帕卡 (PCAR) 2002 Q1 法說會逐字稿

This is an unedited realtime transcript. An edited version with proper case and full speaker names will be available shortly.

Good morning will come to today's conference call. All participants will be on listen. I will introduce your host for the day. You may begin when ready.

Good morning. This is ron. I would like to welcome all of you to discuss paccar's first quarter earnings results. Joining me is mark pigott. Chairman and ceo and mctembreull. As with prior conference calls, I request if there are any members of the media participating, they participate in a listen only mode. Certain information presented today will be forward looking and involves risks and uncertainty regarding general economic conditions. That could significantly affect expected results. For those of you who do not -- did not see the press release showing our results this morning, paccar announced 42 point 7 million dollars net income or 61 cents per dilated share increase of 7% a year ago. First quarter net sales financial service revenues were 1.5 billion dollars. I'll turn it over to mark pigott.

Good morning. Paccar continues to focus on profitability, the market fundamentals have not changed from a year ago in terms of freight. Freight has been generally soft. We are seeing a positive impact from the prebuy. When you look at total industry orders for the first quarter of about 65,000 units, compare that to 38,000 a year on year, you can see the impact. Looking at our industry overall, I note that a number of our competitors, and a half vice star, volvo and fright liner had losses greater than $50 million each for the first quarter. In north america, the new truck inventories continue to decline. They are under 25,000 units. Represents about a two-month supply. The used trucks which we talked about for the last several years are improving. I think we've seen a reduction from about 100,000 units to 75,000 units. The truck purchase cycle continues to lengthen from three to four years. And that will benefit paccar vehicles because of their quality and reliability. Unlike what you may have heard or read, most of the competitors continue to have guaranteed buy backs. And, unfortunately, a number of their customers have had to take impairment charges because of reduced equity on their trucks. Looking at orders for the year, even with the increased first quarter, we expect this the year will be in the 135 to 165,000 range, up probably 10% plus. Certainly as a result of the sharp intake in order, the backlog has improved from a low of 47,000 units in october to about a little over 80,000 units now. Medium duty market is essentially the same as last year. Paccar's market share has rebounded. Year to date we're close to 23%. And pleasing to note that during the month of march, paccar received 43% of the industry orders. Certainly the discussion within the industry has been the prebuy and engine pricing. And it looks like most of the new engines will have an increase in the $5,000 range. In europe, last year it was a great year for the european truck industry. This year it's down about 15% to about 210,000 units. Had a record year in just about every category and continues to do well this year. It is now at record level market share of over 13%. We're holding the dav production steady. Looking at paccar's first quarter, in many ways it was similar to the fourth quarter. We continue to focus on overhead costs and improving margin. But fourth quarter to first quarter number of units was pretty much the same. Finance business, past dues have stabilized and we consider our portfolio to be in better shape than our competitors. I think it will be a year of challenges as it has been for the last few years. Certainly the prebuy will have an impact. I think primarily for the manufacturing portions as quite a dramatic ramp up in build rate and then no one in the industry really knows what will happen in the fourth quarter. So, with that -- w. That we open it up for questions and and.

Thank you, at this time, we are ready to begin the question and answer portion. If you would like to ask a question, please press star then 1. You will be announced prior to asking your question. To withdraw your question, please press star then 2. Once again, if you would like to ask a question, please press star then 1 now.

Our first question comes from joanna shatney from goldman sachs. You may ask your question.

Good morning, guys.

Morning. Some of your competitors have reported so far already talked about the european market for trucks. Actually looking a little bit better than they anticipated. Can you guys just comment on what you're seeing an nick dot tally there. On truck production, you thought the industry would be down 15%. I think your production at dav is only down 10%. Are you continuing to experience market shares so far this year? -- market share gains so far this year? In terms of the market, i think four or five months ago, most of the industry was saying the market in europe could be anywhere from 180,000 to 210,000. That's down from roughly 245, 250,000. So, we're saying the market right now looks to be about 210,000 which is at the upper end of the range that we talked about. I think that is you're an nick dot tall information. I don't see it being much more than that. In terms of dav, we just have a great product over there. Strong dealers, and a great team. We continue to go from strength to strength. And we don't see any increase in build rate. We look at holding our current build rate pretty steady and, as a result, with the lower market, we're seeing some good uptake in our market share.

