帕卡 (PCAR) 2017 Q1 法說會逐字稿

Good morning, and welcome to PACCAR's First Quarter 2017 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. Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead.

Good morning. We would like to welcome those listening by phone and those on the webcast.

My name is Ken Hastings, PACCAR's Director of Investor Relations. And joining me this morning are Ron Armstrong, Chief Executive Officer; Harrie Schippers, Executive Vice President and Chief Financial Officer; and Michael Barkley, Senior Vice President and Controller.

As with prior conference calls, if there are members of the media on the line, we ask 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 Ron Armstrong.

Good morning. PACCAR reported good revenues and net income for the first quarter of 2017. PACCAR's first quarter sales and Financial Services revenues were $4.2 billion, and first quarter net income was $310 million, a 7.3% after-tax return on revenues. PACCAR Parts achieved record quarterly pretax profits of $152 million. PACCAR achieved excellent truck, parts and other gross margins of 14.1%, helped by the strong European truck market and growth in PACCAR Parts sales.

I'm very proud of our 23,000 employees. We have delivered industry-leading products and services to our customers worldwide.

PACCAR delivered 35,000 trucks during the first quarter. Peterbilt and Kenworth raised build rates during the quarter in response to robust order intake. Looking ahead, we expect a 10% increase in deliveries in the second quarter compared to the first quarter due to higher build rates in North America and Australia.

Second quarter gross margins are projected to be slightly higher than first quarter margins, reflecting the operational benefits of higher build rates.

PACCAR's forecast for Europe's greater than 16-tonne market has been increased to a range of 270,000 to 300,000 units, reflecting strong demand and the steady economic outlook.

Europe's GDP growth expectations for this year are 1.6% in the U.K. and on the continent. Freight transport activity on German highways in the first quarter was at record levels and up 3% compared to the same period last year. Year-to-date, DAF has achieved a 15.7% share of European heavy truck market registrations.

The economic picture in the U.S. is also positive with GDP forecast to grow 2.2% this year. Housing starts are projected to grow 9% to 1.3 million units and the automotive industry is expected to deliver 17.3 million vehicles. Industrial production is estimated to grow 1.7% this year due to stronger manufacturing and mining output. This will be the first year of industrial production expansion since 2014.

We estimate U.S. and Canadian Class 8 truck industry retail sales will be in a range of 190,000 to 220,000 units this year. The economy's steady growth is supportive of healthy freight levels. The ATA tonnage index continues at high levels. Peterbilt and Kenworth's share of industry Class 8 orders so far this year is strong at 32% as customers appreciate the benefits of Kenworth and Peterbilt's reliable and fuel-efficient trucks and industry-leading resale values.

PACCAR Parts' quarterly pretax income was a record $152 million, 13% higher than a year ago. Pretax return on revenue was an excellent 19.3%. PACCAR Parts business generated quarterly revenues of $787 million, 9% higher than in the same quarter of last year. These results were driven by the growing number of PACCAR trucks and engines in operation and the many innovative products and services offered by PACCAR Parts and our dealers.

PACCAR's dealers worldwide have invested over $1 billion over the last 5 years to open 200 new dealer locations in North America and Europe. PACCAR's new truck models and expanded powertrain have created a tremendous business opportunity for PACCAR and our dealers. These dealer network investments support PACCAR's continued growth in truck market share and aftermarket sales.

PACCAR Financial Services first quarter pretax income was $57 million compared to $80 million earned a year ago. Excellent portfolio performance was partly offset by the effects of the industry's lower used truck values in the U.S. and Canada.

PACCAR Financial continued to invest in the remarketing of PACCAR trucks by opening its third truck remarketing center near Chicago. These truck centers further enhance Kenworth and Peterbilt residual values, which command a 10% to 20% premium over competitors' trucks.

PACCAR's strong balance sheet and positive cash flow have enabled the company to invest over $3 billion in new products and facilities in the last 5 years. This year, capital expenditures of $375 million to $425 million and research and development expenses of $250 million and $280 million are targeted for truck and powertrain product development, enhanced manufacturing and parts distribution facilities, and aftermarket support programs.

PACCAR continues to enhance its leadership position in the global truck market by delivering the highest quality products and services in the industry.

Thank you. I'd be pleased to answer your questions.

(Operator Instructions) Your first question will come from the line of Jerry Revich of Goldman Sachs.

