帕卡 (PCAR) 2006 Q2 法說會逐字稿

Good morning, and welcome to PACCAR's fiscal 2006 second-quarter earnings conference call. My name is Terry, and I will be your conference operator today. All lines have been placed on listen-only mode until the question-and-answer session. This conference is being recorded. If anyone has any objections, you may disconnect at this time.

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

Thank you. Good morning. I would like to welcome those listening by phone and those on the Webcast. Again, my name is Andy Wold, Treasurer of PACCAR. And joining me this morning are Mark Pigott, Chairman and Chief Executive Officer; Mike Tembruell, Vice Chairman; and Ron Armstrong, Vice President and Controller.

As with prior conference calls, if there are members of the media participating, we request 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.

I would now like to introduce Mark Pigott.

Good morning. PACCAR announced record revenue and profits today for the second quarter of 2006. This outstanding performance reflects the strong demand for all of our products -- financial services, aftermarket programs, information technology, and commercial vehicles worldwide. For the second quarter, the Company achieved net income of $370 million on revenues of 4.17 billion. Both of those are records.

For the first six months of year, PACCAR earned a net profit of 712 million on revenues of 8 billion. During the first half, PACCAR's after-tax return on revenue was an outstanding 8.9%, and the Company's after-tax return on equity was an industry-leading 36.5% -- once again, both records for the Company.

PACCAR's outstanding performance results from comprehensive initiatives in every facet of the business, including the introduction of more new products in the past 12 months that in the previous 10 years. And that includes some wonderful new Class 6 vehicles, a market that we have not been in before in North American.

Capital expenditures have been more than 1.6 billion in the last decade, leading to industry-leading efficiency. Productivity has increased 5 to 7% per year. PACCAR's aftermarket parts sales have tripled since 1996. And our finance and leasing companies continue to deliver record performance.

PACCAR is a company that continues to look forward. And in order to enhance future growth opportunities, Kenworth recently completed a new $70 million facility in Mexico, which increased their capacity by 50%. Kenworth is also designing a 1,000-square-foot addition to its assembly plant in Chillicothe, Ohio. These and many, many other capital programs are supported by the Company's award-winning Six Sigma group, accelerating productivity gains, and increasing product quality.

Just as a note for those that follow the balance sheet side of things, it is interesting to see that the Company has produced 16% more trucks year on year, yet our inventory is about the same -- a tremendous achievement, particularly by our engineers, purchasing, production and materials group.

PACCAR's aftermarket parts business continues to grow. We are planning and building new distribution centers in Oklahoma City and in Budapest, Hungary, and plan to have these in operation next year. These two new distribution centers will add a total of 500,000 square feet to the parts business, and will increase sales in both markets.

Last month, PACCAR and Cummins announced an agreement to install the Cummins six- and eight-liter engines in Peterbilt and Kenworth's North American conventional medium-duty trucks on an exclusive basis, beginning in January of '07. Proprietary configurations are being developed, and the engines will be badged as PACCAR. PACCAR dealers will service these engines, and will source aftermarket parts from PACCAR Parts. We continue to enjoy working with both Cummins and Caterpillar on the larger engines in North America.

Switching to Asia -- as many of you know, having seen our wonderful 100-year video and probably have our incredible 100-year book, PACCAR has been selling into China for nearly 100 years. We are planning to open an office in Shanghai in the next 12 months to source parts for our North American and European plants. And additionally, DAF will use the office to sell components into China.

On the financial side, during the quarter, PACCAR repurchased approximately 900,000 shares of common stock, bringing the total to nearly 9 million shares repurchased during the past 18 months. This investment of $600 million plus dividends of 900 million during the same period equates to PACCAR returning to its wonderful shareholders about $1.5 billion over the last year and a half. In addition, PACCAR also recently declared a 50% stock dividend to be issued on August 10 to stockholders of record on July 27.

Thank you. With that, we will open it up for questions.

(OPERATOR INSTRUCTIONS) Gary McManus, JPMorgan.

I just wanted to let you know -- I had a problem getting into this conference call. So maybe others are having the same issue.

Okay, we will turn that over to our --

But anyways, and I don't know if you -- and I missed you prepared remarks, because -- I assume it wasn't that much, because it was only five or ten minutes, so I apologize if I ask something you (multiple speakers)

Okay.

(multiple speakers) on your '07 forecast, are these retail sales forecast or production?

Retail sales.