Okay. Switching to the north american market, I think you said you have 43% of the incoming order rates in the month of march. Can you talk about whether that was customer driven or dealer driven and what types of customers are placing the orders?

In terms of the customers, it's the usual range of customers. We have some of the largest fleets in the country placing orders. And then we have fleets with 50 to 200. And certainly the owner-operator. It was pretty much across the board. Our dealers are certainly the strongest network in north america. And there was some restocking, if you will, but those are all customer driven. So, I would say primarily it's customer driven orders.

Okay.

Do you think this is because your used prices are holding together than some of your competitors? Is that part of why you are experiencing such huge market share shifts? We have the best products in the market. And certainly on the used trucks we're finding that we have anywhere from 20 to 30% vantage over our competitors on used truck values. And if you are going to buy a product in a good or challenging market, most of the customers we talked to say I would rather buy the best i can get. I know it will hold the value and I'll have a dealer network around to support it. And that's the way we position our company.

Okay. Great, thanks.

Thank you.

Our next question comes from john rogers from d. A. Davidson. You can ask your question.

Good morning.

Hi, john.

Could you talk a little bit about what magazine any tudz of production increases you're looking at in the second and third quarters?

Well.

I guess second quarter probably versus where you were in the first.

Going from the first to the second quarter we've increased production upwards ever 20%. And well continue to look at further increases.

That's both peterbilt and kenworth.

That is correct.

And you'll just have to wait and see how the orders hold up manage into the third quarter.

That's right.

Okay. Thank you.

Our next question comes from peter jacobs from rye began mceven ri.

Good morning, gentlemen.

Morning, peter.

First of all, housekeeping items. Ron, could you give us the interest expense, sg and a, loan loss expense in the financial services business. For the first quarter interest expense about 60 million. Operating expenses about $17 million and loss provision about $19 million.

Okay. Thank you. On the sga expense in the manufacturing business, that was continued to show very good improvement both year over year an on a sequential basis. I was wondering, mark, if you could talk about some of the things that are going on there? Is it more of the same or are you finding more ways to bring the cost down, but also as we look out into the second and third quarter, what could happen with that line item? How much would it fluctuate with a ramp up in production rates that we'll likely see in the second and third quarter?

Well, as you know, we don't forecast, but in terms of paccar's attention to cost control, certainly one of the strengths of our company, i think, an element that has been very successfully implemented hack sic signature may that has allowed us to examine in more detail our -- not in only in the manufacturing arena but manufacturing and office environment. Our 16,000 employees are very aware that the need to produce the highest quality product has to be complimented by a rigorous approach to cost control. I would say it's more of the same good attention to detail, but supplemented by ongoing success with siggma.

Okay. Great. In terms of new truck prices. You commend on the prices in the used truck market. I was wondering if you could comment on what you are seeing in new truck prices currently. Are they holding in there? Is there more pressure. Are you actually seeing some lift there with some improving demand? Well, for our products -- i can't really comment on the competitors, but we are seeing some improvement due to the supply and demand. As you know, because of the prebuys there are limited number of build slots throughout the industry. And, you know, many sectors of the market are interested in purchasing trucks before early fourth quarter. As a result, there has been some margin enhancement.

Okay. And lastly, this is probably the million dollar question.

At this point, are you willing to comment at all about what you're initially seeing out there in the fourth quarter once the new truck emission standards go? Are you seeing any new orders come in at all? Is it too early to tell? Can you give us a sense of that?

We are seeing orders come in certainly. As you know, kum minutes was the first to become certified and every engine manufacturer has a slightly different approach to how they deal with the october 1 guidelines. People will need vehicles at different times of the year and going into next year, so we're seeing some sales, but i think it's a little too early to tell you how the fourth quarter over all is shaping up.

