帕卡 (PCAR) 2005 Q3 法說會逐字稿

(Operator Instructions). I would like to introduce Mr. Andy Wolf (ph), PACCAR's treasurer.

Thank you, good morning. I would like to welcome those listening by phone and those on the webcast. Again, my name is Andy Wolf, Treasurer of PACCAR and joining me this morning are Mark Pigott, Chairman and Chief Executive Officer and Ron Armstrong, Vice President and Controller. As with prior conference calls, if there are members of the media participating, we request that you participate in a listen-only mode.

Certain information presented today will be forward-looking and involves risks and uncertainties, including general, economic and competitive positions that may significantly affect expected results. At this time, I'd like to introduce Mark Pigott.

Good morning. PACCAR is celebrating its centennial in 2005 and it's wonderful to be able to announce today the best quarterly profit performance in the Company's history.

As you know, over the years, PACCAR has evolved into a globally diverse Company, delivering premium products and services in over 100 countries. For the third quarter, net income was a record $304.8 million, a 24% increase from last year. On a per-share basis, earnings were $1.78 compared to $1.41 last year. Total revenues rose 21% in the quarter to $3.5 billion. Return on revenue after tax of 8.6% was another record result for PACCAR. Year-to-date revenues are $10.4 billion and net income is 820 million, both records for the Company. This result is even more impressive considering PACCAR's year-to-date profits reflect an additional income tax charge of $64 million for repatriation of $1.5 billion of accumulated foreign earnings.

PACCAR's worldwide Truck Parts, Finance, Leasing and Technology divisions have all experienced increased demand for their products and services. PACCAR's 22,000 employees worldwide have done an outstanding job. I'm very proud of them for translating growing demand into superior bottom-line performance. Many operating and financial measures within the Company are at or near record levels. These performance figures are highlighted in today's earnings release.

PACCAR completed the previously announced repurchase of 5 million shares of its common stock for an investment of approximately $345 million and today, the Company's Board has authorized an additional 5 million share repurchase program. Both these actions confirm the Company's belief that PACCAR is an excellent long-term investment.

Interesting to note that the combination of completed share repurchases plus cash dividends means PACCAR is returning over $800 million to shareholders during the year. These actions were taken while at the same time investing record amounts in capital expenditures, positioning the company for a great second 100 years.

Year-to-date, PACCAR has invested over $200 million in capital. Some of the highlights include $70 million to double the size of Kenworth production facilities in Mexicali, Mexico; a new engine machining and automated assembly facility at DAF in the Netherlands; installation of more than 1000 personal computers in PACCAR facilities worldwide, and of course, many new products were launched. DAF just introduced its new flagship model XF-105 at the Amsterdam Show last week and we included a picture along with a quarterly release, and Peterbilt and Kenworth introduced new fuel-efficient models this summer.

Taking a look at the industry, carrier freight levels continue to be strong and their profits are also at record levels. Fuel prices are high compared to historical standards, but most trucking companies are able to pass through the majority of these costs.

Industry Class 8 truck sales this year should be 290,000 units in the U.S. and Canada and about 255,000 in Western Europe. Initial estimates for 2006 of these markets will be approximately the same this year, another excellent year.

Taking a look at the past 10 years, PACCAR has achieved significant diversification in terms of how its revenues are generated around the world. PACCAR's truck sales in Western and central Europe are the fastest-growing of any competitor in the industry. DAF has increased its market share from 8.6% in 1995 to over 13.6% today. PACCAR's aftermarket parts business has grown at a 12% compound annual growth rate and is now $1.5 billion in annual revenue. PACCAR parts posted 12 consecutive years of record revenue and profits.

The Company's medium-duty business and light-duty business continues to grow and is now 15% of our total production build. PACCAR Financial, PAC Lease continue to grow. PACCAR Lease has grown by more than 10% compounded annually for the last decade and now has a fleet of over 21,500 premium vehicles.

PACCAR Financial Europe, which was established only four years ago, continues to generate record profit results and assist in the growth of DAF. With that, we're looking forward to 2006. I would like to take your questions.

(OPERATOR INSTRUCTIONS) Andrew Casey, Prudential Equity Group.