Can you talk about which regions drove the acceleration in the parts sales in this quarter? How broad-based is it? And it sounds like the inventory de-stock that we saw parts of last year has played out already. To what extent is that a contributing factor?

Yes. I'd say the greater share of the increase comes from North America, but we also saw growth in our Europe business as well.

Okay. And can you say more about the used truck headwind in the quarter? Was that mark-to-market on the outstanding lease residual values? Could you just flesh that out for us in terms of, is there a risk of additional charges on the outstanding lease book?

That primarily relates to trucks that we sold. The good news is there was better demand for trucks. Unfortunately, the prices are dampened because of the high quantities of used trucks that are in inventories, we've seen from several of our competitors, and that's dampening the prices. And so I don't -- we've not seen any further deterioration in prices, but we haven't seen an increase either.

And what about the operating leases that you folks have outstanding? Can you remind us when do you do the impairment test on whether the market value is below the residual value that's recorded for this income?

We review those every quarter, Jerry. And we mark those -- and we adjust the residual values and depreciation accordingly.

Okay. And there was no adjustment related to the operating lease book this quarter at all?

I don't -- I think there was probably a small amount that was included in the first quarter results.

Your next question will come from the line of Jorge Pica from Wells Fargo.

Could you provide us a little bit more color of what you're seeing in regional truck trends in South America, first outside of Brazil, and then inside of Brazil? I know Volvo commented that it thought it was seeing a bottom. I'm wondering if you agree.

Well, I think the South American market will be comparable this year to what we saw last year. So we would hope that as Brazil and -- solves some of its economic challenges, that we'll see return to growth in that business. And a lot of the -- the rest of the South America would be dependent on how the mining and commodities develop, so I think there's some positive trends in that arena.

Sounds great. I know you commented on improved strength in the North American/Canadian market. Are you -- but you didn't move your forecast at all. Are you expecting the strength to kind of maintain itself throughout the year? Or do you feel like it will subside in any way?

I think when we had discussion in January, our market range was probably above the average of other estimators. And as time has gone on, they have increased their market size estimates to be closer to ours. So we feel pretty comfortable with our range. And if orders continue at the pace, we could be at the mid to upper portion of the range.

Your next question will come from the line of Ann Duignan of JPMorgan.

This is Christie on for Ann Duignan. Can you guys describe the environment by end market in North America and where you're seeing orders comes from? Is it, say, oil and gas or the long haul? And can you describe by region in -- the EU, and how sustainable you think current order rates are into the second half of 2017?

I'd say we're seeing good, broad-based order intake across all segments. The vocational segment has been steady for several years now, and we're seeing good order intake from the long haul side. In Europe, the Western Europe continues to be strong, Central Europe as well. And we're seeing some recovery in order intake from the Russian market as we begin this year.

Your next question will come from the line of Seth Weber of RBC Capital Markets.

This is Emily McLaughlin on for Seth. I was just wondering, do you think that the 32% you reported for Class 8 order share is sustainable? And is there anything you can point to specifically that may be driving the share gains?

Yes, our Kenworth and Peterbilt's retail sell share in the second half of last year was roughly 30%, 31%, and so I think that order intake share is in line with that. The retail sell share in the first quarter was 28.2%, and so we hope to see that continue at that level or increase as we progress through the year.

Great. And then one more. Just wondering if you're seeing any notable change in order mix in terms of smaller owner/operators versus larger fleets for the Class 8 segment?

No. I think it's pretty consistent with what we've been seeing now for the last year or so.

Your next question will come from the line of Tim Thein of Citigroup.

This is Tim. Just coming back to the first question on Financial Services. I'm trying to kind of get a better understanding in terms of the increase -- the, call it, $35 million increase in net interest and other line year-over-year. How much of that would -- is -- I guess I'm getting at, was this a kind of a more onetime impairment? Or is this -- will there be an ongoing impact from higher depreciation? Or a combination of both? Maybe just a little bit more clarity on that would be helpful.

Yes. So one of the things that's cause -- impacting revenues and interest and other is the fact that the mix of our portfolio is a little bit more tilted towards operating leases, which have higher revenue and expense per truck associated with them. And then we did have -- on some bulk sales of used trucks in the first quarter, that's where we saw the losses that we incurred on some of those sales. And so we'll see how pricing develops, but like I say, demand has increased. And we'll monitor prices very closely to see if we can get some better price realization as we go forward.