But by no means is it looking like a dry hole out there? Is that a fair interpretation. You must have a little texas blood in you. There are certainly some orders coming in. I really cannot quantify it at this time because it's a little too early.

Okay. Great. Thanks, mark. That's all I have.

Thank you.

Our next question comes from gary mcmanus from j.P. Morgan. You may ask your question.

Hi, gary.

Hi, mark.

The 43% of orders in march, were you actively encouraging customers and dealers to order? Was there a reason for them to order in march as opposed to april or february? Just kind of a -- you know, give a little elaboration on why your order intake in march was so strong? Was there a price increase in april that would pull orders forward?

Well, I think like the rest of the industry, there is model year changes that happen in the april, may time frame. I think overall throughout the industry, even though the manufacturers and the engine companies have been talking about the possible impact of the new emission regulations, it took a while for the industry to really get their arms around it and maybe it was just a result of continual meetings, but I think in the february, march time frame, many of the dealers, many of the customers started to grasp the financial impact of october 1 and recognized that there were limited build slots and need to get the orders in. So, I think it was a combination of events.

And you think your dealers will have the strategy of having artificially high inventories, you know, at the end of september, early october so they can sell out a stock in the fourth quarter?

No. Our dealers don't ever have the strategy of having artificially high inventory. In fact, one of the main reasons our dealers are doing so well, in fact we're the only dealer network that is actually growing. Everybody else has contracted, because they keep their inventories very much in line on the new and used as well as their parts business. So, our dealers are in excellent shape and will continue to be that way.

Okay. If I look at the first -- the act numbers would suggest your build was up 8% in the first quarter. Industry, excluding paccar was down 14%. Some of that may be market share gains, but it seems like you're taking a strategy of building a bit in front of the prebuy more so than your competition? That the way to look at it.

No, it's not. We only build for customer orders. So, well adjust our production rate dependent on incoming order rate. We have no stock, unlike our competitors. I'm sure you've traveled through the southwest. You've seen some big fields with thousands of our come 'pet tors new vehicles sitting out there. We don't have that type of approach to business. So, once again, I can't comment on what the competitors are doing in terms of their build rates, but we're increasing our build rates to satisfy the customer demand.

Okay. In -- in most recent release, you talked about the fleet bankruptcy moderating and used truck price up 10%. Can you quantify as to what degree fleet bankruptcy is moderated here?

Well, gary, what we're seeing is really a -- things have stabilized the last couple of quarters. We're seeing improvement. We're seeing fewer bankruptcies and fewer repo sessions. We are seeing lower pass dues, lower levels of nonperforming. All the quality indicators are kind of moving in a favorable direction. There is, though, the concern of fuel prices are up higher than they were a little while ago. So, you know, things are a little bit better, but they're not back to the, you know -- they're still at relatively high levels, historic -- historically.

You say used prices are up 10 to 15% over what time frame are we talking about.

In the last six months.

Okay. I mean, is this -- you've gone through a few cycles before, I'm sure. I'm wondering is this consistent with the beginnings of recovery in the industry.

Yes. Yes, it is.

Okay. Thank you.

Thank you.

Our next question comes from john mig begin at the from first boston. You may ask your question.

Good morning. Let me follow-up on a question gary asked. On the orders that you all received in march, 43% of the industry numbers, was there an unusually high percentage of those orders that were for dealer stock are were they all customer orders with customer names on them?

I think it was very much the normal distribution in terms of the vast majority are customer orders. That's typically what we see during any --

All right. And then another -- you mentioned $5,000 price for the engines. Was this in essence what your price would have to go up because of the engine or is that the 5,000 that you are getting delivered and you have to put, obviously it will cost you more to put it in the vehicle or was that $5,000 way the -- what the vehicle will cost because of the engine?

I think most of the industry is looking at passing through the price increase that is received from the engine manufacturers.

No. No. Do you have to add to it because it will cost you more in addition to what the engine will cost, there is a cost that you guys are going to have to have.

We are certainly at attempting to hand that will through production efficiency and good engineering designs. So, we don't want to have any more of an impact on our customers than necessary. So, I think -- the vast majority of the cost increase will be what is --

The engine.