Nice earnings quarter. I have two questions; one on the quarter, and then one on the outlook. First on 3Q, if I kind of back into your working capital performance, it kind of looked as if days receivables stayed about constant and days inventory actually increased. On the inventory piece, was there any disruption or does the increase kind of suggest a little higher inventory bank to limit any potential production disruptions that may occur due to component availability?

Not really. Of course, we're at record production levels, so inventory goes up to support those production levels. And as you know, our inventory turns are so good compared to anybody else in the industry that I don't really think there's any issue there. I think it's business as normal.

And then on the '06 outlook, specifically in North America, according to some industry data we get, it looked like Peterbilt and Kenworth's unit production declined in September from August a little bit more than last year. First, is that accurate? And if it is, is it indicative of the near-term quarter intake weakness we have kind of seen in other industry data? And then if that's right, are you expecting any improvement in order intake as we go into '06 to kind of support the flat -- what looks like up 6% forecast that you have?

Actually, we're building more trucks now than we did a year ago, so I'm not sure what you're looking at. Orders seemed to be actually picking up per the normal falls cycle after -- you know, things usually are a little bit slow during the summer around the world. So looking pretty good.

Okay, thank you.

Gary McManus, J.P. Morgan.

Hi, Mark, another great quarter. Just one real quick question. How much did you spend to buy back stock in the third quarter? I counted -- I think it was about 2.2 million shares. What was the dollar amount used to purchase those shares?

I don't have that by quarter. It's about 345 million for the year.

Okay, that's fine. That's a nine-month number?

Yes.

Okay, 345 million. Reading your press release, I have a question. You have a section on '07 engine emission outlook. In the last sentence, it says general economic growth should normalize industry sales during the '05/'07 ordering cycle. What does that mean? Are you anticipating more normalized sales, which I assume would mean down from what we are seeing in '05 and '06?

What we mean is that the cycles from '05 to '07 will probably be the three best years in the history of the industry and should be pretty good.

Okay. So that's just a little bit unclear to me.

I thought you were going to pick up on the humanitarian aid paragraph.

Well, that was going to be one of my questions, but maybe I will save until later. Just one real broad question. It seems like once every decade, PACCAR makes a significant acquisition. I think DAF and Leyland were the last big ones. Nothing has happened here in the last several years of significance, generating a lot of cash, and I know you are returning a lot of cash to shareholders. What is the probability of a significant acquisition near-term or next year?

I really can't address that. I mean, you're right. Typically, the cycle has been once a decade, but I think that's more of an average. And there's always opportunities, but we are just working hard to make sure we have the best company we can.

Is that something you're actively looking at right now, or are you just happy enough to return the cash to shareholders? Is this something that you spend a lot of time exploring?

I think every company has to have that as certainly one of the elements in looking at business opportunities, and we would be the same as every other company.

Okay, great. Thank you.

Thank you.

Peter Nesvold, Bear Stearns.

Good morning. Looking at the truck gross margins, they look pretty good. Year-over-year, you are up sequentially. Sequentially revenues were actually down a little bit. When I looked back to second quarter, there was a fair amount of dialogue back and forth about whether you had hit a structural peak in the gross margins at 15% and whether you could do that 15.8 again that you did back in the late '90s. What has changed here, or has anything changed? Do you still think we are sort of structurally capped here at 15% due to product mix and geographic mix and some other things, or is something improving here?

Let's see. The late '90s, we probably made a few hundred million dollars a year and we have already made 800 million this year, so I think that's a huge structural change. We generated 8.6% return on revenue after tax, which has got to get us in the top quartile for many, many different industries. So I think there has been a wonderful structural improvement in terms of all of the investments we have made that have really paid off and have met their ROI targets and are generating unbelievable quality, efficiency and productivity throughout the Company.

I don't doubt that. I think it was a terrific improvement. I guess what I'm trying to get a sense for is, should I let the model continue to run here? Should I continue to assume some year-over-year gross margin improvement here, or do I want to -- should I be keeping it still around 15% and maybe looking for other areas of growth?

Well, I cannot really advise you on that. When we look at the business, you have strong growth in every element of the Company, certainly on the service side of the business, which would be our finance, technology, spare parts, customer service programs. Those would typically have higher gross margins than the manufacturing aside. So those elements of the business are becoming more and more a contributor to our overall success when you are in strong markets like we are now and have been for a number of years. The overall manufacturing element has a greater weight as things might slow down somewhere in the next 10 or 20 years. You know, there might be some overall margin enhancements as those aftermarket service elements contribute a bigger share of the total margin generated.

