PACCAR Earnings Call NUGGETS: Underwhelming North American Orders, Current Fleet Fundamentals

On Tuesday, PACCAR Inc (NASDAQ:PCAR) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Underwhelming North American Orders

J.B. Groh – D.A. Davidson & Co.: On your comments about 10% sequential decline, is that your North American, U.S., Canada or is that global or Europe or what?

Mark C. Pigott – Chairman and CEO: It’s primarily in the U.S. and Canada.

J.B. Groh – D.A. Davidson & Co.: Okay. So, Europe, okay…

Mark C. Pigott – Chairman and CEO: Europe is fairly steady.

J.B. Groh – D.A. Davidson & Co.: I noticed you didn’t really change the outlook on North American given that the, that the orders have been a little underwhelming, so to speak. Can you sort of talk about that against that backdrop?

Mark C. Pigott – Chairman and CEO: Well, we adjusted the high end of the range…

J.B. Groh – D.A. Davidson & Co.: Right. Okay, you brought that down a little bit, okay.

Mark C. Pigott – Chairman and CEO: Right, and you’re right – we probably have been in times where there had been stronger order intake for the industry and I think that’s why we’re looking at the moderate production decrease.

J.B. Groh – D.A. Davidson & Co.: Then the incremental margins looked pretty strong in the quarter, can you explain that, is it new models, or are you just managing things better, supply chain, where is it coming from?

Mark C. Pigott – Chairman and CEO: Well, I certainly think the team is doing a very good job of managing as they do in every different type of economic market. I think, overall, we’re getting good cooperation with our suppliers. The material side is in good shape. We’ve introduced some new models, but the models that we have had are in a good place in terms of production efficiency, and customers are interested in purchasing our vehicles, and so that has some positive impact on the margins. So, overall, I think, it’s just kind of managing the business, as you’ve indicated in a good professional manner.

Current Fleet Fundamentals

Andrew Casey – Wells Fargo Securities: Can you kind of help us understand, current – we all have our own opinions, but when you talk about the current fleet fundamentals being pretty good, trucks are old, yet the truck buyers are kind of slightly ordering below typical replacement demand, what do you think is going on, is it just hesitation because of look forward or government policy or something else?

Mark C. Pigott – Chairman and CEO: Well, that is a very topical question that has a lot of discussion in many companies around the industry. Andy, a couple things, one, just to reiterate, I think, for a number of years, most of the industry would expect that the replacement size is approximately 225,000 units a year give or take but in that range. So, as you’ve noted, the orders have been below that for a number of years. The other thing is, we do have an older fleet; but when you look into that fleet, what you’re going to find is a number of very good customers don’t have too many miles on their vehicles. So they may be, let’s call it, chronologically old. But when you look at it, they’re not doing 125,000, 150,000 miles a year. So they are still in good shape. So, that’s having an impact. Our customers and many of them are publicly traded, so you can see their results. They are making good profits. They have survived the challenging 10 years with a couple different recessions in there. So they’re managing their business very well. The trucks are performing well and I think as we talk with our customers and we’re out all the time, they’re saying, we will just run these a little bit longer. They are in good shape. Obviously, there is some benefit for parts and service, but the trucks are just made well and performing well. So, I think you see a term in most of the periodicals, industry is sort of in a pause or it’s in a reflective mode. There is lots of different terms out there. I think people are saying, I’m running a fleet; I’ve got 100, 200, 500, 1,000 trucks. They are good. I’m getting great service from whatever dealer is providing that. I’ve got good freight rates. Fuel is manageable. There is a lot of freight. Let’s just run them and kind of see what happens over the next six months.

Andrew Casey – Wells Fargo Securities: To support the anticipated level of production in Q3 from Q2, what you said is, primarily North America. Does anything has to happen in the orders or is that sized to your current order flow?

Mark C. Pigott – Chairman and CEO: I think that reflects the order flow versus production levels, yeah.

Andrew Casey – Wells Fargo Securities: Okay. And then…

Mark C. Pigott – Chairman and CEO: Good question. It’s an interesting discussion, and we’re all discussing it.

Andrew Casey – Wells Fargo Securities: If I can fit one another in, you’ve, I’m sure, noticed that one of your competitors had a pretty sizable engine strategy shift, and I was wondering if you would expect any near-term share gains or any other impact on just general market conditions because of that.

Mark C. Pigott – Chairman and CEO: Well, at PACCAR, our focus is a couple things. One is providing a return to the shareholders. Two, we do that by designing, selling, and servicing the best products in the industry, and that’s been guiding our company for 107 years. So, competitors are always evaluating different strategies. I can’t really comment on that. I know what we do and hopefully we share that with you and your colleagues, and we keep a pretty steady course.