Engine.

And then you used a number on the used going from 100,000 to 75,000. Two questions, one, what is the source of the number. We all wanted the number. We always said in the past nobody knows. That's just the number we use. That's pretty specific saying it goes from 100 to 75. A, what is the source. And, b, what would quote normal be unquote at this time of the year or this time of the cycle? Well, I would say that it's really an nick dot tall information as we tour north america and we have hundreds of dealers out there who can certainly see what is going on in their local town and region. You've got a competitor that had a full lot and 200 trucks and now they're about 3/4 full so you have about 75. You got enough of these stories in and you start to x trap polite. I think that's about as scientific as it is.

Okay. That's fine. It's probably crediblely accurate. I didn't know if there were statistics that we didn't know about is it still above normal. Is 75 still above where it should be, you know, from just to be optimal?

Yes, it is. And I don't have an exact number of where it should be, because this cycle is a little bit different than what we've seen in the past, obviously complicated by the prebuy, but I would make a note that as we look at the fourth quarter and the first quarter of next year, one of the silver linings for the industry may be more used trucks being purchased.

Yes.

Because of some hesitancy by new truck buyers in terms of the reliability and the effects of these engines. So, it may be that we'll see more used trucks purchase which will obviously ultimately result in new trucks being purchased when the new trucks are --

Ultimately -- yeah. On the used trucks specifically, the 10% increase in prices that you were talking about, was that an industry figure or was that for peterbilt kenworth figure.

Primarily for peterbilt kenworth. The fact -- understand some of the competitors used trucks continue to lang quiche.

Okay. And then do you have any slots left -- in other words, if as you have schedules -- in other words, one question we all have, are the orders -- people don't order trucks after october, then are orderinging to come off dramatically? In other words, do you have a number of slots that are available for people coming in or is that what the further increases in the third quarter would be for if in fact the demand were were -- were there to warrant it?

I think in terms if there is increased demand in the third quarter, we have to take a look at adjusting build rates even more. I would just say there are some slots available, but not as many as we would like.

Right.

Final question. Clearly the prebuy will have an effect. It's a debatable effect as to how large an effect. I like your order estimate, the range, 135 to 165. That's probably realistic. It's about as wide as you can get. But the question is, do you -- as the prebuy amounts, does that not also in your mind begin to have an effect on at least the first quarter of '03 coming up to at least the march 1st model change overdate for most of the oe. In other words, there are some people saying they will have an impact of very slow november-december, but not much in january, february either?

Those crystal balls get a little bit fuzzy when you look out that far. I would just sort of highlight that your march 1st, you know, model year change, I haven't heard that figure. Certainly you put yourself in some of the competitors shoes, they got trucks that aren't selling, rapidly depreciating in value, you probably want to pull your model year forward as fast as you can and put it behind you. But, you know, the model year, the change basically by competitors, by vow indication. It can go anywhere from march through july or august. So, I think looking out to next year is a little premature.

Okay. Thank you very much.

I thank you.

Our next question comes from jamie from cigna capitol good quarter. On the prebuy issue, what is the penalty for canceling a new order?

You mean by manufacturer?

To the customer. If he didn't get a slot ahead of this october 1 change?

Boy, you know, people purchase kenworth and peterbilt. I'm not sure we run into that phenomena.

In the event that was to happen. One of the truckloads mentioned in the conference call, that was the first i heard of it and wanted to get your thoughts.

Yeah. I really don't have any come mebt -- comment on that. We work with our customers and our dealers and everything we build end up in the customer's hands. So we're pretty happy that way.

Okay. Thanks a lot.

Thank you.

Our next question comes from joel advertise from lehman brothers. You may ask your question.

Hi.

I think we have a little static coming in here.

All right. Isle try again. A couple of cleanups to start with. Is that 32% tax attainable.

I'm sorry. You're cutting out. Sounds like someone from your it organization is trying to work on your computer.

We don't have computers here. Is that 32% tax rate sustainable.

Yeah. We've said over the last several quarters that, you know -- the current levels, we will be in 31 to 33% area.

