帕卡 (PCAR) 2007 Q1 法說會逐字稿

Good morning, and welcome to PACCAR's first quarter 2007 earnings conference call. All lines will be in a listen-only mode until the question-and-answer session. Today's call is being recorded. If anyone has an objection they should disconnect at this time. I would now like to introduce Mr. Robin Easton, PACCAR's Treasurer. Mr. Easton, please go ahead.

Good morning. We would like to welcome those listening by phone and those on the webcast. My name is Robin Easton, Treasurer of PACCAR. Joining me this morning are Mark Pigott, Chairman and Chief Executive Officer; Mike Tembruell, Vice Chairman; and Michael Barkley, Vice President, 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 affect expected results. I would now like to introduce Mark Pigott.

Good morning. PACCAR today announced excellent revenue and record first-quarter profits. PACCAR's superb financial performance is due to the Company's balanced global diversification and continued growth of worldwide after-market parts and financial service revenues. In addition, the Company today announced a 25% increase in its regular quarterly dividend to $0.25 per share, up from $0.20 per share. The Company has paid a quarterly dividend every year since 1941, and has increased its regular dividend 18%. per year over the last decade. PACCAR's focus is steady long-term growth.

For the first quarter, net income was $365 million compared to $342 million in the first quarter last year. On revenues of $3.98 billion. PACCAR's after-tax return on revenue during the first quarter was an industry-leading 9.2%. All segments of the business performed well. The financial services business continued to grow as total assets expanded during the quarter to $10 billion. Pretax profits for the financial services were $65.6 million for the quarter, a 20% increase over 2006. Growth in revenue and profits in PACCAR's after-market parts business accelerated at a healthy double-digit growth rate.

DAF continues to establish new records in production and financial results. Peterbilt and Kenworth had strong first quarters. As we all know, the U.S./Canadian truck market is lower but hopefully should rebound as customers absorb 2006 vehicles in their operations. For the past 10 years, PACCAR has invested over $2.8 billion in products, infrastructure, and technology to develop and produce the industry's highest quality products and services. PACCAR parts recently opened its 12th parts distribution center in Oklahoma City, Oklahoma.

In January of this year, PACCAR announced plans to build a state-of-the-art engine manufacturing and assembly facility in the southeast United States. The facility is planned to open in 2009 and will produce the 9.2-litre and 12.9-litre PACCAR diesel engines. These will be offered to our customers to complement engines available from our existing suppliers. PACCAR will be making record capital investments this year to ensure that we continue to achieve our 5 to 7% yearly efficiency gains, develop new products, and launch new service initiatives.

The Company's efficient operating model produces excellent cash flow, which allows for investment in products, technologies, and facilities during all phases of the business cycle. In addition to beginning construction of the new engine facility, there are plenty of additional investments underway. Those include PACCAR parts will soon begin construction of its 13th parts distribution center to be located in Budapest, Hungary. This facility will support DAFs growth in customers in central and eastern Europe. Kenworth will soon complete a 30% capacity expansion of its Chilicothe, Ohio, plant this summer. And DAF trucks will open a $60 million, 76,000-square-foot world-class engine test facility in Eindhoven this June.

Switching gears, I'd just like to update everybody on PACCAR's continued investment and reputation as an environmental leader. By investing in returnable containers, installing new logistics software, and capital investments in our suppliers, PACCAR has eliminated 60% of our factory's packaging material. Our facilities in Europe and Canada have earned the highest environmental certification, ISO 14,001. We're very proud that Peterbilt, Kenworth, DAF vehicles are manufactured from environmentally friendly materials so that 80% of the truck by weight is recyclable. And as we have commented before, PACCAR will be introducing hybrid trucks for the median beauty market in 2008 that are set to achieve 30% fuel economy improvements as well as reducing emissions.

Looking outside the US, growth in Europe continues to be strong. In addition, PACCAR is actively examining growth opportunities in Asia. Earlier this month we opened a new office in Shanghai, China, and this office complements our existing office in Beijing. These offices both will focus on sourcing parts for worldwide manufacturing and after-market sales, as well as selling PACCAR powertrain components to customers in China.

