Paccar Keeps Rollin’, Rollin’, Rollin’

Last year wasnt a very good year for the Class 8 segment the heavy-duty rigs laypeople think of as semis in the United States and Canada but, as is its habit, Paccar Inc. managed to keep on truckin.

From 225,000 heavy-duty trucks ordered in 2012, the industry slumped to 212,000 orders in 2013. Both figures are well off the pre-recession level of 322,000 trucks sold in 2006. One company in the segment, Navistar International, reported losses in its North American truck business in the hundreds of millions of dollars.

Yet Bellevue-based Paccar, the parent of the domestic Kenworth and Peterbilt nameplates and Europes DAF Trucks, reported a profit (as it has done the past 75 years), paid its shareholders a dividend (as it has done the past 72 years), introduced some new truck models, invested in new facilities, even added a little to market share. It is the third-largest heavy-duty-truck manufacturer in the world, after Volvo and Daimler AG.

Such is the predictable, drama-free nature of Paccar, which, despite its size it has nearly 22,000 employees worldwide and about 2,500 in Washington and the fact that it operates in a notoriously cyclical business, generates far fewer headlines and attracts much less attention than the other mammoth transportation-equipment company doing business in this region.
But Paccar did do something dramatic in late December: It named a new CEO, one whose surname isnt Pigott the family that has dominated Paccar for much of its century-plus existence. Mark Pigott, who was named CEO in January 1997, succeeding his father, Charles, relinquished the title to Ronald E. Armstrong, the companys president, effective April 27.

Even a change of this magnitude comes off as somewhat less dramatic when its engineered by Paccar. For one thing, the Pigott era is hardly over. Mark Pigott remains on the board of the company, with the title of executive chairman, and the announcement of the change notes that Pigott will remain an employee of the firm to help guide its future strategies and direction. The familys influence remains strong through stock holdings as well: Mark and brother John Pigott, also a board member, together have more than 2.6 percent of Paccars stock, according to the most recent proxy statement.

And thats likely to be just fine with investors and customers of a company that has smoothed some of the bumps in the road of truck manufacturing and sales. Stockholders and customers and the distribution network and suppliers are all comfortable with the [business] model, says Kyle Treadway, president and dealer principal of Kenworth Sales Co., a Salt Lake City-based operator of 20 dealers in the West. They know where Paccar fits.

Armstrongs ascension was not expected. Pigott is 60, only a year older than Armstrong and not especially aged for the chief executive of a major corporation. He had given no signals of an interest in changing his job title.

Someone from the Pigott family had been at the wheel for so long, and theyve done such a good job managing the growth of Paccar over that time period, that [this] angle of it was a bit of a surprise, acknowledges Mike Roarke, a stock analyst who tracks Paccar for McAdams Wright Ragen Inc. in Portland. There wasnt a family member on the bench they were attempting to bring along to take over the CEO job.

Given the growth in size and expanding reach of the company during Mark Pigotts 17-year tenure at the helm, Roarke adds, It requires a pretty well-rounded skill set to navigate that complexity.

In Armstrong, Paccar turned to a veteran of the company who, in recent years, had to navigate the complexities of the recession, which not only affected truck sales but also the companys financing business.

He handled the difficulties that came with that rather well, Roarke says. He left financial services in really good shape.
Few see Armstrong, or his move into the CEOs office, as a portent of dramatic changes.

Rons going to do very well, Roarke asserts. Hes very much out of the mold and in line with the slow-growth, disciplined-finance approach for which Paccar has distinguished itself over the years. … From a leadership and management standpoint, his style seems to be very close to how Mark [Pigott] and family predecessors ran the company. Im not expecting at all for him to come out and lay out some type of shift in technique, shift in strategy, a different game plan.

Armstrong himself promises no major upheavals. I wont make the same decisions day to day that Mark makes, he says. There will be differences. How I approach solving problems will be different. But I would say were more alike than different.
That, too, is likely to be fine with many.

They are conservative and, being conservative, they dont grab headlines and they dont grab market share the way our competitors do, says Treadway. Its a highly cyclical industry and has been my entire career. Because of that conservatism, they ride those cycles much better. Theyre better bankrolled; their management tenure is better.

Consistent with Paccars conservative approach, Pigott declined to be interviewed or photographed for this story. Armstrong declined to be photographed and briefly spoke with reporters after the Paccar annual meeting in April.

Such operating and financial conservatism is evident in the companys acquisition and operating history. Paccar isnt prone to doing deals simply to ratchet up market share or diversify from its core trucking business. So infrequently have deals come about, in fact, that the question rarely arises in quarterly conference calls with investors. The company doesnt build trucks on speculation, nor does it aggressively price trucks to boost sales. While Kenworth and Peterbilt hit a record 28 percent market share last year, the two brands still trail Freightliner, a unit of Portland-based Daimler Trucks North America, in the Class 8 segment.

If they discount and buy up [market] share, that discounts the value of product thats already in the marketplace, Treadway explains. Theyre keenly aware that the resale value of their equipment and the longevity of their equipment helps bolster future sales.

Nor does Paccar charge into the latest thing without knowing if someone actually wants to buy it. For instance, the firm has done research on natural-gas-fueled trucks for decades and does sell vehicles using natural gas, but Armstrong says it remains a niche market.

Conservatism isnt the same thing as do-nothingism. Paccar made a dramatic move in 1996 with the acquisition of Netherlands-based DAF Trucks. While it was already an international company Kenworth has operations in Canada, Mexico and Australia the DAF deal gave Paccar entry into a huge new market and some geographic diversification. In 2013, European orders represented nearly 30 percent of the companys revenues.

