帕卡 (PCAR) 2014 Q1 法說會逐字稿

Good morning and welcome to PACCAR's first-quarter 2014 earnings conference call.

(Operator Instructions) 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. And joining me this morning are Ron Armstrong, Chief Executive Officer; Bob Christensen, President and Chief Financial Officer; and Michael Barkley, Vice President and Controller. As with prior conference calls, if there are members of the media participating, we request 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 Ron Armstrong.

Good morning. PACCAR reported improved revenues and net income for the first quarter of 2014. PACCAR's first-quarter sales and financial services revenues were $4.4 billion. And quarterly net income was $274 million, an after-tax return on revenue of 6.3%.

Net income increased 16% compared to the results generated in the first quarter last year. I'm very proud of our 21,700 employees who have delivered industry-leading products and services to our customers worldwide.

2014 marks another major milestone for PACCAR, with Peterbilt celebrating its 75th anniversary. The Company's 75-year tradition of excellence and innovation has established an uncompromising focus to deliver the highest levels of product quality, customer satisfaction, and return on investment.

PACCAR delivered 31,800 trucks during the first quarter, a 4% increase versus the first quarter last year, and in line with our expectations. The improvement reflects increased truck deliveries in the US and Canada due to the ongoing replacement of the aging truck population and improving construction and automotive sectors. Looking ahead we expect to increase truck deliveries in the second quarter by 8% to 10% compared to the first quarter.

Second-quarter gross margin should be somewhat higher than the first quarter, reflecting the benefits of higher production levels and improved operating efficiency. It is encouraging that housing starts in the US are over 900,000 units and there's growth in nonresidential construction. Other good economic news is that US auto production should be around 16 million vehicles this year. These positive trends should benefit truck demand in North America.

US and Canadian Class 8 industry truck retail sales are estimated to be in a range of 220,000 to 240,000 units this year, up from 212,000 units in 2013. The stronger market reflects ongoing replacement demand and some expansion in industry fleet capacity due to continued strong freight fundamentals. Industry truck orders for the US and Canada in the first quarter were 80,000 units.

Economic news in Europe is trending positively, with GDP growth expectations for this year of 1%. Freight in Germany, as measured by the Maut Index, has risen 5% compared to the same period last year. Europe's greater than 16-ton market is projected to be in a range of 200,000 to 230,000 units. Customers in Europe accelerated purchases of Euro 5 vehicles in the second half of last year, and are adjusting to the increased prices of Euro 6 trucks.

Production of DAF trucks in Brazil is progressing, with production levels expected to increase gradually through 2014. PACCAR's parts business generated quarterly revenues of $727 million, a 9% increase compared to $667 million in the same quarter of the prior year.

PACCAR Parts quarterly pretax income was $112 million, an increase of 18% compared to the $95 million earned in the first quarter of 2013. The strong results were driven by increased freight tonnage, improved fleet utilization, and the many innovative products and services offered by PACCAR Parts.

PACCAR Financial Services revenues were $294 million in the first quarter, comparable to a year ago. PACCAR Financial's first-quarter pretax income was $86 million compared to $80 million earned a year ago. The improved results benefited from growth in asset balances and excellent portfolio performance.

PACCAR's strong balance sheet and positive cash flow have enabled the Company to invest over $2.2 billion in new products and facilities in the last three years. PACCAR began production of the new vocational Kenworth T880 and the Peterbilt model 567 trucks in late 2013. These new vehicles expand PACCAR's offering in the construction, utility, and refuse markets, and complement the Kenworth T680 and Peterbilt model 579 on-highway trucks launched in 2012.

The launch of the new DAF XF, CF, and LF Euro 6 vehicles in 203 strengthens DAF's position as the leading provider of integrated transport solutions. PACCAR's capital spending of $300 million to $350 million this year is targeted at enhanced powertrain development and increased operating efficiency of our assembly facilities. Research and development expenses are estimated to be in a range of $200 million to $250 million.