Okay. And normally, when retail sales go down, does production drop more? Would that be what you would expect in North America in '07?

Well, in our press release, we indicated the range for '07 worldwide. And Europe is having a very strong year. We are increasing market share, and there might be some downtick in the market. Obviously, we would like to counter that by increasing our share. There are a lot of variables to go into that.

In North America, we continue to increase our share. There will be some impact due to the new EPA requirements. So you know, production will follow retail sales. But we are hoping to continue to increase share also.

And another question on 2007 -- just in North America, this downturn has been kind of well advertised. I guess everyone, including PACCAR, has greater ability to plan ahead for this coming downturn. And I am wondering -- do you think that is going to make a difference on how PACCAR performs, given you have got a lot of leadtime to prepare for this -- compared on how you performed in previous downturns, are you doing more over time, variable labor and so forth, that maybe makes it less of an impact than in previous downturns?

Well, a couple of thoughts. One, when I think of a downturn, I usually think of an economic-led downturn. So this is not a downturn in my opinion. There is some legislative impact that will most likely reduce demand for the first part of '07. But as we indicated in the press release, the economy is very strong in North America. It is strong in Europe, and improving in Europe, which is very, I think, satisfying.

So with a strong economy unlike '01/'02 or '91/'92 or '81/'82, which was economic led, this is purely legislative. And you have got housing sales, which might be moderating, but are still at strong levels; car production, which might be moderating, but are still at strong levels; and retail consumer purchases, and those shopping malls are a good levels.

So we might see some adjustment. But I would say people are going to need trucks because there are a lot of product to be moved throughout Europe and throughout North America.

Jamie Cook, Credit Suisse.

Nice quarter. I guess my first question, Mark, gets back to -- more on the forecast for 2007. The forecast now appears to be wider in range, down 20 to 40% versus what you guys talked about on your previous forecast. So I am just trying to understand what the changes was before -- the forecast before -- your own personal forecast versus now this is a PACCAR one? And I guess -- are you hearing anymore bearish comments in '07 from your customers just because there is talk in the second half of '06 and into '07 of a moderating U.S. economy?

Well, all the forecasts are PACCAR forecasts.

Okay, so the 15 to 20 last quarter was PACCAR, not yours?

Yes. They are always PACCAR's. Always have been, always will be.

Okay.

So, well, we're three months further along in the year. We are closer to '07. And as we get closer, we will continue to refine it, as, I think, the entire industry understands what the impact or probably lack of impact is going to be. But strong economy this year, and we are certainly hoping for a strong economy next year.

But are your customers any more concerned about the predicted slowdown in the U.S. economy? Is that why your forecast is wider in range versus last quarter?

No. I think -- well, our customers are making record results. And they are certainly hoping for record results next year also. They continue to be increasingly efficient, and a lot of that has to do with purchasing our product. And I think we're just trying to gather more information. And even if it is 200 to 250, you're still talking about two years that will be in the top 10 in the history of the industry.

Okay. And then I guess just my last question, back to the decision to go with Cummins on the engine there -- I guess what were the primary factors driving that decision? Was it technology, price? And are you hearing any initial reactions from your customers so far?

(technical difficulty) really, just an extension of a very good agreement we've had for seven years in Europe that Cummins is the exclusive supplier for our DAF LF line produced at Leyland, and that has gone very well. And it is just a national extension.

And I think the reaction will be the same as we get in Europe. It is a great product put into a great truck. It is easy to service. And certainly with one engine, it makes for, I would say, a similar approach to engineering, manufacturing, and servicing the product.

And I guess as a footnote, I would just say that every one of our competitors is in the same position that we now put ourselves in. So I think it levels the playing field.

Peter Nesvold, Bear Stearns.

Maybe a follow-up to the prior question -- because three months later, your '06 outlook is modestly better than what you had previously. Your '07 outlook predicts twice as big a decline as you previously expected. It does seem that freight is holding in there, despite what some of the doomsdayers seem to argue.

So do you expect freight to weaken further in '07 from what you thought three months ago, or is the magnitude of the prebuy bigger than you expected? Because clearly, something has changed here in your outlook for 2007. And I don't think that was really elaborated upon in the last answer.

I really think, Peter, we are just -- we are understanding the market better than a few months ago. I mean, it was almost a year out when we talked about it, and I think freight is good, as you indicated.