Okay. And then, second, I see that the prices of used trucks are up about 10%. I wonder if you raised eury side dual values on the leases from your finance portfolio and if you did, what impact that had on the profitability?

We've been, you know, paccar historically has been conservative on the historical values and that continues.

There wouldn't be any reason to make an adjustment if the price changes?

We'll take a look at the market. We do every day and professionals review that. But we want to make sure that we are very conservative in our residual value approach.

Okay. And trying to ask, I think a question that has been asked a couple of times maybe from a different angle. Are your market share gains from any relation to your ties to kata pillar. Are you seeing more orders for the kat versus your kum minutes are or the orders evenly mixed.

I think they're pretty evenly mixed on where we have been historically for the last five years. You can buy a variety of engines in a different array of manufacturers products. They're buying kenworth and peterbilt because of the value that is in the vehicle.

Okay. And then last, can you give us just a stab for 2003 on the outside look and maybe, you know, instead of -- I don't know, just looking at maybe what is sustainable this year versus prebuy and what kind of a normal listed level for 2003 would be?

No, we really can't. Thanks for -- thanks for asking.

All right.

Our next question comes from karen from gic. Ma'am, your line is open.

Hi karen.

I thought I would never get on. Okay. Two questions. One, on your market share of 13% which is a record, do you have any feel for who you might be losing -- who might be losing share?

Well, we're gaining shares is that what you mean.

Right. But it has to come from somebody. So, is there any one person losing or is everybody losing a little or can you give some color on that?

Well, you know, we take a look at the industry registration information and it looks like mercedes and volvo are losing the share.

Mercedes has been losing for quite some time so that just continues then. Okay. And then the other question is on the other income expense on the manufacturing, there was a swing from about $5 million income last year to, you know, expense of 2.6 this year. Was there any large item in that swing? That actually worked against you in the quarter? What is included in there is interest expense from our -- from manufacturing debt, but off setting that, too, is interest income on some intercompany loans made from manufacturing company to finance company. There was less of that in the first quarter. So that as a result, the net interest expense was higher.

Okay. Okay.

Okay.

So the net -- okay. And, then, you said you are not making any changes to your european production. What were your previous plans given the fact it looks like the end market is a little better than you expected. Did you have plans to take another leg down and you're not doing that now or what were your previous plans for that business? We're just working on trying to develop new products so that we can win that truck of the year award again. That's our main focus.

But did you plan on cutting production based on that more like 20, 25% decline and now you're not or did you not plan that far ahead? Our main focus is continued to really enhance the quality and reliability of our products and just meet the customer demand. That's our focus.

And just lastly, I mean, we've had in the past on occasion prebuys around, you know, regulatory changes. Nothing quite this big. Can you tell us what you are doing to the extent that you can, to manage the ramp up and then bubble bursting at the other side? What can you really do. Eaton said every company is trying to manage it differently. I'm trying to get a feel for what can you really do? Production goes up a lot then down a lot. What are you going to do to try to manage that voluntary a tilt?

I think you sound like you're pretty tuned into manufacturing. We should talk later. That is the operative challenge is that production will go up and then most likely it will go down, although as I said earlier, the fourth quarter is still a little bit difficult to determine exactly how that will play out, but certainly one of the strengths of paccar has been the flexibility in managing different build rates. We have an outstanding manufacturing group and a number of factories around north america. They are working that very diligently.

And, then, just one last question, I heard some rumors that one way some companies were trying to deal with it was saying, sure, he'll give you a slot prior to october 1 but you have to give us a truck in the fourth quarter, too. Have you heard any of that or is that just rumor?

You've been around the industry as long as we have, you heard all kind of stories. I don't know if that one is true or not, but it certainly is something you hear periodically.

Okay. Thank you.

Thank you.

Our next question comes from andrew casey from prudential securities. You can ask your question.

Hello, andrew.

Good morning, how you doing.

Good. Thank you.

Getting back to karen's question on the manufacturing and how you smooth out the potential spike, at what point do you start to close the order book on trucks built prior to october 1st and how do you manage the ability to put shifts and then remove them potentially in the fourth quarter?

