帕卡 (PCAR) 2006 Q3 法說會逐字稿

Good morning, and welcome to PACCAR's third quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS). Today's call is being recorded, and if anyone has an objection, they should disconnect at this time. I would now like to introduce Mr. Andy Wold, PACCAR's Treasurer. Mr. Wold, please go ahead, sir.

Thank you. Good morning. We'd 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, Ron Armstrong, Vice President and Controller, and [Robin Easton], Assistant Treasurer.

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 affect expected results. Now at this time I'd like to introduce Mark Pigott.

Good morning. PACCAR today announced record revenue and profits for the third quarter and the first nine months of 2006. PACCAR's excellent performance is due to the Company's global operations, award-winning products, record market share, consistent investment in innovative technologies, manufacturing efficiency improvements of 5 to 7% annually, and double-digit growth in the Company's finance and aftermarket parts divisions.

Looking at the third quarter, net income was a record $403 million, a 32% increase over the same period in 2005. Revenues were a record 4.2 billion, a 19% increase over the third quarter of 2005. And as a measure of PACCAR's leadership in asset utilization, the Company's after-tax return on equity was a superb 36.5% during the quarter.

For the first nine months of the year, PACCAR earned a net profit of $1.1 billion on revenues of 12.2 billion. Year-to-date, the Company's profits have nearly equaled the record full-year results for last year. Third-quarter after-tax return on revenue was a record 9.6%, and we're very pleased that we are now getting into the same range in terms of return on revenue after tax as great companies such as ITW, 3M, GE and Microsoft. We're also pleased that PACCAR is now one of the 500 largest companies in the world.

The consistent and, in fact, increasing capital investments made over the last 10 years totaling about $1.8 billion have contributed to faster development of products; new technology being introduced, such as industry-leading GPS systems in our vehicles; over 2000 tablet PCs in our distribution centers, our manufacturing facilities and finance offices; new logistics centers, which have enabled PACCAR to increase production by almost 20% without a corresponding addition to factory inventories. The PACCAR proprietary manufacturing system is now integrated in our worldwide plants, and is delivering excellent efficiency improvements of 5 to 7% per year. In fact, we're taking our manufacturing system to our suppliers, and many seem to be interested in purchasing the system.

As many of you know, PACCAR products have earned a great reputation for superb quality and excellent lifecycle efficiency for our customers. Building on that strength, the DAF XF105 was recently named the International Truck of the Year for 2007, and we're very proud of DAF being the only OEM to win that award three times in the last 10 years.

As you may have also seen in the press, Kenworth Truck Company was honored with J.D. Power's satisfaction awards in three different categories -- the second year in a row they have done that. In fact, PACCAR has won 21 J.D. Power awards.

Some of the recent operating highlights include production commencing at our new 420,000 square foot Kenworth factory in Mexico, which will serve the Mexican markets, where we're market share leader, as well as export markets.

We have begun construction on an increase of 30% to our Kenworth assembly plant in Chillicothe, Ohio. This 100,000 square foot expansion will be completed by the middle of next year.

We're very pleased with an agreement with Cummins Engine to provide exclusive supply of the 6 and 8-liter engines for our Peterbilt and Kenworth North American conventional medium duty trucks. That will begin in January 2007. The engines will be badged PACCAR and will include proprietary configurations.

On the parts side, PACCAR is in the process of constructing two new parts distribution centers, and these are typically in the 250,000 square foot range -- one in Oklahoma City and one in Budapest, Hungary. And we're doing this to handle the annual 10 to 15% growth rate that our aftermarket business is achieving.

Turning to our finance companies, PACCAR Financial Services delivered another record pre-tax earnings of $66.7 million during the quarter.

In the press release we talked about Asian opportunities, and we've noted in there that we've been selling into China since 1908. We are also going to be opening an office in Shanghai, which will complement our existing Beijing location. The Shanghai office will accelerate DAF sales of powertrain components into China, as well as provide some limited sourcing of parts for our European and North American facilities. PACCAR is a leader in China, supplying trucks to the oilfield industry.

During the quarter, PACCAR repurchased approximately 1.1 million shares of its common stock, reaching a total of 10 million shares repurchased since the beginning of 2005. PACCAR's investment of $675 million for the 10 million shares, plus the dividends of approximately $1 billion during the same period, have enabled PACCAR to deliver nearly $1.7 billion to our shareholders over the last seven quarters.