PACCAR continues to enhance its leadership position in the global truck market by developing the highest quality products and services in the industry, and by investing in new geographic regions.

Thank you. I would be pleased to answer your questions.

(Operator Instructions)

Jamie Cook from Credit Suisse.

Actually this is Andrew on behalf of Jamie. Good morning. I just have a quick question. Can you just comment quickly on your parts business in the quarter, what you are seeing particularly across each region?

The parts business had good growth, I would say slightly a little bit stronger in the US and Canadian markets compared to some of our other markets. But good growth in, really, all regions for the quarter. And I think that's evidence of the improving freight conditions that we've seen both in North America and Europe.

Okay. And, then, just along those lines, given how the US has trended going forward, what do you guys see for the remainder of the year in terms of the North American market?

Are you talking about the truck market or the parts market?

Truck.

Our projection for US and Canada is in the range of 220,000 to 240,000 units. And, so, we're thinking that the market will progressively improve as we go through the year. We talked about our planned production increase of 8% to 10% in the second quarter.

All right. Thanks, guys.

Stephen Volkmann from Jefferies.

I'm going to drill in a little, if you will let me, on this production increase of 8% to 10% in the second quarter. Can you just give us a rough magnitude of how that breaks down US versus Europe? And then maybe even heavy versus medium, if you would?

On the heavy versus medium, I would say the increases are comparable across those categories. And in terms of geography, I'd say the increase in the US and Canada is probably a little bit higher than that average percentage and Europe is a little bit below that.

Okay, great, that's helpful. And, then, can you talk a little bit -- I think historically, once we hit some sort of inflection point, I'm not sure really where that is, that we would expect to get a little bit better pricing as you start to build the backlog further out. Are we there yet? Is that happening? Or is it maybe something different this cycle? Just any comment on that.

I think, as we've progressed through the market, we continue to work closely with our customers and be very competitive in the marketplace, providing the best solutions. You look at things like our industry leading residual values, allows us to provide a very competitive price to our customers with the lowest operating lifecycle cost of any of the manufacturers. And so we can provide a very attractive proposition and we'll continue to gauge the market and price accordingly.

All right. Maybe more simply then, is pricing up year over year or flat or down?

I would say it's maybe up a bit.

Okay, thank you so much.

Ross Gilardi, Bank of America.

I was just wondering if you would talk a little bit more about Europe. Some of your other competitors have suggested things are maybe slightly better. Could you talk a little bit more about DAF orders during the quarter?

Sure. As we transition from Euro 5 to Euro 6, I would say orders started off in the first quarter soft in January. We have seen progressive improvement through February and through March. And we've got some good momentum as we head into the rest of the year. So we feel good about DAF's continued strong position in the European market.

And then just shifting to Brazil, obviously the economy faces challenges there. Is it making it tougher for you to gain traction there? Many of your peers seem to be complaining about slowing environment and pricing pressure. Obviously you're starting more from ground zero position, but what are your thoughts on Brazil?

I think the Brazilian market does have its challenges. But, as you mentioned, we're in the start-up mode, really focused on getting our production, our distribution network well established, doing it all right first time, if you will. So, market conditions aren't as significant to us, and we'll continue to progress in our build plans. Shouldn't affect our plans for 2014.

Okay, great. And then just lastly, I'm just wondering, could you give a little more color on why you think orders have been so strong in North America so far year to date? What are you hearing from customers on sustainability? Is the issue that your customers are finally getting pricing power for the first time in a long time, and therefore more willing to invest? Anything you could provide there would be helpful.

I think it's a matter of confidence. You look at the customers today and over the past years, there's been a lot of uncertainty about how significant the economic improvements might be, and what might the government do. And I think with some of the positive things that the government was able to achieve in the fourth quarter last year, with solid budget plans, without stopping the government. And so I think people feel better about the ability to support keeping their trucks active and being able to get fair rates to get for their business. So, I think it's a matter of confidence.