Let me ask you a quick question about medium-duty, because that has been an important driver of the growth story here in North America. We saw a couple of your competitors cutting capacity recently, we saw some order weakness and we have seen some market share moving around a little bit, some people winning, some people losing a little bit. What is happening in medium duty in your view (indiscernible) both from an industry perspective and I guess company specific to you guys?

The medium-duty -- we look at medium duty on a global basis, so we continue to grow medium-duty, record level medium-duty worldwide, so that is very exciting for us. As far as the competitors, I see that they are cutting build rates. I can't really comment on why they are doing that. But for us, it's a good opportunity, particularly on the -- let's call it historical revenue stream because as we know, medium-duty per se is not that much of a margin generator upfront. It's really the aftermarket profit stream, the finance element.

But in the U.S., certainly with the fuel cost jumps, that has probably had more of an impact because typically, medium-duty is run by smaller companies, proprietorships. They don't typically have contracts in terms of their haulage. Their costs are absorbed by their own company. So I think they're saying well, let's see if we can continue to hold the vehicles for a few more years. Of course, that plays to our strength because our vehicles perform so well compared to our competitors that that probably would generate more business for us.

Fair enough. One last question and I will get back in queue. It looks like you're looking at assembling some DAF trucks going forward in Taiwan. Can you talk a little bit about that? And is that just really a point of assembly, or do you see yourself at this point going into the Asian market or taking a longer wait and see approach?

I saw that note -- that is a dealer, that's all that is. It's much ado about nothing. That's just a dealer. We have 1800 dealer locations around world. I guess they were -- you know, you can't help it. They were very proud of being appointed as a DAF dealer so they wanted to get some press, and we admire that.

In terms of Asia, of course we have been selling into Asia for almost 100 years, since 1908, and that has been a steady market for us and we have seen reasonable growth over the last 97 years. And probably in the next eight to 10 years, there will be some serious opportunity for the commercial vehicle market. Right now, it's embryonic.

Okay thank you.

You bet, thank you.

Andrew Obin, Merrill Lynch.

I'm not allowed to say that you guys have a great quarter anymore.

You can still say it.

I am not allowed.

We have 22,000 people working awfully hard here.

Anyhow, question, first about your product line upgrade in Europe. One of the comments I've heard from your competitors that what keeps you guys back from gaining any more market share is the fact that you have not updated your product line in awhile. Could you -- I understand the products you've outdated is at the top range of your product line. Does that mean that we're just going to go over the next couple of years, just upgrade the entire line in Europe?

I would love to be with my competitors -- those competitors must be thinking about us if they keep making a comment about us. I guess we've got their attention, Andrew.

I'm not saying you don't. Nobody is not saying you're executing.

Let's see. We are the fastest-growing commercial vehicle company in Europe. We're third -- tied for third in terms of share. So we have passed half the market now, and we are the most profitable of any manufacturer in the commercial vehicle space in Europe and we have the newest product range. See, we have two truck of the year awards in the last four years; the LF, it's a small line. The CF has been fleet truck of the year by five or six times in a row in the UK, the biggest market. And the XF was truck of the year and we just updated the XF. So --.

Does that mean that there are updates coming up with CF and LF as well?

Well, we have invested close to EUR0.5 billion in -- we have all new product range. I'm a little bit confused, because we have been newest product range in the world in Europe. We have won all of the awards and we are the fastest-growing market share and we are the most profitable. So I guess I'm a little bit confused.

Okay. From where you're standing, okay, fine (indiscernible). The second, am I correct in looking at your filings that you are now disclosing (indiscernible) revenue by -- on a quarterly basis?

We included it in this quarter's press release.

Is that something that you intend on doing going forward, or is that a one-off event?

We'll take a look at it periodically and I appreciate your bringing that up, because I think it's important for all of our shareholders to have a better understanding that more than half of our business is outside the U.S. The U.S. is important. It's a big market, but other markets are in our mind equally important. So it's just a way to share additional information.