During the first quarter we were delighted to be named in the top 10 companies in BusinessWeek's 50 best performing companies and additionally Forbes Magazine recognized PACCAR as a global high performer. These awards are a wonderful achievement and really reflect the passion and dedication of PACCAR's 21,000 employees worldwide.

During the first quarter, the Company repurchased approximately 720,000 of its common shares for an investment of $48 million. Over the last 15 months, PACCAR's purchased 6.9 million shares, split adjusted, for a total investment of over $350 million. For our shareholders over the past 12 months, PACCAR has paid dividends of $700 million and delivered a 47% return to our shareholders last year.

Looking ahead, we expect that global commercial vehicle markets will continue to grow slightly faster than GDP, with a healthy economy in the U.S. and Canada, we certainly hope that demand will improve in the second half for class A industry sales. The European economy continues to expand, and the European truck market should deliver another excellent year. Our other key markets, Australia, Mexico, and export business are strong, and as I mentioned earlier, financial services and after-market parts business are achieving solid growth. Thank you, and with that, let's open it up for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Jonathan Steinmetz with Morgan Stanley.

Thanks. Good morning, everyone.

Good morning, John.

A few questions. Are you able to provide the currency translation benefit on revenue and also EBIT?

Currency translation compared to last quarter, benefit was $129 million on revenues and net income impact was $15 million.

Thank you very much. It looks like you nudged down your North America or U.S. number on the class A sales side. What specifically in the market caused you to make that adjustment?

Well, I think, John, as we talked earlier, we're four months into the year. We're just getting that much smarter. We'll continue to evaluate it on a month-by-month basis.

Okay. And lastly, it seemed like you emphasized saying actively examining growth opportunities in Asia. You talked about this before. Is there any acceleration in your focus here, any desire to do anything more quickly than you would have in the past?

Well, we just opened up our office in Shanghai as I mentioned last week. So we have a team in place there for the long term. And I think Asia and particularly China continues to make excellent investments in their infrastructure. Also the same with India. So continues to have more and more interest to us and be more applicable for our high-quality products.

Okay. Thank you very much.

Thank you.

Your next question comes from Peter Nesvold with Bear Stearns.

Good morning, Peter.

Hey, Mark.

Good morning.

Hey, you didn't mention the PE this time.

The what?

You didn't mention your product earnings multiple this time.

Peter, as you have trained us, we're always looking for steady, long-term growth.

There you go. Okay. I see your point. It does seem that there's been disproportionate growth coming out of Mexico and other export markets. I was hoping maybe you could provide some color on what's been driving that acceleration over the last five or six months?

Yes, Mexico, well, and Australia and Europe are all very strong levels. In Mexico and Australia in particular, they're in a situation where they have new emission regulations coming up in the next 12 months. So there's apparently an element of people anticipating higher costs engines. The economies are strong in both those markets. And as we continue to introduce new products across our entire range, I think just the benefits to the customers worldwide -- we salvage about 100 countries a year, make the PACCAR product more and more attractive for their use.

Okay. So the emissions changes in those sections, too. Europe, looks like you took your western European outlook to flat year over year versus down roughly to 7% last time. I guess when I listened to calls out of some of your competitors, you guys out there are looking to mid to high single digit growth in Europe. So I guess I'm just -- trying to understand, why just flat given what just said about strength in the European market with Germany in particular?

Well, last year as you know for the industry in Europe, it was another record year. DAF did an excellent job in every sector, and every market they compete in. This year our range is 265 to 280 which would be another record for the -- for the marketplace. DAF continues to grow, it continues to increase its production rate. So I think that's just the PACCAR conservative approach.

Okay. Can you give us a sense for the magnitude of the parts growth year over year in this quarter.

We don't typically break that out as we've indicated in our press release and in other discussions. It's approaching $2 billion in total sales. And we are looking at low double digit increases year-on-year. The investment that they're making not only in the new PDC distribution centers, but also the technology and the way they are able to reach out and really pull the customer and dealers closer so they've done a terrific job. So it's good, steady growth worldwide. I'd say one other thing is the population of PACCAR vehicles is at a record high, as you would expect after a strong growth for 10 years. But also the parts group has done an excellent job of providing sort of what we call all makes brands to retrofit onto our competitors' vehicles.

