5 Crucial Things PACCAR Inc. Management Wants You to Know

Image source: PACCAR

European truck market is gathering steam

#1

What management said

“We’ve raised this year’s 2015 forecast for Europe’s greater than 16 tonne market to a range of 255,000 to 265,000 units. We expect the strong market conditions to extend into next year. Our 2016 forecast for Europe’s heavy truck market is a range of 250,000 to 280,000 trucks.”

Ron Armstrong, CEO

Why that mattersEurope is PACCAR’s second-largest market, accounting for a quarter of its truck revenue.

The company’s truck deliveries from Europe jumped 21% year over year in Q3.

DAF – the brand under which PACCAR sells truck in Europe – dominated 14.6% of the market during the first nine months of the year, compared to 13.5% in the year-ago period.

Rapidly growing parts business#2

What management said

“PACCAR's parts business generated record revenues of over $2.3 billion and record pre-tax profits of $430 million for the first nine months of this year. Profit is a 17% increase compared to the same period last year.”

Ron Armstrong

Strong growth over the years

Source: PACCAR’s Q3 presentation

Why that matters Parts contributed 23% to

PACCAR’s income before taxes in Q3.

Higher freight tonnage and fleet utilization is driving demand.

PACCAR is expanding the business with new stores and distribution centers.

Image source: PACCAR

Engines business has taken off#3

What management said

“The MX-11 is not as prevalent in the engine market as the MX 13-litre engine is. But now we have our own engine that we can offer in that range and so that will add several percentage points to our PACCAR engine penetration as we get into the next year.”

Ron Armstrong

A fine example of vertical integration

KW/PB = Kenworth/Peterbilt. Source: PACCAR Q3 earnings presentation

Why that matters

PACCAR will launch its MX-11 engine in North America early next year, after which the company will no longer source 11-12 liter engines from Cummins, as it does now.

PACCAR expects to meet 40%-50% of its engine requirements with its own engines in the near term.

Undeterred by slowdown concerns#4

What management said “Our thoughts are as long as the economy is in that 2% to 3%

growth, there is continued strong housing and automotive activity, and consumer spending is up 3% or 4% year-on-year, I think the fundamentals of the economy and therefore the effects on our business, I think are all good. So I would agree that 15% to 20% is probably overly pessimistic.”

Ron Armstrong

Why that matters

PACCAR doesn’t foresee heavy-duty truck sales falling as much as analysts fear in the near future.

The company expects “flattish” gross margin for 2016 despite lower projected sales. For perspective, its gross margin for the first nine months of the year improved to 14.6% from 12.4% in the year-ago period.

Capital allocation

plans intact#5

What management said

“PACCAR’s strong balance sheet and positive cash flow have enabled the company to continuously invest in new products and facilities.”

Ron Armstrong

Investing in the future

Source: PACCAR Q3 earnings presentation

Why that mattersPACCAR expects to spend $325 million-$375

million in capital expenditures and $240 million-$270 million in R&D next year. That’s higher than its projected 2015 capex and R&D spending of $300 million-$350 million and $235 million-$240 million, respectively.

Projects in the pipeline include logistical expansion at three plants, new stand-alone TRP brand parts stores, and expansion of distribution facilities.

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