I mean, the economy is very good in North America, and the economy is getting to be very good in Europe. And I think this -- we will continue to refine it as time goes on. But we are getting strong orders in for '06, and starting to see orders come in for '07.

So I think it is very positive for us. And yes, there will be some reduction probably in the first quarter because of a prebuy, but as we indicated in the press release, if there continues to be a strong economy, which is what the consensus is from all of the economists, hopefully, that will, let's say, dampen some of that lower demand.

Okay.

That is what we are looking for, and -- the second half of '07, hopefully, we will return to good levels.

And then a follow-up on the Western European outlook -- can you elaborate on what do you attribute the downtick in Western Europe to? I mean, it does feel like maybe there has been some prebuy in maybe the UK and Scandinavia. But in Germany, with the tax incentives, it doesn't seem like there has been as much of a prebuy. And it seems like the construction market there has started to improve in second quarter, if not accelerate.

So what -- and Germany is probably the biggest driver of the Western European market. So again, can you elaborate on what you attribute the potential downtick and Europe in 2007 to?

Well, I think the potential downtick -- as you have, I think, so appropriately called it -- is sort of a conservative estimate. And there has been some pull forward ahead of the October 1 legislative change. Germany is improving, as you can certainly see from the newspapers. Scandinavia is really a very small market, so that is not really a factor. It really comes back to Germany and the UK and, I'd say, France. And those economies are going reasonably well.

So the other element is DAF continues to have very strong market share increases. We have increased over 15%, and are now number two in Europe, and certainly number one in profitability. And with new products they have introduced, including the DAF 105, which has been very well received, we are hopeful that we will continue to see additional growth. So that is -- I think sort of covers [the waterfront].

Yes, DAF has been impressive. Maybe some color on your medium-duty outlook, because you didn't provide anything in the press release this time -- we have been watching those medium-duty truck inventories really growing in the second quarter. They are at an all-time high. And you kind of run the math, you say -- all right, if those inventories come back down to normalized levels in '07, that alone would drive a 15% downtick in medium-duty builds in '07. What is PACCAR's perspective on that?

Yes, Peter, this is Andy. I think in '07, the medium-duty demand will be comparable to this year, probably down a bit -- U.S. and Canada, maybe 90 to 100,000 next year compared to 100, 110 in '06. And Western Europe could be in the 60 to 70 range, which is down slightly from the '06 75 to 80,000 units.

But I think one of the key stories for PACCAR is that the medium-duty market share continues to grow. So as the Company takes share, the impact of any potential downtick might be less for us than for others.

(multiple speakers) on that, I mentioned in my opening the addition of the Class 6 vehicles, which realistically we have not had in the past. And Class 6 is comparable in size to Class 7. So in a sense, we are now entering a market that will sort of double the opportunities. It will take time to establish the new products, but we have got very great products. And with the new PACCAR-badged engine, I think there is going to be some good opportunities out there.

And just quickly, what are the operating expense line items in financial services?

Sure, we've got -- the total was the 171.7 million, and the components are interest and other at 138.9 million; SG&A is 23.4 million; and the provision for losses, 9.4 million.

David Bleustein, UBS.

Forgive me if I missed this, but in North America, how many of the [2,000 in] trucks in your forecast do you expect will be shipped with 2006 engines?

Could you repeat the question, please?

Yes. How many of the trucks that will be built and shipped in 2007 do you expect will still have 2006 engines held over in inventory?

Well, we are working very hard to try to minimize that number. There may be some carryover due to lack of production slots this year. But we are trying to minimize it. There will be some, but we really don't have an exact figure for you at this time.

For an industry, would 40,000 be way off?

I really cannot comment on that.

Okay. And then second, do you have any build slots left for trucks with 2006 engines?

No. Basically, we are sold out.

Andrew Casey, Wachovia Capital.

A follow-up on David's question first -- earlier in the discourse, you mentioned that you were receiving '07 orders. Are those orders for trucks with compliant engines for '07?

Yes, it is starting to come in with some '07 engines.

On your Western European outlook, one of your competitors -- I don't know, late last week or earlier this week indicated they were seeing a pickup in order intake for the post emissions standards change implementation date. Are you seeing the same thing?

Well, we have seen a lot of growth. I think every one of our competitors has been stunned at the success of DAF. So I would say sure, we have seen some improvement as we have jumped, say, a point, 1.5 points in market share.

