

Okay. I guess if I could ask one last question I'll hand it off.

Sure.

There was no comment in the release about your North American outlook, which I believe was 270 to 280 the last time we spoke. The industry was chugging along at about 340 in the first half. Why not revisit that forecast at this time?

We think the market will be up somewhat compared to the earlier 270, 280.

Well that's -- for the year. I mean you'd have to have a pretty weak second half in order to come in modestly above 270, 280. I don't -- I'm guessing that's not what you're saying.

No, that's not what we're saying. I mean, everybody is essentially sold out in the industry for the rest of the year. And so I think everybody's in -- is trying to maximize their, their profitability for the vehicles they have in hand as getting ready for 2006. It should be a very strong year. It has the opportunity to be possibly a record year in the US and Canada and that's, that's very exciting.

Okay. All right, I'll get back in queue. Thanks a lot.

Okay, our next question comes from Andrew Casey. Mr. Casey, you have the floor.

Good morning Andrew.

Good morning. A few questions. First, a clean up thing. Can you detail the cost items in the finance service please?

Sure. For the financial services segment, interest and other was $102.5 million, SG&A in the finance group $20 million and the provision for losses 10.1 for the total $132.6.

Thank you. And then in terms of the tax rate, the 32% in the quarter. Is that quarter specific or is there some sort of structural shift that allows that to continue?

Well the, the main positive impact is that Holland and Mexico have implemented a structural program within their countries to reduce the corporate income tax rate. And in Holland they've brought it down 1 to 2 points. So we have a very large presence on the continent, as you're aware, and that's a positive impact and hopefully that will continue going -- going forward.

Okay, thanks. And then the, the last one. You mentioned raw material input costs flattening. Are you still seeing some supplier price increase requests? And if so do you really look at those as -- meaning the recent pricing that I would expect you saw from that community -- to be temporary? Or is that something that is the new reality?

Well, I've been in this business for 28 years. Mike's been in it for 35 years. I think we've seen price increase requests every year from every supplier and I anticipate we will see for the next 100 years. I -- sometimes price requests are completely detached from commodity prices. There's always price requests and I think there always will be price requests.

Okay, just as a follow up to that, is that kind of indicating that some of the capacity constraints are temporarily shifting the balance power away from the OEM/customer in favor of the suppliers at this point?

I - I've really actually never looked at the relationship that way. As we've talked and shared with the financial community, we're one of the only, if maybe not the only OEM that's very strongly in favor of our suppliers all being profitable. We see a real benefit to that, and its always sort of going hand in hand. That may sound corny but that's one of the real strengths of PACCAR's. Our suppliers are making a lot of money, we're in -- of course, we're also increasing our investment in suppliers.

I haven't read any articles in any periodical about other companies doing that, but we're investing millions in our suppliers, not only in computer systems but actual fabricating and manufacturing machinery. We want them to do well. So we like it when they do well and I think they like it when we do well because you don't have to read very far in any of the business papers to find many industries and many companies that are struggling mightily because they don't have good partnerships.

Okay. Thank you.

Thank you.

Okay, our next question comes from JB Groh. Mr. Groh you have the floor.

Morning.

Morning.

Hey, could you guys comment on sort of where you think dealer inventory levels are relative to last quarter and maybe last year?

Well, I think they're in excellent, excellent position. Where are you located?

I'm here in Portland.

Okay, so you've got those fellows over in Swan Island, probably a lot of inventory.

Yes.

But -- no dealer inventory is in very good shape. Once again, similar to production inventory, we're at record levels in terms of production and deliveries and a number of units going to the system. So I think as all the ratios and percentages are in great shape, so the dealers continue to do very, very well.

So you're saying its stable relative to last year? Lower? Higher?

I think it's probably about the same.

About the same. Okay. Then in the past we've heard these component shortages, can you kind of give us an update of what you're seeing there on tires and that sort of thing?

I think we've seen some good improvement on that over the last six to 12 months. People -- as I've indicated before, suppliers are making investments and continue to make investments. That's been, I think, a positive trend.

And Andy, do you have a depreciation amortization number for the quarter?

Sure. $90.5 million.

$90.5. You guys don't disclose a unit number deliveries, do you?

No.

No.

Okay. Thanks a lot.

All right. Thank you.

Bye.

Okay. Our next question comes from John McGinty. Mr. McGinty, you have the floor.

Good morning.

Good morning.