Thanks very much.

Andrew Kaplowitz from Barclays.

Nice quarter. Can I ask you about your other revenues? You have talked and broken it up in the past about geography. Maybe if you could do that again. The numbers sequentially continue to come down a little bit. Has there been an impact on your Russia business? And is Mexico still weak when it comes down to it?

Yes, I think there is some softness in Mexico. We saw that their economic situation was challenging in the second half of last year. But I think they're starting to see some signs of recovery in that market. And Australia has been up and down a little bit with the effects of the mining industry, but starting to see some solid business there. So, I think we see some of the other markets starting to show some positive signs.

Okay. And then maybe can you talk about the penetration of the new products that you had over the last six months? A lot of vocational trucks. I would assume that they come with modestly higher margins. Maybe you could talk about the overall construction market and its receptivity to these trucks. Have you seen a pretty good growth rate out of these trucks here in the early going?

This is Bob Christensen. The impact of production with our new models at Kenworth and Peterbilt is about 50% new model production. Of course DAF is almost 100% with their new Euro 6.

With respect to the vocational market we're seeing strong growth in the overall market. And both Kenworth and Peterbilt have high penetration levels. And so we're selling a lot more vocational trucks than we have over the last three or four years. And that's good for PACCAR and good for our customers.

Thanks, guys. Appreciate it.

Jerry Revich from Goldman Sachs.

Ron, formally congratulations. I'm wondering if you could talk about the margin ramp over the course of the year. Presumably as Europe ramps up margins should improve each quarter sequentially from here. But can you just help us with the order of magnitude of improvement in the second quarter? Can you come close to the 13% gross margins you were delivering last year? Do you need a healthier European truck production environment before we can talk about that margin range?

I think we see second-quarter margins probably improving somewhere in the 20 to 40 basis point range for second quarter. Continue to be able to leverage our cost structure. DAF the first quarter transitioned its production from roughly 15% Euro 6 vehicles to 80% Euro 6 vehicles.

And, so, that transition now is done and the DAF team did a tremendous job of really transitioning that product line and achieving great production efficiency as they transitioned. And, so, we'll continue to see, depends on the market conditions, et cetera, but we're well positioned to the extent that we're able to continue to increase our production levels we'll achieve some level of operating efficiency with that.

In Brazil I know your all-makes parts business is a big part of the distributor build-out strategy. Is that a significant enough part of the parts franchise where you can give us a sense for how that's going? And just give us, if you could, an update on the broader distributor buildout there.

The parts business will start slow in Brazil and will build out over a long period of time. Certainly the all-makes program that you refer to is an important part of our strategy. We have 20 dealer locations in Brazil and they are all beginning to sell both trucks and parts. But it's going to be a slow ramp-up over the next several quarters, if not years.

And from a capital deployment standpoint, Ron, I think you have in the past spoken about a 45% to 50% net income payout ratio. Is that still the way to think about business? And any other capital uses that we should be thinking about?

Obviously the first point of investment is back into our products and our services and our facilities to make sure that we can continue to provide the best trucks and industry-leading operating efficiencies that we're accustomed to. Our payout ratio has been in the range that we've talked about, but obviously that's a matter that's reviewed and discussed with the Board over time. So, we'll continue to monitor that and adjust our capital deployment strategy as we go forward.

Okay. And lastly, I think did you nudge down your CapEx and R&D outlook for the year. Can you just give us a sense for what's driving you to the lower end of the previous range?

Yes. As we look at specific things that we're doing, we continue to invest strongly in our products and our services. And so, as we look at where we're at and where we're going, just felt like we're probably going to be at the lower end of those prior ranges as we look forward. But there's a lot of things that we're looking at as we go forward to maintain a strong, steady flow of new products and services, and keep improving our warehouse and plant operating efficiency.

Thank you very much.

Rob Wertheimer from Vertical Research.