Well, you know, that is handled differently by every company. Obviously we have great confidence in our plant management teams throughout north america and they've been through the cycles of our business. So, they have a lot of experience and have a well orchestrated plan to deal with that. In terms of the first part of your question, you know, you only have a finite number of build slots available. And once you fill those up, that's all you are able to build.

Okay. And then on the financial services business, at what point do you look at bringing down the loan loss reserves?

Well, you know, paccar as very conservative company. We want to make sure we have adequate reserves and we're going to be back to growing the finance company. We will be growing into the reserve we have and increasing the reserves over time to keep the portfolio in line. We continue to conservatively manage the financial services business.

If I could ask a follow-up on that, given that the fundamental condition of your customers really hasn't changed too much from last year, and what we're seeing is, you know, early signs of recovery, but nothing really to justify what is going on in the orders, that is probably mostly prebuy. Are you saying with respect to the financial services that conditions are improving, but it's really modest and you have to look at it a little bit more.

That's correct.

Thanks.

Thank you.

Our next question comes from david sin no from to belly company. You may ask your question.

Hi, david.

Quick question. Is is there any correlation between the used truck prices and extraordinary demand driven by prebuy? Do you see what I'm getting at? In other words, customers buying used trucks may be more so than they would in light of the prebuy and that's driving up prices.

I don't think so, no. It's an interest question, but, I mean, the kenworth and peterbilt used trucks have -- have had for 50 years the highest resale value and i think that is only increased over the years, particularly as some of the competitors have taken a different approach in terms of building a cheaper quality vehicle. So, I don't see a great correlation at this time between the prebuy and increasing used truck values.

Okay. Thank you very much.

Thank you.

Our next question comes from robert toomey from rbc. You may ask your question.

Hello, robert.

Good morning. European market share increase, I believe you said in the press release it was 13%. Where was that a year ago or two years ago?

Oh, it was between 10 and 11%. And was that about a year ago, mark?

Yeah. 12, 18 months ago.

Okay. And, again, obviously the reasons why you are growing there, quality products, gaining share. What would you say the most important reasons for that gain, mark? In europe?

Yes.

I don't think there is just one reason. We look at -- we have a brand-new product range that is the light line, the medium line and the heavy line. Those are brand-new. Two of those vehicles have been named truck of the year. That is two out of the last four years. We have an outstanding focus on quality and all aspects of the business. We have a very strong and growing dealer network, thousand service points throughout the continent. We have -- dav has had for 20 years, the premier aftermarket service network and 24-hour, seven-day a week service call centers. And we now have introduced paccar financial europe which is starting to grow very well. So, in combination, I think it's an outstanding business model. We have a great team that is managing it. So, it's not just one element.

Great. Thanks. When you look at your capital spending priorities this year and next year, what would you say are the most -- the most important in terms of where you are investing capital expenditures and r and d. Every why our focus is on new product development. That is the life blood of any type of company in the automotive industry as well as any other industry that manufacture something. Focus certainly on new product development. Our facilities are world class. The information technology initiatives that we've spearheaded continue to receive funding. And other programs, such as sigma certainly get their share.

Okay. And a question I had relating to a comment you made earlier. You said there is not as many slots available as we would like in relation to some other question. Does that mean you are basically a full -- at full production or what did you mean by that particular comment? Continues to be very strong demand for paccar product and we would certainly be pleased to make sure that every customer receives a product that they want in the time frame that they want. We're working hard to achieve that.

If you had to describe what% of your capacity you are actually utilizing now, what would you say?

I really can't comment on a specific percentage. Well continue to review and adjust production levels as orders are sent in.

Okay. One other question I had was your medium duty share in the u.S. Can you comment on that and how that is going? I believe we're still the fastest growing medium duty product in north america. And as you are sure aware, we won the jd power award now three years in a row and our factory outside of montreal is world class, a great group there. And people absolutely love the kenworth and peterbilt medium duty product.

Do you have any dense what your share is there, yet, mark?

Oh, it's in the 3 to 4% range.