Okay, okay. And are you able to disclose -- I mean, at this point, maybe provide some more color in terms of the amount of lease returns in your North American financing business in the quarter? Do you have that?

Yes, that'll be in our 10-Q when we publish that. Yes.

Yes. Okay. Okay. And then I guess maybe just the last one on parts. Obviously off to a strong start in 1Q. Are you still expecting to be in that kind of plus 2% to 4% range? Or has the thought process changed in terms of full year revenue for parts?

Yes. I think based on the first quarter results, probably 3% to 5% would be our estimate of how we would see the year progress for parts.

Okay. Okay. Understood. And just close it up on gross margin expectations. Obviously, above the midpoint here on 1Q with -- and you're talking about deliveries going up. Are we still thinking it kind of mid-14% range at the higher end or -- for the year?

Yes, I think in the 14% to 14.5% range for the year would be the way to think about the rest of the year for us.

Your next question will come from the line of Ross Gilardi of Bank of America Merrill Lynch.

Sorry to harp on the FinCo questions, but just, I guess, to expand on what Tim was asking. I mean, in a flattish used truck pricing environment, is that $57 million in FinCo pretax earnings kind of the -- an appropriate run rate? Or should this kind of bounce back to more in line with year-ago levels?

I think once we get through the used truck, I think we'll see recovery. Assuming all other things being equal, assuming similar interest rate environment, et cetera.

Okay. So in order to see sort of a step up, you've actually got to see a change -- in earnings for the FinCo, you've got to see a change in market conditions from the sounds of it.

Yes, I think that's fair. And as we continue to work with our used truck inventories, we'll see, hopefully, that progress as we go through the rest of this year in a positive way.

Got it. And then maybe you could talk just about the truck margin itself, because the parts margin was very strong, but the truck margin was a little bit soft. Could you help us maybe bridge the year-on-year and maybe just include some comments on sort of pricing and raw material costs.

So when you look at the incremental margin from the fourth quarter, incremental margin was 18%, which is basically in line with how we would think about how incremental margins would move quarter-to-quarter, in the 15% to 20% range. So right in line with how we anticipated it would develop.

And in terms of pricing versus raw material costs, was there anything notable from the U.K. or with all the currency movements or anything like that, that you would highlight?

The pound/euro exchange rate continues to be, I guess I would call it a bit of a headwind, but we're working through that as time goes on. And the U.S. and Canadian market, as we progressed through last year, the orders and the retail sales declined. So we ended last year in a more competitive position, and we're still in that same situation as we begin the year this year.

Your next question will come from the line of David Leiker with Robert W. Baird.

This is Joe Vruwink for David. Sorry to do this one quick one on used price dynamics. Any impact from mix of what was sold in the quarter? You're seeing, I would say, much more pressure on the sleepers in the market, less so on the day cabs. Did that factor into what you saw?

I think it's pretty evenly across the market. I don't think there's any particular impact with sleepers versus day cabs.

Okay. And used prices being weak isn't really a new issue for the industry, so I guess I'm struggling a bit with why. This is really the first quarter PACCAR has had an issue. Just any idea why it's popping up for you, where your peers have been dealing with it for a while now?

I think it's just because of the volume of used trucks. We did have increased used truck sales in the quarter. And so higher trucks, higher used truck sales is the reason it's -- I guess it's a slightly bigger impact than it has been.

Okay. Okay. Shifting to the new market. So you've obviously gained a lot of share at the trough of this recent correction. It looks like we have an up cycle on the horizon. Looks like, with that up cycle in play, Q1 market share in terms of the order book is normalizing a little bit. Can you maybe help us frame -- I don't know if peak-to-peak market share is the right way to look at it, but what sort of market share PACCAR would expect as we maybe hinge back closer to a 300,000 unit market?

Our guys are working hard to make our customers the best trucks and satisfy their needs. And we have great products. We have great support services. And we think that, over time, that will lead to share improvement, as it has for the last 20 years. So being able to predict how that's going to progress quarter-to-quarter or year-to-year is a bit challenging.

Maybe on Q1 itself, so to hold 32% -- and I think we can call Q1 a recovery quarter in order intake. Is holding 32% doable? Because that obviously would represent market share relative to where you have been.

You know, just dependent on how things develop. There's no -- we would hope that, that 32% continues, but it's -- we have competitors in the market, and everybody works hard to keep their business moving forward. So we'll see how it develops as we progress through the year.