Looking at the markets, some of the trends and activity inside the markets, the European 15 ton-plus market is doing well. As we noted in the press release, we expect '07 to be in the 230,000 to 260,000 unit range.

DAF continued to perform very well. It's the fastest-growing OEM in Europe and has increased its share to over 14 to 14.5%, making us either the second or third largest in Europe, depending on the month.

Speaking of Europe, I note in the paper over the last month or two some ongoing discussions between some of our competitors. And I just would point out, for those of you that don't track it that closely, that DAF produces more trucks than Scania, we're larger than Scania, the MAN/Scania combination is smaller than PACCAR in terms of trucks produced, and their net profit is about comparable to PACCAR. Some people have compared the proposed pending acquisition to the challenging DaimlerChrysler merger, and I'm sure time will tell.

Looking at the U.S. and Canadian Class 8 market, next year we'll probably be in the 200,000 to 230,000 range, and certainly could rebound if the general economy continues its steady growth.

If you look at the European and North American markets combined, 2007 promises to be one of the top five years in recent history and should be reasonable. PACCAR's financial services and aftermarket parts divisions are delivering double-digit growth, due to superior customer service, ongoing investment and increasing vehicle population.

Finally, we're very pleased that PACCAR shareholders have earned returns exceeding the S&P 500 for the past one, three, five, 10, and 20-year time periods. Thank you. I look forward to your questions.

(OPERATOR INSTRUCTIONS). Joel Tiss, Lehman.

I didn't know I moved up to having an actual location now.

Joel, you're doing that well.

But obviously not as well as PACCAR. Can you give us a sense of what's changing in the marketplace recently to make the overall outlook for 2007, both between yourselves and Volvo, look better today than where you were a couple of months back?

I can't comment on what they're saying, obviously. But I think we actually have a pretty similar outlook to what we've had throughout the year. We certainly look at the market on much more of a global perspective than sometimes people who are covering only one sector or one geographic segment. So, Europe is going to be very good. And North America, although down, is still going to be reasonable. So, when you put those together, and obviously we do when we run our total business, the growth in medium duty, the growth of finance, the growth of leasing, the growth of aftermarket parts, the growth of IT, in balance should be a pretty good year.

Can you talk a little bit about the 2006, the estimated growth rate in the earning assets in place for the financial division, so we can try to formulate a reasonable expectation for '07?

As you know, typically we'll finance between 25 and 30% of all of PACCAR's sales in our various finance and leasing subsidiaries around the world. And as we noted in the press release, PACCAR Financial Europe is now at $2 billion in assets. We're financing in 16 countries around the world. And it just continues to grow. We support PACCAR sales and earn a competitive return. So, if you're looking to model, hopefully that can help you a bit.

Last question, can you just go a little bit through the outlook for some of the non-North American Class 8 end markets for 2007?

Mexico, having a strong year this year, should be reasonable next year. Australia might have a bit of a rebound. They had very strong growth over the last 10 years; a little bit down this year. Of course Asia continues to be strong in terms of their GDP growth, and the main drivers there are China and India, but the other Asian countries. And as we develop new models, particularly medium duty and exciting new products being delivered by all of our divisions, we're looking to continue to grow market share. We're pretty much at record market share in almost all of our markets. And it's very exciting. A strong dealer network, which we continue to work with and grow. So, should be good.

Jonathan Steinmetz, Morgan Stanley.

This is Ravi in for Jonathan. A couple of questions. I think your variable margin in the truck segment was lower in this quarter than in previous quarters. Anything in particular that caused that to happen?

As you know, PACCAR looks at a number of metrics, including return on assets, return on equity, operating margin, SG&A performance. And so, looking strictly at the gross margin is potentially helpful. But if you don't see the entire program, then you don't see the whole story. Gross margins are actually up quarter-over-quarter, and the Company's after-tax return on revenues at 9.6 is outstanding, as we've noted before. So, it's just -- it's a terrific business model.

(indiscernible) variable margin, which is the incremental increase in profits. So, did you see any particular material headwinds in the quarter or something?

I think, like many other companies have noted, over the last several years there's been increases in commodity prices, certainly on the oil side; that's come down from -- our customers are seeing from $3 dollars now to closer to $2. That's a significant improvement. Steel seems to have plateaued and perhaps even slightly going down in price. But other commodities are still holding at close to record highs.