A question maybe about North America and how this is trending a the quarters progress. I guess -- it looks like you took a meaningful production cut in March sequentially from February, which is not the seasonal norm, but it's understandable. We're getting to that period where '06 engines are running out of supply. So the March production rate on a per-day basis, how much lower do you think that goes sequentially in the next couple of months or so? I'm not asking you for a back half. I'm just trying to understand, coming out of the March data, how should that trend sequentially into April, maybe into May? Based on your current production plans?

Well, I think a couple things. One, the production materials, logistics people within PACCAR have really done an a admirable job. We're the first OEM to install 100% of the '07 engines. So I think that not only gives us a productivity improvement but certainly a leg up in dealing with the customers and being able to tell them firsthand how these engines are performing. And they're performing generally pretty well. But we're also able to continue to invest specifically to improve the efficiency of putting the new engines in. Because it's not just a new engine, it's a new front end, the new radiator, cooling package, the new hoods, entirely new front frame. In terms of build rates, certainly the industry and ourselves included have made some adjustments to reflect the lower demand, and at this time, we're hoping that it continues at a steady rate from where we are now.

So I guess what I'm looking at maybe for across your 5 to 8 builds, March was down about 15% sequentially from February, just under 6300 or so in the month of March. So you generally anticipate that it will be flattish there going forward?

Well, I think it's going to be -- in that range. Obviously, we'll continue to monitor the market and the demand and make any adjustments necessary. But we've got products that continue to win the majority of the JD Power awards. And of course in Europe we won the truck of the year three times in the last 10 years. So we've got great, exciting products. We continue to introduce a lot of new services. The financial group's coming out with some very exciting programs. The fastest credit turnaround, great parts. So the whole package is very attractive to our dealers and our customers. So as we've indicated in the press release, the adjustments will have a dampening effect until the industry absorbs the new vehicles. The good news is, GDP in the U.S., Canada still at 2.5% growth. And Europe growing, Mexico growing, Australia growing, Asia growing. So there's a lot of good news out there.

Got you. Okay. Thank you for your time.

Thank you. Good questions.

Your next question comes from [Chase Becker] with Credit Suisse .

Good morning, Chase.

Hi, good morning, it's Chase Becker in for Jamie.

Glad to have you here.

Good to be here. I just wanted to follow up. It seems like clearly the market -- at least if you look today is starting to give you guys more credit on the diversification you're having on the international side. When you talk about strategic planning and you're talking about long-term market share in Europe of about 20%, I mean when you're talking about strategic planning, what is the timing on that? Is that 2012, five years down the road, is that 2015, I mean, how do you guys think in term of incrementals?

That's a great question. I think it's a -- it's a complicated answer. I mean, we think, strategically tomorrow, next week, next month, next year, and then 3, 5, 10, and 20 years out. That's one of the advantages of being 102-year-old company. Is you have it viewed in our DNA, the long-term view. So if you're talking specifically about the 20% share, is that what your question really is about?

Yes.

Well, I think you take a look at the tremendous growth and investment, and I think that's a very important element of the growth at DAF, is an entirely new product line, it's brand new factories, brand new services, brand new IT. Many new dealers, and the DAF team led by Aad Goudriaan has done a tremendous job. 10 years ago they were roughly at 8%. Now they're 14% to 15%. So I think use that as a bit of a guideline.

Okay. And then my follow-up is in terms of the North American market, obviously you brought down your forecast slightly. But if you're looking out and what you're hearing from your customer, is there any reason to believe that besides for what you've emphasized in the past about having great products, is there any reason to believe that you're going to need to at some point provide some sort of incentives for dealers or can you comment on potential pricing, if that's going to remain firm?