I wanted to first just make sure I had correctly the forecast, Mark, that you gave in your commentary. In the text of the release, you say industry sales in Europe over 15 tons could be up slightly for the year. Whereas, last quarter you said Europe would be up 5%. And you said in the remarks that you gave, Europe would be up 5%. So I'm just trying to understand, it looked like, from the text of the release, that you were bringing down the forecast a bit, but then, from what you said, Mark, you guys are still at up 5% for Europe in '05, just to make sure I have that correct.

I think that's a fair comment, John. But I think more importantly, look at the strong performance of DAF increasing its market share, quality leader, re-sale value leader, technology leader, pricing leader. It's got to be one of the most incredible industrial success stories in the last 100 years in any industry. Here's a company coming out of bankruptcy in the early '90s. Yes, the market should be up, but irregardless, DAF is growing. That's the story.

Right. And just to complete -- in the US, you didn't in the press release, give a number. You said up 20 to 25%. You all have said in the previous quarter up 15. So we're now up -- that up 15 is now to up 20 to 25% in the US and Canada.

In the US and Canada.

Yes. Okay.

That is correct.

Yes. Fine. A second question is do you all have trucks at customers with '07 engines from Cummins and Caterpillar now out in the field in test?

Yes, we do.

Okay, okay. Third question, on the share repurchase, the 2.8 million shares is part of a 5 million share authorization. Does that 5 million share authorization have a -- any time constraint on it one way or the other? Or is it essentially open-ended?

It's essentially open-ended.

Okay. And then in terms of the issue about pricing and costs and so on. One of the questions I have related to that really comes down to a timing issue. In other words, your comment -- and it's a very valid point and answer to Gary's questions and a couple of other questions -- were you guys look at the gross margin and you say the gross margin was a fabulous gross margin. And I don't disagree with it, but the stock's down $2.44 and the market tends to say sales are up 28% and the gross margin was down.

So two things I had questions about. One is yesterday, or last week, one of your long-term agreement partners reported a phenomenal quarter and they talked about being able to get pricing under their long-term agreements. We know that you were very aggressive at raising prices on orders in the first part of the year.

Is part of what's going on here a timing issue? In other words, you've put prices up, but they necessarily haven't flowed through in terms of timing, when those units are shipped, and yet some of the things like engines and some other components, have those costs finally have come through? Should we see the cost price relationship move back to being more positive in the second half? Or -- I'm just trying to understand whether or not timing has any factor to play in this at all in the second quarter?

Well, I can't really comment on other companies --

No. No, but just simply talking about the prices that you're paying to your suppliers, be they long-term agreement or whatever, those prices go up at one point in time, your prices might lag a bit going up. I'm just trying to understand if that's at all playing a role here.

I think one of the factors -- and obviously sometimes it's a challenge when you're obviously not working inside a company -- but one of the things that PACCAR does extremely well, and we set the high bar for many companies and many industries, is our management of cost, cost SG&A, cost materials.

And I think what you're seeing at other companies -- in different industries -- is a better handle on their cost structure that they're able to -- whether it's through closing down factories or managing the way they spend, that's having a positive impact in their results. Now, it may be floated out there as pricing, but I would venture an estimate that a certain percentage is their own costs are coming down.

PACCAR is the low-cost manufacturer in many industries. We share those numbers with you, you see those numbers, and that's what we keep working. We're the premium product in the world and we have the highest margins. We have the highest profitability. We have the highest return on sales. We have the highest return on equity. Our margins are fantastic. They're, as I say, they're in the top several quarters in our history.

Let me follow up and ask it in a slightly different way. If we look at -- kind of take the ACT forecasts for '06, they're not a lot different than '05, because, as everyone says, the industry's kind of at capacity in terms of major components and it's not going to get a lot better. If demand is there, there's not going to be -- we're not going to have a 28% gain in sales next year over this year, as we've had in this quarter.

The question is, for many companies, having a 28% of sales gain, no matter how low-cost you are, having a 28 gain in sales off of what was a good base to begin with is costly, expediting, inefficiencies, all kinds of things like this. If in fact, sales gains are much more modest next year and everything else kind of stays the same, should you be able - would you be able, do you think, to improve margins?

In other words, just simply not having the cost of the inefficiencies and the disruptions, which would be attentive to a 28% gain in sales, if things are more moderate, would that allow your margins to expand? In other words, are there some costs involved in sustaining a 28% increase in volume year-over-year?

Well, we don't forecast, as you know.