And just another question based on your previous answer. You sort of said that you think that Asia could be an opportunity for PACCAR in the next 8 to 10 years. Is that any change from your previous view? Because before, you've -- the timeline is fairly sort of broad, but I don't think you have ever stated before that you're actually interested in Asia, other than your presence in oil fields right now, et cetera, on top of what you're doing right now. Is there any change in your thinking, or am I just sort of misinterpreting your words?

I don't think it's a change. I think we're awfully pleased. Probably in terms of our company and our business, it had been in Asia longer than any North American or European company in the commercial vehicle market. I mean, 1908, as I say. And certainly as the infrastructure, and particularly or specifically the highway system is developed, there will be increased need for commercial vehicles and services just as we saw in the '50s here in North America and in the '60s in Europe. Until you have the highway system, there really isn't a requirement for intra or interstate or interprovincial trade. And so that will be something that will obviously help that growth and we will certainly be taking a look to see what opportunities there are for PACCAR.

Thank you very much.

John McGinty, Credit Suisse First Boston.

I think that that's great. The geographic revenue breakdown is a very positive thing that you put in there. So thank you for doing that.

Thank you, I appreciate it.

With regard to the orders, you mentioned I think in an answer to Andy's question that you were seeing an order pickup as is per normal in the fall. If we look just first at the states, there has been sluggishness in terms of the Class 8 orders. A couple of your large dealers have talked about their orders starting to pick up in October a bit more than seasonally. And I'm wondering if you could just talk to how you see the orders as not necessarily what has come in, but as the dealers are out, as the people are talking to your customers and so on. Do you see the orders starting to pick up in the states? And then could you talk similarly about the order outlook out in Europe?

Sure. Of course, you know talking with the dealers, we have hundreds of dealers, so that would be strictly anecdotal information.

I agree totally. That's why I thought you would have a perspective that the anecdotes don't.

They're wonderful, wonderful dealers. They have a certain defined territory, of course, that they're working in. So that will sort of vary in terms of what they see. But overall, all of our products -- Kenworth, Peterbilt, DAF -- in response to an earlier question have launched brand-new models this year. The biggest investment and the largest launch new of products in the history of PACCAR occurred this year. So as those products particularly, and we'll start with the states, Kenworth and Peterbilt, are now coming into the marketplace. What we're hearing from our customers and we have now left five years ahead of our competitors in terms of the quality, the fit and finish, the durability, the reliability -- so that this starting to generate additional orders.

Also, PACCAR works very hard on being the fuel economy leader, the aerodynamic styling leader. We've introduced new models that we've been working on for several years which certainly in today's high fuel cost, people say, boy, I want the most aerodynamic vehicle and the highest quality. The obvious answer is going to be a PACCAR product. So we're seeing some good improvement in terms of sales.

In Europe, the Amsterdam, the Rye (ph) Show just wrapped up after two weeks. It's a show that would get up about 300,000 visitors compared to the biggest show in the U.S., would get maybe 50,000. And DAF has a whole new range of products that I guess some of our competitors are pretty shook up about hearing (indiscernible) as a fellow analyst comment and they're seeing some very good order intake there. So overall, Europe, North America, steady improvement coming out of the summer, which is good.

If you haven't had a chance to see these new product and get inside, a lot of people say that it's basically the next closest thing you're going to get to driving a Lexus. So anytime you want to get to a dealership or a factory, I would be happy to set up for you.

The other question I had was getting back to the paragraph that you had on the 2007 emissions. As you are out there working with as you say the Cat and the Cummins actively testing the engines and the after-treatment, what has been the experience of the customers and your people? Are the '07 engines meeting expectations? And particularly the question is, what kind of fuel economy are they able to achieve relative to the engines that they are replacing?

I would say it's still a little bit early to be responding to that. It's a good question. Of course you know, Cummins and Cat are taking two different approaches to meeting the emission regulations. They Cummins solution is a little simpler I find, but both companies are working with us, with our customers. The goal is certainly to minimize the fuel economy impact. The engines are going to generate additional heat, they're working with the cooling packages and there will be a little more weight because you have a lot more physical equipment on the engine. But I think it's going reasonably well as we look 14 months out until it actually goes into production. So every day, it's being monitored and everybody is working on getting millions of miles of test data analyzed.

Thank you very much.

Thank you.

Brian Rayle, FTN Midwest Research.

