Suppliers riding it out

Truck OEMs and other suppliers seem to be weathering the industry downturn by balancing the drop in U.S. heavy-truck sales with strong growth in other segments as well as in global markets for both trucks and components

Truck OEMs and other suppliers seem to be weathering the industry downturn by balancing the drop in U.S. heavy-truck sales with strong growth in other segments as well as in global markets for both trucks and components.

“We’re benefiting from balanced global diversification and continued growth in aftermarket parts and financial services revenues,” said Mark Pigott, chairman & CEO of Paccar, parent of Kenworth and Peterbilt as well as European OEM DAF. “Our robust business in Europe and international markets has partially countered the emissions regulation-induced truck market decline in the U.S. and Canada.”

As a result, Paccar has stayed profitable, though its 2007 profits and revenues are down compared to 2006. Paccar earned $298.3 million on revenues of $3.72 billion in the second quarter this year, compared to profits of $369.9 million in the same period in 2006, while net income slipped to $663.9 million on sales of $7.7 billion for the first half of 2007, compared to earnings of $711.9 million on revenues of $8.02 billion in the first half of 2006.

“The U.S. and Canada truck industry ‘pre-buy’ experienced in the second half of 2006 continues to impact new vehicle purchases,” said Tom Plimpton, Paccar president. “However, steady GDP [gross domestic product] growth and regular replacement demand should positively influence demand in the second half of the year. It’s expected that U.S. and Canadian Class 8 sales will be in the range of 180,000-210,000 units for 2007.”

By contrast, the European economy – and thus truck sales – continues to experience more robust growth, said Aad Goudriaan, president of Paccar’s DAF Trucks subsidiary.

“In the second quarter, business and consumer confidence reached six-year highs and unemployment fell to a ten-year low,” he said. “Industry truck sales in Western Europe above 15 tonnes are strong and could reach 265,000-280,000 compared to 268,000 in 2006.” Goudriaan noted DAF is seeing particularly strong growth in Central and Eastern
Europe, Australia, and Mexico.

“In truck operations, the market trend is very strong in Europe and significantly weaker in North America. However, we have managed the downturn in North America well and [our] underlying profitability is strong,” said Leif Johansson, president of the Volvo Group, parent of both Volvo Trucks and Mack Trucks.

“Order bookings rose by 68% in Europe, where the focus was on gradually increasing capacity in the entire industrial system to be able to meet demand,” he said. “In North America, the quarter was difficult as predicted as a result of the transition to new trucks with a new generation of engines. There were also disturbances in conjunction with changes in the North American production structure intended to create a more efficient structure for the future. Toward the end of the second quarter, the situation in the plants gradually improved, but productivity is still unsatisfactory.”

Goodyear Tire & Rubber Co. said that while its North American tire sales were down 3% this year compared to 2006, European Union tire sales rose 6%, sales in Eastern Europe, Middle East and Africa increased 14%, Latin America sales climbed 18%, and Asia Pacific sales went up 14%

“Overall, our tire sales in the second quarter increased 4% to $4.9 billion over last year, offsetting softer conditions in several key markets with a richer product mix,” said Robert Keegan, Goodyear chairman & CEO. This growth … offset a 3% decline in North American tire sales, primarily due to our exit from certain segments of the private label tire business along with softer original equipment and commercial replacement markets.”

Truck engine maker Cummins reported strong profits this year, though not as high as in 2006, largely from rising demand for medium- and light-duty truck engines
The company’s revenues in the second quarter increased 18% to $3.34 billion, while profits fell just 3% to $214 million, compared to the same period last year.

“This was a tremendous quarter for Cummins and is further proof that the work we have done to diversify our business is paying off,” said Tim Solso, Cummins chairman & CEO. “Our strong performance in the first half of the year has put us in a position to make 2007 Cummins’ most profitable year ever – which would be a significant feat given the challenges we have faced in the heavy-duty truck engine market.”

That strong performance comes in the face of the emissions-related slowdown in the North American heavy-duty truck market, he stressed, which is still expected to be down 45% this year. Solso said Cummins’ North American heavy-duty engine shipments fell 42% from a year ago, but significant growth in the company’s non-heavy duty truck engine markets and other product lines more than offset that decrease.

However, based on its first-half performance and its outlook for the remainder of the year, Cummins is raising its 2007 projections for the balance of 2007 to $7.15 and $7.65 per share, up from $6 and $6.50 a share.

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