(Operator Instructions) Your next question will come from the line of Steven Fisher of UBS.

It's Cleve Rueckert on for Steve. Just a follow-up on the Q1 order strength. Can you give us any color on how that developed from a customer perspective? I mean, how much was energy versus construction versus over the road? Is there any shift going on there?

Probably -- the biggest increase was probably the over the road. Like I said, vocational has been pretty steady. We did see some improvement in vocational. But as a percent of total, the increase in orders, I think, comes a lot from the on-highway customers. And we are seeing some recovery in the energy segment, but it's pretty early days for that.

Okay. That's helpful. And then just a quick one. Can you reconcile the lower European revenues with the higher volumes, say year-over-year basis? What's driving that small divergence there?

Interest on [ bank ] exchange rate.

There was a couple of factors on that one. One, as we have -- when we do residual value guarantees in Europe, we account for those as operating leases, so we defer the revenue. So there's a truck delivery, but the revenue gets deferred and amortized over time. And we had a higher number of those operating lease activities in Europe during the quarter compared to last quarter. So that accounted for about $40 million or so of the difference, plus the pound and the euro were both lower against the U.S. dollar compared to last year.

Okay. So there's nothing to do with pricing there?

No.

Actually, pricing was up a bit as some prices were increased to reflect the effect of the pound versus the euro in the U.K.

Your next question will come from the line of Joel Tiss with Bank of Montreal.

This is John Joyner in for Joel. So I guess you're getting a lot of B teams today. So just real quick on FinCo again, and I know this amount is -- absolute dollar amount is not big. But when you look at the provision for losses, why did that, I guess, nearly double from a year ago?

I mean, the provision for loss is at historically low levels. I think last year, if you look at the elements of the change in the reserve, the level of credit losses is very similar. This year, we had an increase in the provision. Last year, we had a decrease in the provision. And that just reflects movements in portfolios in the various geographies. And as you said, it's a relatively small -- small impact, and so the portfolio continues to perform very well. Past dues have been below 1% for almost 4 or 5 years now. So it's purely just small numbers.

Got it. And just maybe one more. Can you talk a little bit about your products? I know over the past couple of years, you and other of your competitors have been rolling out new products and kind of a refresh of the portfolio. And can you maybe talk about any traction that's being gained? Or where you see strong customer uptake versus your competitors? Because kind of all you hear is that, "Oh, every product is gaining share," and obviously, that can't necessarily be the case.

Well, we have great products. And we've launched the 2.1-meter products here in North America. That percentage of build has continued to increase. And currently, we're at about 75% of Kenworth and Peterbilt. Heavy-duty truck build are the newer models. Very well-received. Performing excellently. We launched -- we included the update to the 2017 MX engine in those trucks at the beginning of this year, adding another 3% to 4% of fuel efficiency. So the trucks are performing great and very well-received by the customers. And just this morning, our DAF team launched their newest XF model at the Birmingham Truck Show, which basically incorporates all the engine enhancements that we adopted here in North America into the DAF product, as well as some additional chassis and cab changes that improved aerodynamics and fuel efficiency up to about a 7% improvement. So we just continue to move the needle forward on our products. And customers really appreciate the lowest total cost of ownership. When you combine the low operating cost with the strong residual values, it makes for a good value proposition for our customers.

Your next question will come from the line of Mike Baudendistel.

Just wanted to ask you, on the parts segment, I think you said you have 17 existing parts distribution facilities and you're opening a couple more that are 100,000 to 170,000. Can you just frame that for us as what percentage increase in parts distribution capacity that represents?

So I think we roughly have about 2.2 million of square feet in parts distribution center space around the world, so we're going to increase -- we increased the distribution capacity here in Washington in our Renton facility by about 80,000 square feet. And we're going to increase the distribution capacity in Toronto by another 100,000 square feet when we finish construction of that next year. So as we look forward, our Parts team has a really clear view of continuing to increment that capacity as the Parts business grows. So that kind of pace per year I think you'll see going forward.

Okay. And your forecast for growth in Parts of 3% to 5% this year. If you view that as a normalized rate or somewhat of a muted rate, given the environment, that you think will accelerate back to the prior growth rate of 7% or 8%.

Yes. I think that's what we're expecting at this point. Whether that's -- it's just how we see the development of the market for us globally.