No, I'm just asking conceptually, given kind of what's going on in the factories and everything.

Well, all of our facilities are doing extremely well. So the increase in sales was because we build, sell, service, finance, and sell information technology more and make excellent margins, record profitability. That's what we keep working on. And that's really all I can say.

The company is in such fantastic shape, as I commented. We appreciate you guys holding us to a high bar. We have an even higher bar internally. But if we're going to do that, then let's make sure we're comparing with companies who we track, as I say, the Dells, the Microsofts, and the ITWs. Those are the outstanding companies that we benchmark in terms of manufacturing efficiency, inventory control, financial systems, software development, product development. That's the group we're in.

I think that the wonderful thing for our company is that we've transitioned, over the 100-year period, three or four times and we're transitioning now. The US sales of trucks, for us, is very -- it's a small percentage of our business. It's a great business, but we continue to grow.

Great. Thank you very much.

Thank you.

Okay. Our next question comes from Andrew Obin. Mr. Obin, you have the floor.

Yes. Good morning.

Good morning.

Just a question on the industry order rates. They seem to have accelerated over the past month. And I'm just wondering, in your view, what caused the order rates to decelerate and why did they decelerate? I mean, was it something OEMs have done or is it just general macroeconomic environment? Is it you guys coming out and finally getting the pricing for '06? I'm just trying to understand the industry trend here.

Well, the orders have been very strong for the year. Not every month is going to be higher than the previous month and I think they're pretty good. They're excellent.

Well, we sort of saw a sharp drop-off early in the spring and then they've really bounced back. So you guys are just not seeing anything specific. You're just sort of saying it's up, then it goes down, right?

Generally, it's up. It has been up for the last few years. You don't - you can't judge it by what happens one day or one week, because as people place orders, whether it's large fleets or medium fleets, sometimes they order as a group because that's the timing of their particular replacement cycle. Other times they space it out. So I think you have to take a little bit more of a macro view.

When would you expect your customers to start ordering trucks for '06 in large numbers?

Well, some are ordering now, others will order in '06. It really depends -- there's no particular set time or estimated time when people will order vehicles. The economy continues to be very strong in the US and in Canada, and they're ordering now. I mean, everybody's sold out this year. They'll order all the way into '06.

Switching gears a little bit to Europe, one of your competitors have noted that your market share gains would have been even stronger if you were to update your product line. Is there a regulatory change coming up in Europe that would make it sort of a natural point at which you guys could update your product line there?

Well, since we've got the most sophisticated, high-quality product, we're always updating it. There's a legislative change in terms of engines that will take effect in October of '06.

So would that be a European -- would that be similar in terms of design changes to what's happening in the US, in terms of magnitude of design changes?

For engines?

Yes, for engines and the trucks as a whole, exactly.

Well, engines are completely different than everything else. Yes, it's very similar to what's happening January, '07 in the U.S.

Okay. Thank you very much.

Thank you.

Okay. Our next question comes from Don Brown (ph). Mr. Brown, you have the floor.

Good morning, Don.

Hi, how are you?

Good.

I was just wanting to ask the question, first of all, about your price increases. It seems to me that the price increases have lagged here recently, maybe because the trucks aren't built yet. Is that more of a second half phenomenon where the price increases will come through?

Well, typically, most people in the truck business have a yearly price increase that becomes effective anywhere from February to June. And depending on what they have in the backlog, they will take effect anywhere from April to September, because there'll be some price protection as people order before the price increase.

Okay. Is it typically in the industry, what, three months or two months or -?

Well, it depends. I've been in the industry a long time. Sometimes it can be one week, sometimes it can be six months. It depends what the backlog is.

Okay. Can I ask a follow-up question? Not a lot's talked about your Mexican operations. Can you give me kind of -- what your view is there -- of that market currently?

Fantastic. We're so proud of our Mexican operation, over 40% market share. We've been the market share leader there for decades. We're investing $60, $70 million to significantly expand our operation and update it, put all the latest technology in that we have pioneered around the world. And great dealers, making huge investments in dealer premises, IT programs. The finance company's doing well. The leasing company is very strong. Just a wonderful, wonderful operation and very proud of the entire team there.

Thank you.

Thank you.

Okay, we have no further questions in the queue. If anyone has a question, hit star one now. Okay. Mr. Wold, there are no further questions in the queue.

Okay. Thank you for participating. This concludes PACCAR's second quarter call.