Just a quick question on the gross margin in the quarter which is lower than it's been for a long time. The overall margins weren't all that bad, obviously. But curious as to whether that was the pass through of the European price increase, whether that was mix in the US. Maybe if you would just give some color around it. Maybe you didn't see it as all that bad. I just wanted your take.

I think we feel good about how the team has performed around the world. In Europe, the Euro 6 product, as I mentioned, was a higher percentage of our deliveries in the first quarter. And with that comes about a 15% average price increase for the price of a Euro 6 truck. We were able to recover that cost increase. But the ability to make a margin on that increase was challenging just given the transition and the competitive environment that we're placed with in Europe.

Okay, great. And if you could just comment, if you are willing, on the margin environment in the US. Perhaps it was more big fleet deliveries, and it will be for the rest of the year. I don't know if it was an abnormally fleet-driven quarter.

No, margins are solid, our teams are doing well. And we're competing very well in the marketplace. So, we feel good about where we're at in North America margin-wise.

Great. Thank you.

Seth Weber from RBC Capital Markets.

Just following up on an earlier question on Europe, the trends there do seem to be a little better than expected. Is there something that you are seeing that's preventing you from raising your market outlook for the European market this year? Or you're just trying to be conservative?

We didn't feel like there was enough evidence at this point to raise our outlook because there's a mix of Euro 5 and Euro 6 trucks that are being registered and delivered to customers right now. And so we felt like we'll continue to monitor that. And, as we always do, we'll be smarter in 90 days than we are today and we'll modify our market estimates as we see fit, based on how things develop. But we didn't feel like there was enough evidence probably to change at this point.

Okay, understood. And then a follow-up question on the MX13. Can you give us the penetration there on the Kenworth and Peterbilts and just an update on where you are with capacity?

Yes. The MX is 35% to 40% of our builds for Kenworth and Peterbilt heavy-duty trucks. And we continue to support the production and are in great shape from a capacity standpoint. And lots of opportunity to continue to grow that penetration in our product line.

Okay. That's all I had. Thank you.

Ted Grace from Susquehanna.

Nice quarter. The first question I had was a follow-up on Jerry's. He had asked about the operating margins relative to a year ago. Ron, you mentioned you thought you could expand them 20 to 40 basis points. Was that a sequential comment or a year-on-year comment?

That's a sequential comment.

Okay, that's helpful. Then, as it relates to Europe, could you just bifurcate how you are thinking about the UK versus the Continent in terms of end market improvements in 2014?

The UK and the Netherlands, they followed one set of Euro 5, Euro 6 transition rules. The other markets followed a different set. And, so, you saw in the first quarter registrations the UK and the Netherlands were down. And those are markets where DAF has a market leadership presence. And on the Continent, Germany, France, Spain had increases -- again, because they had different transition rules for Euro 6.

So, I think we'll see that the UK and the Netherlands will accelerate in terms of total market. Because the UK economy is good and the Dutch economy is starting to show signs of improvement, as well.

Okay, that's helpful. And then the last thing before I get back in queue, over the last couple of years the first quarter has tended to be the most weighted on SG&A. Is that a progression we should look for to repeat itself in 2014? Or might there be any change in that normal pattern?

No, I think that's probably what you should think about it. The SG&A numbers will be comparable to a little bit down, maybe, as you progress through the rest of the year.

Okay. That's great. Best of luck this quarter.

David Raso from ISI Group.

First a clarification. When you said margins up 20 to 40 bps 1Q to 2Q, that was gross margins, not operating, correct?

That's gross.

Okay. It was two different answers. So, gross margin. On the production, the first to second quarter -- just hopping between a lot of calls today, my apologies -- can you state again the production changes first quarter to second quarter, and then an answer to an earlier question, North America versus Europe? Can you just repeat that please?

Our expectation is for overall production to be up 8% to 10% in the second quarter compared to first, with slightly above that average in the US and Canada, and slightly below that average in Europe.