We're also working with many of our suppliers on redesign and more efficient use of those materials, perhaps transferring into different types of materials. I think next year will be a little bit better for many companies because of the slightly improved commodity pricing around the world.

The next question is, I think you took down your estimate for the range of sales for North America Class 8 from what you said previously, to 200, 230. Any particular reason? Anything that you saw that made you do that?

I think we're three months further along than when we last talked.

But nothing tangible that you saw? Do you think it can go any further lower, or --?

Realistically, we're three months smarter than we were three months ago.

Finally, do you have an aftermarket number -- revenue number for 3Q?

We disclose that just annually.

Peter Nesvold, Bear Stearns.

It's actually Waymond in for Peter. I wonder if you guys could actually address the tax rate. It looked actually to be low compared to what we've seen historically. I wonder if you could maybe address how we should look at that going forward?

In the quarter, we had a onetime item related to a reduction in our estimated tax related to repatriation that we provided last year. So, it was a $10 million reduction in our third-quarter taxes. And as we do each quarter, we reevaluate our estimated annual effective rate. We now believe that the estimated annual rate for the year would be closer to the lower end of our previous range, about 32% for the year, excluding the onetime items.

Thank you. Also, I was wondering -- inventories -- they seemed to tick up sequentially about 20 million more in 3Q than we normally would see this time of year. Are those engines? And if not, could you elaborate on what you're carrying in higher inventories?

We're producing a lot more vehicles than we were a year ago, and that's going to be the vast majority of it.

And also, we were surprised to learn from industry contacts that Navistar looks like it's going to cut production in November and December for their new truck. And if we could, like, take that as an assumption, would you increase your assembly capacity in North America during 4Q if Cummins could increase its allocation of engines to you?

I'm not sure about the company you just mentioned; I haven't seen any financial results for close to two years. I don't know what they're up to. And I think we're working with all of our suppliers, including our engine suppliers, on maximizing the vehicles we can get to our customers every quarter. So, can't really add anything to your question there.

One final question. Just wondering, in the financial sub, it seems that the provision for losses on receivables was considerably lower in 2Q. It seems surprising, given that 3Q report where the public fleet has been weaker than expected. It's also a little confusing in the context of you guys lowering the high-end of your '07 outlook. I was just wondering what gives you the confidence in accruing for fewer future losses.

We (indiscernible) portfolio that we have had for years. We continue to (indiscernible) equality and it is performing excellently. And the amount of provision that we provided reflects the performance up to this point.

I think, in addition to that, typically we are selling the highest-quality premium vehicle in the world. And many of the customers that gravitate towards that -- and of course, we're at record market share levels -- are financially strong. So, we don't quite have the cross-section of different credit ratings that perhaps other financial institutions might be working with. Our customers tend to be very financially strong and very pleased to be working with PACCAR.

Andrew Casey, Wachovia Capital Markets.

A lot of the questions have already been answered, but if I can circle around, I think this may have already been asked. The 2007 North American unit sales range, kind of narrow. Was that just better '06 volumes, or expected a little bit slower U.S. economic growth?

We did answer that. But I think, as we said, we're three months smarter than we were three months ago. So, as we move towards the actual '07, we'll continue to get a better handle on the general economy and impact of '07 emission changes. But I think the point I would make is we're looking for '07 to be one of the top five years in recent history on a global basis, which is the way we are approaching it. And certainly Europe, which is a very strong 40% of our business worldwide, looks encouraging -- brand-new models; many awards; improved efficiency; great investment. Many other segments of the world are growing -- Mexico, Australia, Asia. So, may see some slower markets in the U.S. and Canada. But overall, I think this will be one of the five best years for the industry. Very exciting.

Sorry to make you repeat that.

That's fine. Good question.

On the manufacturing cash position and completion of your share repurchase authorization -- first, congratulations. And second, can you elaborate on what you might be looking at using cash going forward outside of reinvesting in the Company and the dividend policy you follow?