Okay. And also just want to ask you on one of the topics of the hour. There was a lot of media attention given to a certain tweet about -- from a certain company that does electric vehicles, that they're planning to have a prototype out of a semi -- electric semi truck this fall. And wanted to ask you, since you occupy sort of the premium end of the marketplace on Class 8 trucks, do you view an electric truck as a credible threat, longer-term, if we were to think out 10 years?

Yes. longer-term, 10 years, I think that's the kind of time frame. And we're working on electric trucks, hybrid electric, hydrogen fuel cell, natural gas. I mean, we're investing in all alternative fuel strategies to be prepared for what may come. So nobody's standing still and everybody's -- I can't say everybody, I guess. We're certainly focused on being prepared for market dynamics and market transitions as they occur.

Your next question will come from the line of Barry Haimes of Sage Assets.

Yes, I have one follow-up on the Financial Services. So if you're marking the used trucks to market every quarter and if used truck prices stayed flat sequentially, why wouldn't the Financial Services profit move up sequentially as well, as opposed to -- it seemed like you indicated that it would be sort of a gradual improvement as you went through the year. But why wouldn't you see that improvement sequentially right away?

Well, in the accounting rules, the mark-to-market is based on a 1-truck transaction, and we sell used trucks in typically multiples of that. And so a larger sale typically gets some discounting pricing that goes with that.

Okay. And then one question on another topic. The Class 8 orders, I think by most accounts, have come in better than folks expected over the last several months. And in spite of the fact that truckload rates have been pretty soft. So I'm wondering if you have any thoughts as to why you think the orders have been better. Is it that the fuel economy gap is so large? Or are there some other factors that might account for the better tone in spite of the fact that truckload profitability isn't so great?

That truckload profitability, I mean, it's down from maybe the peak, but it's still pretty good. And we see that in our finance portfolio. Customers have no problem servicing their truck payments. So I think there's -- as in any year, we're starting to see the age of the fleet creep up a bit. And so there's just more customers that are probably getting to the point where it makes sense to take advantage of the additional investment to fuel efficiency that comes with the latest versions of heavy-duty trucks.

(Operator Instructions) Your next question will come from the line of Alex Potter of Piper Jaffray.

Just wanted to ask another maybe longer-term thematics strategic question, this time regarding self-driving vehicles. Obviously, it's another area of intense media interest recently. Just wondering if you could give an update on what your strategy is there, if it's changed at all over the last 6 to 12 months. And I don't know if you would consider acquisitions, partnerships, organic development. Just any color you can provide would be helpful.

One of the things that we've done and we've seen over the last 12 months, or really 24 months, is the software controls that are in our vehicles are becoming ever more important. And we've increased our engineering resources, particularly in the software area. And so I think we'll continue to see that as we progress over the coming years and with some of those resources dedicated to developing autonomous vehicle technologies. There's a lot of things that have to happen for autonomous trucks to become a reality, but we've had platooning demonstrations, we've had autonomous truck demonstrations. So we're involved and engaged in that in a big way, and we'll continue to make investments in that arena as we go through this year and for the next 5, 10 years. So we're working closely with a lot of different parties in the industry. And so we'll continue to develop our capability.

Okay. Great. And then one last question. You had mentioned earlier the impact of the pound moving around and the OEMs having to increase pricing in the U.K. in order to make up for that. Just wondering if you've seen any pushback or if the market seems capable of absorbing that increase in pricing.

I'd say it's a gradual process. It just takes time. And we've been -- we've done this before, and it just takes a while for it to work its way through the system.

Your next question will come from the line of Neil Frohnapple of Longbow Research.

This is actually Faheem on the line for Neil. And I'm just wondering, what's your -- what was the MX installation rate in the quarter in the Kenworth and Peterbilt trucks in North America?

I believe it's 46% for the first quarter, yes.

(inaudible). And can you remind us what your outlook is for the MX market share in 2017?

I think we'll -- we were 47% last year. Our target is to be at 50% or so this year.

Okay. And as far as the bulk used truck sales that you mentioned in the first quarter, were those to, like, a particular dealer group or were those to fleets?

Some of both. Yes.

Both? Okay. And as far as the Class 8 order increase in the first quarter, I mean, was that a little more to end users? Or did you see an increase in dealer stock orders?

No, most of it was to customers, end users.

Customers?

Yes.

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

We would like to thank everyone for their participation. And thank you, Operator.

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