Well, we -- we've been through a number of these, whether they're legislative induced slowdowns or economic slowdowns. I would just emphasize, first of all, as you mentioned we've got great product. Best product in the industry, bar none. Second, GDP growth is very strong, 2.5%. So when there's less demand out there, everybody makes sure that they -- they try to get on every deal as we do when things are booming. And you always try to make sure you provide the best package to your customer. That they find attractive.

Many, many of our customers are having record results. The trucking companies, particularly the truckload groups, are having record results, freight is, if not at an all-time high it's within a few percent of an all-time high. And many segments of the market are strong. Housing is down. We know that. We recognize that. Car production is still strong, retail sales are strong. And many other elements are continuing to be strong. So if you talk with our customers, they love our products. They did purchase additional units last year, which they got essentially in their bank of new product inventory. And as the natural progression of trade-in cycle occurs, they'll use those vehicles that are parked and then go out and purchase new ones. So it's a pretty natural process.

Okay, great. Thanks for your time.

Thank you.

Your next question comes from Andy Casey with Wachovia Securities.

Good morning, Andy.

Good morning, Mark. How are you?

Fine, thank you.

First, I guess on the strength in Europe. Are you seeing any change in the appetite for pricing new models given what sounds like a growing backlog over there?

Well, I think if I understand your question, the DAF product -- I know we've emphasized this before, just won the truck of the year again. And probably what won't get reported, but it's -- it also won the truck of the year in the UK, it just won the truck of the year in Poland. Continues to gain a tremendous, well deserved recognition. They've been able to introduce new products and new features and benefits in those products that customers recognize will bring value to their operations. And as a result, they are paying more for the new products.

Have you seen any of your competitors been able to realize any price increases?

I'm not sure what they're doing. I think they're struggling with tired old products, and you see their financial results as well as I do. I'm not sure what they're doing.

Okay. Thanks. On the -- flipping to North America and U.S. GDP, there's been some more recent new negative reads on the potential to be more like 10% instead of 2.5--.

On GDP?

Yes.

Yes.

Are you hearing anything from your field network and all the vast network it is or customers that would cause you concern?

Well, there's certainly numerous articles in the business periodicals and on the Internet. People analyzing the economic foundation of the country. Interest rates, what's going to drive demand across a broad spectrum of industries. So I've seen those same articles as you have. I think people feel generally good, but they're certainly conservative and are looking for tell-tale signs that maybe there will be a shift. But it could be 2%, could be 2.5. Certainly even the economists come up with different numbers on a regular basis. But I think people are positive but conservative.

Okay. Then one detail and then more a broad question. On the detail in financial services, it looks like the provision for lost receivables decreased a little bit sequentially. Is that -- from fourth quarter. Is there -- and what I mean is on a percent of sales. Is there any change that's going on, or is that just--?

Are you comparing to the fourth quarter of '06 or the first quarter of '06?

Fourth quarter of '06. It went from 4.4% of sales down to, if I'm looking at it correctly, 2.9% in the first quarter of this year.

We look at the -- we look at the reserve as a percent of the outstandings. So the reserve went up as the outstandings went up.

Okay.

I think it makes a very good question. Our total outsets in the financial services as you've seen are now over $10 billion. So we take a very conservative reserve. Business goes up, our reserve goes up.

And then on kind of on a more global basis, and you are a global truck manufacturer among other things--.

Thank you.

You're welcome. There's -- there's been a lot of discussion coming out of Europe about potential growth aspirations of different manufacturers over there. What do you see as going on? Is that just a drive for engine volumes for those manufacturers, or is it they just want to become more global than they already are?

Well, certainly you've done a terrific job of following our company. So you're probably familiar with what my answer is going to be. But not sure exactly what the plans are for our competitors, but I think people appreciate that they need to achieve a certain volume, but also a certain profitability. There's some turmoil in Europe as different companies either try to escape the clutches of near bankruptcy or look to combine businesses to achieve sought after economies of scale.