I think, as we have shared with you and others, we continue to actively look at acquisition opportunities. That's -- don't have anything in mind right now, but working hard on that; a strong dividend policy, as you have already noted; and we continue to increase our internal investment, which is really, I think, the major story here within PACCAR in terms of the wonderful efficiency improvements, the improved margins, the return on sales after-tax, and the technology lead we have taken in the automotive and financial services industry. So, those are the three areas, I think, we've been pretty consistent on, and continue to work on that path.

Lastly, just kind of following up on the internal investment, were there any specific new product startups that occurred in the quarter?

Our products -- of course, the 105 really went into full production. Kenworth and Peterbilt are introducing, on a staggered basis, a number of new products. New powertrain products are now going into full production, and of course, couple that with the brand-new factory in Mexico. It's a pretty broad array of new products, services, because we also invest a lot in our services, our financial services, IT support to move those forward; our dealers. It's a whole broad array. A lot of new products, facilities and services.

Jamie Cook, Credit Suisse.

My first question relates to -- PACCAR has always done a phenomenal job in pricing their trucks. But when you look at 2007, do you feel comfortable that the price increase you'll pass along to your customer will cover the full cost of the new truck and the new '07 engine?

That's certainly our intention. Yes.

Yes? Okay. My second question, not to focus too much on your '07 forecast, I guess -- what are you hearing -- when we look at the results recently from the truckload guys or the LTL guys, you're seeing them reduce -- miss their earnings forecasts for 2006, freight isn't as strong as we expected, and we're hearing they're cutting their CapEx forecast for 2007. I guess when you talk to your customers, what are you hearing anecdotally? Is this why you're reducing your forecast for '07?

I know everybody wants to look for the hidden reason on the forecasting. We typically don't forecast. But I think it's true of ourselves and many other people in a whole host of industries. Now we're in mid-October, so we have a little better understanding of what's going to happen in '07. Many things can change. Usually all of it is driven by the general economy and the GDP growth, which I'm sure you follow as closely as we do. Still good, but perhaps there's some slowing going on in housing and some of the other retail side.

Our customers are a very broad mix, from the largest fleets to the small owner/operators. And typically, if the market does slow, PACCAR benefits because people are saying I'm going to spend x amount of money; let's spend it on the very best. And we've demonstrated that for, well, 101 years, that we can deliver low cost of operation, the highest resale value.

And I think two other areas that don't get a lot of play, but I think it's a wonderful story are, first, the tremendous aerodynamic efficiency improvements we deliver with new vehicles, not only compared to our previous vehicles, but certainly swamped the competition. And you've got a whole host of those from DAF, Kenworth, Peterbilt. And then the fourth one related to our leadership globally on hybrids. And we're very excited about that. We're talking about a 30% fuel economy improvement with vehicles going into initial production in '08.

So, our customers certainly are impacted by the real world of economics, but more and more, as our market shares attest, are saying -- hey, I want to hook up with PACCAR. It's the highest quality, lowest cost, most innovative, most aerodynamic, and I think that bodes well for the Company for many, many years.

David Bluestein, UBS.

A question for you. First a technical one. In the Financial Services business, on that provision, would you describe the provision in the quarter and really for the year as kind of a onetime adjustment in the reserves to a now more appropriate lower level? Or would you call this level of reserving more sustainable?

We follow a very consistent approach over time with respect to provisioning. And the provision is affected by, really, two things -- the size of the portfolio and our credit loss history. And our credit loss history continues to be very good. So, pretty much staying the course and following the same practices we have followed for years.

What were write-offs in the quarter?

I don't have that number. That was a relatively low amount.

Let me totally switch gears. You touched on the M&A issues, I think, so I want ask any more questions. But the other hot-button issue out there are the state of the 2007 engines from Caterpillar and Cummins. What have your experiences been in testing those engines, how have your customers responded to them to date, and what comments can you make for us?

I think the only hot issue is a 10-second quip from a person at one truck show. Maybe that's reflective of the journalism of today. I don't think if you get past that there are any other items. And we continue to work with both Cummins and Cat. And of course, we also are a world leader on engine manufacturing, and have to meet the same emission requirements, which we're doing very well. So, as we would say in the UK, a bit of a tempest in a teacup. I know it's certainly gotten a lot of press; I'm not sure why, though.

But you really don't have any plans to bring your engine into North America in the near-term, do you?

Not that I know of.

Barry Haimes, Sage Asset Management.