And we don't have the detail yet about the truck sales, with the breakdown. So I'm going off of more total geographic revenue, so I apologize. But does that seem to imply that we are going to be up in Europe again year over year in revenue in the 2Q?

Again, remember that the Euro 6 vehicles, the average sales price for a Euro 6 truck is about 15% higher than a Euro 5 vehicle. So that's part of the equation.

Maybe that's my question. Sorry to interrupt. When you say production I'm thinking unit production. You're speaking in revenue.

Yes. Production and deliveries are the same for us.

Okay. That's a distinction. So it's the pricing which is particularly helping the sequential Europe. Are units going up sequentially 1Q to 2Q?

They are, yes. So, when I talk about the 8% to 10%, that is units.

Okay. So that was different from what you just said. So 8% to 10%, North America up more, Europe up a little less. That is units? Or is it including the pricing from Euro 6? I apologize.

That is units.

That's interesting. So, if units are up that much, and then the pricing on top of it, because I assume there's even a little heavier mix Euro 6 in the first quarter, so you had some Euro 5 going out to start the quarter, the year-over-year growth in Europe sounds healthy in 2Q, North America strong. I do appreciate you not getting any margin on that Euro 6 price increase. With that backdrop, the gross margins still seem to be a little more challenging than you would have thought.

So, just trying to flesh out why the gross margin is going to be -- let's just take the exact comment -- 20 to 40 bps at only 12.3%. Why would that not be up more? I'm just trying to be clear. Is there something about North America, or is it -- look, we're just not getting any incremental margin on that Euro 6 pricing?

There's not any incremental margin on the Euro 6 pricing, as we sit here today. Now, as we progress through the year, the market improves, could be an opportunity.

The last question related to that, do we expect the gross margin to be up year over years at all this year, third quarter or fourth quarter? Because obviously the second quarter has implied it's down year over year again.

I think as we see it today, the margins this year would be comparable to prior year. But that will depend on how the markets progress, how the pricing situation progresses, et cetera. So, there's a lot of variables in that equation.

To get back to full year the same, we do need a little bit of growth somewhere year over year in the second half.

Yes.

Okay, that's helpful. I really appreciate the detail. Thank you.

Neil Frohnapple from Longbow Research.

A follow up to Seth's question on the MX engine. Parts segment pretax margins were at record level in the quarter. And I'm just wondering if you are starting to see benefits from the increased MX penetration rate that's occurred over the last years, or is that a tail wind that could still be to come?

I think it's still to come. Obviously the more engines we have in the part, the more opportunity we have for part sales, but that's still developing, that part. We were up to 55,000 engines that we've put into Peterbilt and Kenworth vehicles. So, it's a great story but one that there's still a lot more upside as we progress.

Got it. And sorry if I missed this, but can you provide a breakdown of the new truck deliveries by geographic region in the quarter? I think you mentioned 31,800 for total Company. But just wondering if you can provide more granularity between Europe and North America.

Sure. For US and Canada, 18,600 units, Europe 9,300, and rest of world 3,900.

Great. Thanks very much, guys.

Jeff Kauffman from Buckingham.

Thank you very much. Actually, a lot of my questions have been answered so I'll just follow up on an earlier clarification. The gross margins, you mentioned you're just not getting gross margin on the increase in Europe. But that doesn't explain the full amount. And it looks like gross margins are trailing down 50, 60, 70 basis points. Is there anything else in there that's complicating that analysis?

No, I don't think so. Obviously we're in a start-up mode in Brazil. But I think it's -- we feel good about where we're at and the margins are solid.

Great. We'll see you at the analyst day. Thank you.

Alex Potter from Piper Jaffray.

First of all, I had a high-level philosophical question here. You could break it into two parts. Number one, do you think over the next two, three, five years there is going to be a higher percentage of fleet buyers as a result of hours of service and everything else pushing these smaller fleets and owner-operators out of the market? That's part one. And part two of the question is, if so, do you think that that's going to drive lower peaks and higher valleys, or less amplitude in the truck cycle as we go forward?