Always PACCAR as sort of the model, the way our team looks at it is opportunity because those companies are, let's say, trying to keep their businesses afloat. Usually they neglect their customers and it provides a terrific opportunity for us in every market to go and say once again we've got the best products, we got the best services, the best backups, the best technology, the best investment, and as you've seen over the last, well, let's say 102 years, steady growth and market share, and profitability. So we -- we certainly follow what others are doing or saying they're going to do because I think it's very important that a lot of companies say they're going to do things, and they get the momentary headline and then we're not sure what happens after that. But terrific opportunity for PACCAR to continue to get closer to all the customers in every market.

Okay. Thank you very much.

Thank you.

Your next question comes from David Bleustein with UBS.

David, good morning.

Good morning. Congratulations.

Thank you very much. And how are you doing today?

Doing fine. Let me ask you a couple. First, can you speak to your changes in price realization in Europe?

Well, I think we might have just covered that a little bit, and we don't break out specific figures. But we'll say the new product and services that the DAF team have been able to introduce with the brand new 105, the brand-new line of PACCAR engines, the updated CF, the updated LF have allowed them to deliver more to their customers and in return the customers have seen the value of a higher transaction cost.

All right. Second question, within the U.S., what percentage of the class A builds in the first quarter did have the 2006 engines in it?

For who?

In the U.S.?

For the whole industry?

No, just for you.

Well, I think in -- for the first quarter, I think it's fair to say that the majority of the engines would have been '06, and now as we've indicated we're 100% '07 engines.

You were still shipping them a late as March?

It was tailing off pretty quickly.

Okay. What percentage of your Q2 and Q3 build schedules are already in backlog?

We typically don't break that out.

It's not a typical year, though. Is a -- let me rephrase it. Is a normal percentage of your Q3 build schedule already in backlog, or is there more holes than normal at this point in time?

It's really pretty much consistent as we've seen over the last 20 years because of some of the adjustments we've made in build rate.

All right. And then the last one -- sort of wide open. But help me to understand a little bit better your expansion in Asia. And the question is really -- is there a DAF-like company out there that would make sense as a part of PACCAR?

I'm hoping if you find one you'll call us. You have our direct number.

Those days are over, but understood. Thank you.

No, there is a lot of excellent companies in China, if that's what you're really referring to. At this time they're all owned by the government either directly or indirectly. I'm not sure how that will evolve over the next decade. What we're focused on now is we've got world-class components, and engine family, axle family, and lets call it systems families that have great appeal to manufacturers in China. And of course we also continue to invest in our suppliers worldwide, many many tens of millions of dollars of North America, Europe, Asia, helping them to continue to produce the highest quality product and have the lowest cost for themselves and for us. So we're going to take a look at doing that also in China. Those are really the two areas to focus on.

Terrific. Thanks a bunch.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from David Campbell with Owl Creek.

Good morning, David.

Good morning. Can I just ask you all to comment specifically on whether or not you would be willing to pursue a combination with Fiat's truck business?

With who? I didn't quite hear you.

With Fiat.

We don't know anything about Fiat but I'm not sure what they're up to.

You haven't heard from them? They have not contacted you?

I can't comment on that, but last we saw, they were struggling quite a bit, weren't they?

Yes. I just, are you open to a combination like that?

PACCAR has grown tremendously through organic growth and occasionally acquisitions, so that's all we can really say.

All right thank you.

Thank you.

Your next question comes from J.B. Groh with D.A. Davidson.

Good morning, J. B.

Good morning, guys. Could you maybe discuss the implications of a general rise in interest rates on the financial services side of the business and how those assets are financed?

Well, the financial services, a lot of it depends on the economic activity and the economic activity has been good, even with interest rates going up but the portfolio remains very strong. PACCAR does all a match funding, so we don't take any risk on interest rates, but the portfolio is strong and the value of the PACCAR products keeps residual values high so our loss experience is quite favorable.

You don't have any carry exposure one way or the other?

No. We don't do any type of -- everything is match funded.

Got you.

PACCAR takes no speculative risk.

And then Mark, in the past, you've mentioned maybe acquisitions that weren't necessarily truck manufacturing, maybe something that's more technology related. Could you maybe give us your updated thoughts there and your thinking?