One of the things that is different in the European market versus North American -- and, you know, they are comparable in size -- is that, particularly in Germany, there is a financial incentive to take the new compliant engine. And as a result, that has -- on a financial return basis allowed fleets to say, yes, I will take some engines this year, and I will take some engines or some trucks next year, and kind of able to work the costs out, because they are getting either reduced tax or a benefit on the number of miles they drive in Germany.

In North America, there isn't any incentive. So the new engines, which have increased the cost of the vehicle, because you have got engines, you have got radiators, you have got exhaust systems, you are adding 5, 6, 7, $8,000 -- that have to be borne by the purchaser, which -- we will continue to try to pass some of that along and become more efficient.

So I think in Europe, it's more of a sort of equal demand between this year and next year, although we're being conservative in saying it could go down next year -- big difference.

And then a little bit longer-term question on your medium-duty engine alliance with Cummins -- did your distributors service the medium-duty engines prior to when this new agreement takes place, or was that taken care of by your engine suppliers?

Could you ask that again? You are kind of breaking up.

Oh, sure; sorry about that. On the new agreement with Cummins that you recently signed, I am just trying to understand the changes for your distribution channel in terms of the engine service capability. Did your medium-duty -- well, did your distribution service channel service the medium-duty engines, or do they today? Or is that taking care of by your existing engine suppliers, and this would be something new?

I think you have analyzed it correctly. Up to this point, in North America, the engines are typically serviced by the engine manufacturer. Of course, in Europe, we service all of the engines, whether we produce them or not. And so the change will be the opportunity for our Kenworth and Peterbilt dealers to service the engines. But it is still available to the Cummins distributor to also service them.

So it just for our customers expands the service capabilities throughout North America, which is a very positive development, and one that our customers are very excited about.

Peter Nesvold, Bear Stearns.

Just a couple of cleanup questions. What was the quarter ending share count?

I think it was --

166.2 million.

Okay.

(multiple speakers) It is on the balance sheet and press release, Peter.

Okay -- hey, there you go. And I guess thinking ahead to December, we all look forward to that special dividend. Clearly, you can't speak on behalf of the Board, Mark, but what are your expectations there? I mean, we have the downtick in '07, but to your point, global economy feels pretty good, still. We have another emissions mandate coming up. Do you see a downtick in the special dividend, or do you expect that PACCAR can maintain the $2.00 going forward?

I really can't comment on that.

Robert Toomey, Riley Advisors.

I have a question pertaining to your '07 forecast in your press release. Can you comment on what the economic assumptions you see in '07 supporting that forecast?

Well, we have got -- I think as we indicated in the forecast, a consensus economic -- or the economists or the blue-ribbon panel are saying that they are thinking that GDP growth will be 3%. It is a little more than that this year, so strong economy. Freight continues to be at very strong levels. Some months, it is record levels. Other months, it's not quite at record levels.

Housing as I indicated earlier is at strong levels. It has come off its peak. And car production is still at strong levels -- two major drivers for commercial vehicles in North America, and to some extent in Europe, also.

[Garrett Stephens], [Giboni Capital].

This is a follow-up on two previous questions. For the orders for 2007 trucks with 2007 engines that you said you have been seeing -- could you comment as to whether or not you saw those in June, or if you are just starting to see them in July, and kind of what percentage of your order book they might comprise?

I would say that they are beginning to trickle in. And I think that is really about all I can say. You know, we are still five months out, and still starting to ease on in.

Robert Toomey, Riley Advisors.

I just sort of thought of another angle on my question I asked regarding the economy. With respect your '07 forecast, I guess economy versus the '07 emissions impact -- can you comment on the relative weighting of each of those with respect your forecast for '07 -- how much of each might have an impact there? I'm just trying to get a better understanding of that. Maybe that's a confusing question.

No, it's a good question. I think what we are sharing is that when you look at the cyclicality of the business, we are trying to say -- this lower demand because of some pull forward due to the legislative changes to meet new emission requirements typically has an impact. And we have seen that in '02. We saw that in '98. We saw that in '94, and you can kind of go back. And we will see it again and '10 and '13 and on and on.

The main difference compared to previous times are it's, let's say, swimming in the face of a strong economy versus a recession or a dramatically slower economy. So we are saying -- I would say that we don't have an exact percent, but a strong economy is always good for our business. And we are saying that there is some potentials to moderate what could be lower requirements if it was a recession, which it is not.

There are no further questions at this time.

Okay. Thank you. This concludes PACCAR's second-quarter earnings call.