We've seen that trend with fewer owner-operators, more fleet buyers in the market over the last five, six, seven years. Will it continue, or is it to a point where it's about where it is going to be? I don't know, but we're ready to be able to flex to however the market evolves.

I think we've seen customers being very prudent in their purchasing habits over the last two or three years, as there's been uncertainty. Will that lead to less volatility? I don't know. But clearly I think buyers of trucks have exercised restraint, if you will, as they've lacked the clarity of their ability to put trucks into operation and maintain those. I think we're seeing improved confidence in that realm. So, as backlogs get extended, whether that changes, we'll see how it develops.

Okay. Thanks. Then the last question here is just on natural gas. I was wondering if you could give a quick update. Also, if possible, what percentage of your production approximately right now is natural gas? Thanks.

We continue to be the leader in the natural gas business, but it continues to be very much a niche market. It's probably 1% to 2% of our production. It's what we see, and it's what the industry is seeing. And, so, as we look forward for the near future, it will continue to be a niche market, one that we're prepared to serve, but not a major element.

Okay. Thanks very much, guys.

Scott Group from Wolfe Research.

I know there's been a lot of questions on gross margin. I want to ask one on operating margin. If I plug in what you guys are implying for revenue and gross margin, it's tough for me to see much operating margin or any operating margin improvement in the second quarter. And I know you saw good operating margin improvement in the first quarter. So, just wondering, does that sound about right with the way you guys are thinking about it?

I don't have those numbers lined up in front of me. But I think as we look at our R&D spending range, our SG&A, we feel second quarter will see numbers comparable to first quarter in those areas. And so, yes. I think that operating margin probably would be, in terms of trend, similar to what the gross margin has trended from first to second quarter.

Okay. That makes sense. In terms of share, down maybe just a little bit year over year. And I know it can be choppy, but how are you thinking about Class 8 share going forward the rest of the year?

Obviously Peterbilt and Kenworth have some great new products that they've launched in the last 6 to 18 months. And those markets have gained great acceptance with our customers. As we continue to add additional features and elements that the market expects, then we'll continue to grow that. Peterbilt and Kenworth are in great shape. Market share has been very consistent over the last two or three years. And we think there's more upside as we continue to get more customers in these new trucks.

Okay. And just last one, if you go back historically after a new big product launch, or new technology or regulation, where the cost of the truck goes up a lot, how quickly do you (inaudible -- break in audio) after that? Is it a quarter, two quarters, a year before you can start to make a little bit of a margin on that price increase?

It's really dependent on the market conditions. If there's an improvement in market demand, that opportunity can present itself. But, if you recall in 2010, it's a big increase, and it takes awhile to work through that.

Okay. Thanks, guys. Appreciate it.

[Fain Majors] from Wells Fargo.

Good morning. I'm on for Andy Casey. Most of our questions have been asked and answered. But I wanted to explore the pricing question a little bit more. I know you had said that pricing was up a bit. But could you give us a little bit more color on how pricing trends are geographically, either US and Canada, and then the European market? Then, how competitive are those in the market versus the recent past?

I think we've talked about Europe, that the pricing is up, consistent with the additional content that's added with Euro 6. And in North America, we're looking at small price realization enhancements, as the market allows, but it's a very competitive -- it's always competitive. That's the nature of our business. You always look to have the best value looking at the opportunity to provide your customers the best transportation solutions, and that includes operating costs and residual values. And we think we have a great solution for our customers.

And in the US and Canada, what's the competitive environment surrounding pricing?

It's always competitive. In all markets. It's what we do. We have great new products and great dealers and excited employees. And we're pushing ahead and making inroads with new fleets that are appreciating the new Kenworth and Peterbilt models. For as long as I've been here, it's always competitive.

Thank you.

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

I would like to thank everyone for their excellent questions. And thank you, operator.

Ladies and gentlemen, this concludes PACCAR's earnings call. Thank you for participating. You may now disconnect.