Good morning, great quarter. Most of the questions have been answered. I just wanted to talk about DAF. We get a pretty good read on western Europe, and I know you mentioned central Europe. I'm just trying to get a picture as you have over the last basically 18 months ago, you had nine new countries come into the EU. Truck seems to be the preferred way of moving tonnage in that scenario. And then also, does DAF help your export business as a whole globally, just having more obviously of a cab-over? I would imagine that would help you more in the Asian market?

Could you repeat the first question? You kind of kind out?

With the integration of the Eastern European countries into the EU, the preferred method of tonnage movement seems to be truck versus the antiquated rail infrastructure. I just kind of wanted to get a picture of what is going on in eastern Europe, and then if the cab-over, where that helps you in your export business?

Excellent, excellent questions. The first one is that DAF with the newest product lineup of any competitor is doing incredibly well. And if you do have a chance to get Eindhoven or to Leyland in the UK, we would be pleased to give you a tour to see basically brand-new factories that we have installed in the last nine years. Tremendous investment and wonderful results. DAF right now is either the market share leader or vying for market share leader in Hungary, the Czech Republic, Poland. It's the market share leader in Israel. So those countries -- at Turkey, we're doing very well in -- those countries aren't really adopting the DAF product and becoming very mainstream in their fleet selection. They're going for high quality. As you know, they have not been in the EU. And in order to compete with the western Europe carriers, they say we need the highest quality product, and DAF is number one.

So we are investing a lot of money in new dealerships, whether it's tandem with an independent business owner or building them ourselves in major markets such as Berlin, Stuttgart, Frankfurt, Rome, London -- those are obviously western Europe, but we have a lot of opportunity to continue to grow. And I think as I have commented in the press release, our goal is to be over 20% share in Europe, which would make us number one on a single-brand stand-alone basis.

Your second question, DAF with its great array of products in the cab-over configuration really is playing to the requirements of most customers around the world. Certainly in Asia, much of South America, Africa, the cab-over product is the preferred configuration and DAF is one of the market share leaders in South Africa, and we even have its product running in Mexico at this time. But the DAF lineup, in combination with primarily Kenworth, is really the best range of product of any competitor, any manufacturer in the world. We're very, very pleased.

Thank you.

Joel Tiss, Lehman Brothers.

First, I would like to make a comment that I think you guys are doing yourself a disservice by referring to your shares as common stock.

Joel, you always know how to lighten the load. We appreciate it. What should it be called?

I don't know. You have a lot of time over there since everything else is going so well, and I'm sure you can think up something.

How about superior stock?

Anyway, two questions. One is -- why is the cash down since December by 475 million? I know you spent money on share repurchase, but I would assume that you would have generated some free cash flow. Can you recreate a little bit of what some of the bigger buckets would have been there?

Since the end of last year, there has been three significant items. One is the payment of the special dividend declared last December which was paid in January. We had the stock repurchase, the 5 million share repurchase. And lastly is the significant amount that we are investing in capital this year, putting a lot of money into new facilities, new operations that facilitate future operations.

Is that CapEx going to be more than 250 million?

Well Joel, this is Andy. What we have suggested is it's certainly trending up and we're little over 200 million year to date.

Okay. And then the last question, can you give me the ending diluted share count at the end of the third quarter? Because the way it's reported, there's an average number.

Sure. Actually, it is 170.5 million.

Okay, thank you very much.

Thanks a lot. I appreciate it, good comments.

Fritz von Karf (ph), Sage Asset Management.

Good morning. I was wondering, demand dynamics within the customer base. Your smaller customers, sort of mom and pop truckers, or smaller local truckers. How are you -- have you seen any noticeable change in demand from that sub-segment since we have seen gas prices rise?

I think it's really all across the board. Some have a steady replacement program, others, depending on their contracts with their end customers, may be purchasing, may be delaying, may be modifying the number of vehicles, and that can be either up or down. It really comes down to the end customer contract. And the easiest way I think we try to explain it is that, certainly, fuel gets at a lot of press; fuel price. It's usually the delta that is the most unsettling, not whether it's high or low, but it's how fast it goes up or down. At the end of the day, the fuel goes up and stays up. The consumer is going to pay, they're going to pay another nickel on a sweater, they're going to pay a little bit more for food produce, but it is going to go through to the consumer.