I had a quick question. I wonder if you could just comment on the pricing environment kind of sequentially as you've gone through the last several months, if there have been any changes. One of the earlier questions was on the somewhat lower variable margin, and I'm just curious if pricing hit was a piece of that? Thanks.

I think pricing is actually pretty steady, and you know, we've been in this industry and many of these industries for decades, as many of our customers have. So, although it gets a lot of press discussion, I think the seasoned companies understand and recognize that every three, four, five years there's going to be some sort of legislative change. You adopt for it. You work it through your operating model. What doesn't change is PACCAR is always the premium and others are not, and you make your purchasing decisions accordingly. So, I think it's pretty steady in terms of the pricing model right now.

Matt Stover, Wellington Management.

I wanted to talk about sort of global expansion. You have built up a real nice cash pile on the balance sheet right now. You folks have always invested to grow. One market that you have been under-represented in is probably Asia-Pacific. Although the truck market there is not necessarily your type of truck, does it make sense to be more aggressive or strategic in your expansion in that part of the world?

I think that's a great question. Let me answer it -- your three-part question with a three-part answer. First of all, within PACCAR, we pretty much view ourselves as one of the leading companies in Asia. They say we've been there for almost 100 years. There are very few companies that have that type of longevity in the Asian market. So, we understand the Asian market very, very well. We have offices in a number of locations in China, in other markets.

Second, the truck markets are growing. The investment in particularly China and India in their 4 and 8-lane freeway systems will soon eclipse North America and Europe. And when I say soon, it will probably be in the five to seven-year time period. So, they will have in excess of 50,000 miles of interstate highway. That will continue to stimulate GDP growth, as they essentially go through what we went through in the mid '50s in the United States and Canada. And as you see more GDP growth, you're going to have higher demand for quality vehicles that are reliable. Currently in Asia, they estimate that the cost to transport and the total cost of manufacturing is about 12 to 15%. It's about 4% or less in Europe and North America. So, I think they're going to see more demand for our type of high-quality product.

Third, we're opening new offices and are selling our components into China, as we have for a number of years -- engines, axles; looking at doing a little bit more sourcing. And finally, you'd be hard pressed to find many companies in the capital goods automotive sector that are making money in particularly China, where they're making they call it a finished product, versus a part or a component. So, I think we're in excellent shape. Great opportunities. I think we're represented well for where we are now, and certainly we look to increase our representation.

Are you at the point where it makes sense to start to think about capitalizing your capacity in Asia outside of Australia?

Does that mean building a factory?

You describe that however you want to me.

I don't know what it means. We continue to invest in all parts of the world, including Asia.

I guess, invest in capacity.

We're investing a terrific amount in capacity in Europe and North America, and at this time we're certainly evaluating opportunities in Asia is what I would say.

Peter Nesvold, Bear Stearns.

It's Waymond again. Just one quick follow-up question on Western Europe, kind of to follow-up some questions that have been asked. It just seemed that your industry range on a percentage basis was kind of wide, 0 to 12%. I just wonder if you could elaborate if there was any reason for it being that wide. And then also, if you could just outline were there any macro-assumptions discounted into the two extremes. Is it GDP-dependent or something else?

You're talking about 230,000, 260,000 units?

Right.

I think that's a pretty normal range as we're sitting in October; we're not even in the year yet. So, I think that's pretty normal. In fact, typically we'd probably be wider.

Can you just elaborate what are your macro-assumptions, or are there any in your guidance for '07, or forecast for '07?

We see some improvement in GDP in a number of the major Western European countries, [whereas what's] driving us is the best products in the industry. We're the fastest growing OEM in Europe -- they say second, sometimes third in Europe. The most profitable. And we're looking to continue to grow our market share. We have a medium-term goal of 20% share. We're between 14 and 15%, so we're investing accordingly; increasing the number of our dealerships around Western Europe. And of course, we are now going to be building a major facility in Budapest, Hungary, to service the growing Central European market, which we're market share leaders in some of the countries there. So, I think, you know, it looks very bright for PACCAR and DAF, and growing the DAF, PACCAR Financial, PACCAR parts. We still don't even have our leasing company in Europe.

At this time there are no other questions in the queue. Are there any additional remarks from the Company?

No. Thank you.

Ladies and gentlemen, this does conclude the PACCAR earnings conference and question-and-answer session. Thank you for participating. You may now disconnect.