Sure. That's a very good point, as we look back over our 10, now 11 decade history of the Company, we certainly have had complementary acquisitions and growth in the fields evolving from steel to rail cars to trucks to financial services to information technology, so we're very interested and have demonstrated a willingness to make acquisitions in companies that are profitable, are at the premium end of their business, involved in some type of manufacturing or distribution or financial services that perhaps have some barriers to entry into their particular industry, and have a technology component that is not easily duplicated or replicated so I think that's sort of a general overlay on the strategic thinking.

And have you seen things come across your desk there or is it few and far between?

We're always open for good ideas.

Okay. Thanks for your time. Congratulations on the quarter.

Thank you.

Your next question comes from Peter Nevold with Bear Stearns.

Good morning, Peter.

Hi, Mark. I guess I'd like to take one more last crack at the consolidation question because you look back over the last couple of years and Volvo bought Renault, Mack, Nissan Diesel, and reportedly they are knocking on-(Inaudible) door and you have MEN's bids for (Inaudible) to scale up to the size of Volvo and Daimler. Then you have (Inaudible - audio difficulties) looking at the new U.S. market and there is another independent there which isn't -- arguably has fully venellated your stock. If If you have four OEM's then, global OEM's, do you -- just do you lose any sleep thinking that you could be at risk in losing out scale wise and maybe you can't keep up with the price competitiveness of four global OEM's versus only two today?

No.

Then why wouldn't that be the case if if you have four much significantly larger competitors at that point?

I'm not sure they are.

Well, I mean, if the consolidation math plays out as some of the bids haven't sold--?

Well, let's look at them. First of all, again, MEN combined is smaller than PACCAR, smaller in profit, smaller in number of units. We hold the premium position in the world. You can ask our competitors. They will tell you that PACCAR products are the best. 80% of the customers in every market we compete say our products are the best, and so the volume differences are pretty inconsequential and a number of our competitors have taken the approach that they would like to occupy the, as we like to say, cheap and cheerful, and some customers are interested that but we find more and more customers are interested in long term value, reliability, and contribution to their operating performance. So the ongoing discussions that you read about, some will happen, but we're 102 years old, and we're long term focused, and a lot of it gets a lot of play within the financial press because that's kind of what people read about, but let's see in the next 5 to 10 years what actually happens.

Okay, that's a fair answer. Thank you, Mark.

Good question. Thank you very much.

Your next question comes from [Bob Sales] with LNK Capital.

Good morning, Bob.

Good morning. Very nice performance. I have two questions.

Thank you.

Why do you think that Europe remains so much stronger than North America given that they passed through the same emission regulatory changes last year?

That's a great question and very simply, Western Europe, not the UK, but Western Europe governments independently, perhaps working together, if you will, saw that this may be an issue so they were able to provide incentives to fleets that reduce some of the cost impact of switching to the new emission technology, and as a result, if you're a company in the transport business, you saw that there was a financial advantage to buying the new technology because it's good for the environment and hopefully in DAF's case it's even good for your operating performance because some improvement we made to fuel economy, so they were able to smooth out that transition whereas in the U.S. and Canada, there were no incentives and there was just the capitalistic markets at work.

Got you. And then my second question is that in your forecast of retail sales for Class A North America of 190 to 220, given the amount of inventory that still seems to be out there and was out there in Q1, looking at Russia's results, what do you think the build rate will be in North America versus the retail forecast?

Well, let me just comment on the inventory. Certainly, there are literally several thousand dealers representing our industry so I think that's very important that you have a macro view. I think that's sort of an important item, but second, the inventory in the field is essentially the same as it was a year ago, and certainly the build rates are lower coming out of the factories, but in the inventory we're seeing some positive signs across U.S. and Canada, as I think others are that inventory is going down. Essentially, inventory is almost exactly the same as it was a year ago.

So the answer, so in answering the build rate versus retail sales?

We typically are looking at retail sales in the build rate as you've seen from announcements by PACCAR and others continues to be adjusted to reflect incoming demand.

Got you. Okay, thank you very much.

Good questions. Thank you very much.

There are no further questions at this time. Are there any additional remarks from the Company?

No, thank you, operator.

This concludes today's conference call. You may now disconnect.