Okay. And since I have you, can I follow-up and ask the same question for larger segment. Any impact there you're seeing in their order patterns?

No. I think as I say overall, we're seeing some order improvement coming into fall season. You know in Europe, of course we're shut down for a couple of weeks as are most of the competitors. And in North America, it's usually a little bit slower as people have other things to do. But we are seeing recently order demand coming into the fall.

Gary McManus, J.P. Morgan.

Hi, just a quick follow-up. I'm looking at the ACT numbers, which I assume you look at as well. Dealer inventories -- this is North American Class A -- you were up quite a bit over the past year, up about 50%. And I'm sure you're going to say that your dealer inventories probably aren't that high. But in times where we had that big dealer increase, does that cause any kind of problems in terms of pricing pressures? How would you interpret that big increase in dealer inventory? It's like the highest level in five years.

Well, I think people or dealers are taking the vehicles in. And we have had a few -- you're talking about the U.S. only, right?

I think the numbers are given in NAFTA, to be honest. But it's primarily U.S.

I think it's almost all primarily -- in fact, I don't think Mexico is included. But we have had a couple of shocks with the hurricane and the fuel prices. So I think that put a little bit of hesitation into the market in the middle of the summer and into August. So the inventory may have built up for the industry. I think some of that is going to start coming down. Certainly, some of our competitors are cutting build rates, which will help the inventory.

The other element is, as you introduce new models, people that have the older models on the lot then have to sort of figure out what the pricing is going to be to move those. But I think as you look at in terms of the inventory to sales, about two months, which is pretty normal.

So you're not seeing any kind of pricing pressures with -- and you don't think the dealer inventories from an industry's perspective is out of hand or too high?

No. I know you say it's the highest in five years. That may be, but that does not mean they were not abnormally low five years ago either. I think two months, very normal.

And looking at your industry forecast again for the U.S. and Canada being 290 to 310, just modest growth from this year, 3% I guess in the midpoint. I think the sales have been getting better as '05 has progressed. So is that -- I am just wondering, do you think your current build rates -- and the build rates have been getting higher as the year progressed. Is this level next year, do you think your build rate is high enough or too high, it would have to come down under this industry volume forecasts? (indiscernible) the retail sales in the recent months have been higher than the 290, 310 number you're looking at next year.

We are comfortable with our build rates right now. And as I say, we're introducing new products all around the world. It seemed like the customer base in all segments are really excited and really receptive to these new models. So, we are comfortable.

So if your build rates hold and your industry forecast is correct, you probably would have to take share. Is that right?

We really don't comment on share, so.

I gotcha. Thanks.

But we did achieve record financial results.

Absolutely, and you're doing a heck of a lot better than your competition. That is for sure.

We appreciate it. Thanks for your questions. Good questions as usual.

David Bleustein, UBS.

Are any of your suppliers having trouble meeting your production schedules?

I think it's pretty normal. We have been doing this for 50, 60 years. There's always something going on, but it's very normal.

Alright. And you mentioned that you thought the Cummins 2007 solution might be simpler. Would you also infer that it might end up being cheaper and might end up being more durable, or is that too much to assume?

I cannot assume anything like that.

Thank you very much.

I have a question.

Okay.

Are you related to the fellow at Harley-Davidson?

I'm his son.

At least I'm reading the newspapers.

You take care, thanks again.

J.B. Groh, DA Davidson.

Hi, guys, I had a question on the financial services. It looked like the provision was up quite a bit there. Is there any specific thing that is going on there?

Nothing more specific. The growth in the provision reflects the continued strong growth in the portfolio. Had slightly higher credit losses, but certainly nothing to be alarmed or just very -- business as usual.

Growing along with the portfolio is what you're saying? And in terms of the buyback, is there kind of an expiration date on that, and do you expect to purchase those 5 million shares at the same rate that you purchased the last 5 million?

If we knew that, that would be (indiscernible) forecasting. Typically, we monitor this on a regular basis with the Board and most buybacks don't have typically an expiration. So as opportunities arise, and I think as we indicated in the press release, from time to time.

Okay, great.

Thank you.

At this time, there are no further questions. Are there any closing remarks?

No. Thank you. This concludes the call.

Thank you. This concludes the PACCAR earnings call. Thank you for your participation.