The company has made some other significant bets during Mark Pigotts tenure, including getting into the engine manufacturing business with a $400 million plant in Mississippi in 2010 and the construction last year of a DAF assembly plant in Brazil, thus opening yet another large market.

International expansion is likely to continue under Pigott and new CEO Armstrong. The company has opened a research and development center in India and continues to explore ways to get involved more in China. Russia is another growing market.
As we look around the world, there are still lots of fairly large truck markets we dont have a large presence in, Armstrong notes. Those will be opportunities for us at the right time and we continue to explore those opportunities to find the right time [to make an investment].

Meanwhile, the company is making strategic, focused investments at home, including a new parts distribution center in Renton, estimated to cost $25 million to $30 million, and expansion of its research and testing center in Mount Vernon. Its investments to diversify within trucking building the finance and parts business, building engines give Paccar some competitive advantages and attractive returns
as well.

Rick Williams, CEO of Central Oregon Truck Co., a long-haul carrier specializing in flatbed loads, particularly likes the Paccar MX engine, originally developed by DAF to satisfy European emission requirements and launched in North America in 2010.
We are having great luck with this product in terms of reliability and fuel mileage performance, Williams says. Also, you should consider the value of Paccar Financial Services. They understand our industry and offer some of the most innovative financing products on the market today. … They are true partners in our business model.

So what is on Armstrongs to-do list?
As stock analyst Roarke sees it: Sell more trucks. And hes not being facetious. Last year, the company reported nearly $16 billion in revenue from truck and parts sales, a level, he notes, the company hasnt been close to since 2006. At the depth of the recession in 2009, that figure was barely $7 billion and Kenworths Renton plant essentially stopped making on-highway trucks, focusing instead on giant off-road vehicles used in industries such as mining and oil and gas exploration and production.

In the meantime, the company has added the carrying costs of investments including the Mississippi engine plant and Brazil assembly plant, compressing profit margins. Getting more sales over which to spread those costs would help profit margins, Roarke adds, and, by extension, the stock price, which hovered around an all-time-high of $67 at press time, compared to about $55 a share 12 months earlier. (The stock price enjoyed a bump in early July amid rumors that Volkswagen might make a bid to acquire Paccar, but VW denied interest.)

Unquestionably, Armstrong has as a high-priority item the building of market share.

When I joined the company 21 years ago, Kenworth and Peterbilt had 21 percent market share combined, Armstrong says, referring to the U.S. heavy-duty truck market. Now, its close to 29 percent. Theres still opportunity for us to grow in our primary home markets, both here and in Europe.

When Paccar bought DAF, it had a 9 percent market share in Europe. Now DAF is at 16 percent and Paccars intermediate target is 20 percent.

The drive to increase sales will be aided by the position of Paccars brands in the marketplace and its reputation with customers. Phil Taylor, Central Oregon Trucks senior vice president of fleet maintenance, says, The ability to control our operating expense and keep our trucks operating efficiently gives us an advantage in the market over our competitors. Kenworth is considered a premium product in the industry by drivers. This, Taylor says, gives Central Oregon Truck an advantage in recruiting and retention, a growing challenge for the trucking industry.

Still, Armstrong and Paccar are largely at the mercy of the economy and subsectors ranging from housing construction to automobiles, as well as the occasional influence of new environmental regulations on engine emissions, which often spark a run on trucks ahead of the introduction of more expensive models. Predictions for 2014, at least in North America, range from tepid to decent; Paccar itself has published a range of 220,000 to 240,000 orders for the industry.

I think the recovery will continue for some time, Armstrong says. Every day that goes by, were another day closer to the next downturn, but we dont see anything on the near-term horizon. The fundamentals of the truck transportation [business] and the economy seem to be pretty well rooted. It seems our government has found a way to work together to solve problems that dont take us to the cliffs edge. That has given our customers and our dealers confidence to move forward.

Whatever the volume, its not likely to produce a dramatic change in how Paccar operates, which maintains considerable strategic and financial consistency and discipline in thick or thin. Says Roarke, They know what theyre about.

The Ron Armstrong File

Name: Ronald E. Armstrong
Age: 59
Title: Chief executive officer of Paccar Inc. since April 2014
Previous experience: Armstrong joined Paccar in 1993 as assistant division controller at Peterbilt Motors Co. in Denton, Texas. He transferred to the Bellevue corporate
office in 1995 as operations controller and has served as VP/controller, SVP financial services, EVP and president. Prior to Paccar, he was a senior manager with Ernst & Young, where he worked for 16 years.
Education: BS in accounting from University of Central Oklahoma
Professional designations: Certified public accountant
Family: He lives in Woodinville with his wife, Pamela. They have two adult children.

American Heavyweights

Seven brands of Class 8 heavy-duty trucks are made in the United States:

Kenworth and Peterbilt (owned by Paccar, USA). U.S. assembly plants in Chillicothe, OH (Kenworth), Renton, WA (Kenworth) and Denton, TX (Peterbilt).

Volvo and Mack (owned by Volvo Group, Sweden). U.S. assembly plants in Dublin, VA (Volvo) and Macungie, PA (Mack).

Freightliner and Western Star (owned by Daimler AG, Germany). U.S. assembly plants in Cleveland, NC (Freightliner) and Portland, OR (Western Star).

International (owned by Navistar International, USA). U.S. assembly plant in Springfield, OH.