Okay.

That's up from 1 to 2% a few years ago.

Great. And one last question, if i might, that has to do with the financial services business. If you look at the way you've grown that over the last few years, as we go forward over the next few years, this next cycle, to what degree would you expect financial services could contribute to your total growth or total revenue over the next few years versus say five or 10 years ago. Will it be meaningful higher in both revenue and margin contribution in your view?

Yes, we think it will continue to grow and contribution to the company. The introduction of paccar financial in europe is very important and we're in the seven western european countries right now. It will continue to grow right now. Core come pay tan see of the company and competitive vantage.

Thanks very much.

Thank you. Our next question comes from john rogers from d. A. Davidson.

Just a follow-up question. Can you tell us what depreciation and amortization was in the quarter.

You cut out. One more time.

Depreciation and.

49 million dollars. Do you know what roughly capital spending was in the quarter?

It was near $10 million.

And then one of the -- one other question. Do you have any union contracts expiring this year?

Yes, we do. Typically have different contracts, you know, most years.

Right.

At different facilities.

And which ones are coming up this year, mark?

Well, I think the main one would be in nashville.

Okay. And that contract x peenses when?

Later in the year thank you.

Thank you.

We have another follow-up question from joanna shatney from goldman sachs. You may ask your question.

Hi, joanna.

Hi. Can you talk what what you are seeing in april. Was it running at a similar runway as it was in march.

You mean 43%.

I don't know if you guys know that until the numbers are reported. If you look absolute number of units, is it pretty similar?

Well, obviously, you're correct. We don't know that until the numbers are reported. That will be in may. But I would say it probably won't be at 43%.

Okay. Okay. Can you just help me with how different the engines are going to be? I know the technologies are very different. For you guys as a manufacturer of trucks, is it very different a process to put the cummins engine in versus what cat will be using?

Well, as I said, each of the engine companies is -- has taken a different approach to the marketplace. And so, I really don't want to comment on their approach. In terms of the truck manufacturers, the main impact will be on the additional cooling necessary. And, we're talking upwards of 30% additional cooling because of the increased heat being generated by these engines. So, that has an impact on everything from your radiator design and fixturing to your air flow under your hood and also even to your exhaust. So, it's a coordinated approach working with the engine companies and it's been one of the real interesting programs that we've seen in the trucking industry.

Okay. Talked about using an interm inagain ba krert comes out. Have you seen that inagain yet.

No, I can't comment on any specific actions that the engine companies are contemplating.

Fair enough. This last question, it's important for another stock i cover. Leyland used to make defense trucks several years ago. And there has been some talk that they might start bidding on defense contracts again. Is that something that you would consider a core piece of the dav leyland strategy going forward?

You're talking about uk military?

Yep.

Dav, bow dand and leyland have been the primary vehicle suppliers to their respective governments for 40 or 50 years. And when we acquired those three companies over the last 20-some years, that certainly is one of the expertise that we continued to nurture and invest in. So, you know, almost every military contract that includes vehicles, you know, the type we build or similar to it, one of those three companies, dav, bow dand or leyland is in the middle of or at the forefront. It would have to be similar to the product you sell in the commercial market? Not necessarily, although what we've seen around the world is more and more military plow pros sales are trying to utilize some of the commercial features to reduce the cost and just for the ease of maintenance by the military personnel.

Okay. Okay. Fair enough. Thanks.

You bet. Thank you.

We have a question from andrew casey from prudential. You may ask your question.

Hi, andrew.

Hi, again. In reference, mark, to your earlier part on continued buy back guarantees being it kill listed by some of your competitors, does that indicate that the hope that rash ality would enter back into the competitive landscape for north american truck is still a hope are is there some reality that that is actually occurring?

Well, it certainly is a market that we enjoy and we have an outstanding track record of, you know, our approach has been conservative and quality focused one and will continue to be. And that's why our customers enjoy working with ourselves and the dealers in buying the products. So, you know, through the years, we've seen different competitors try many different business models. Most have had mixed success. All I know is that our dealers are very happy to be paccar dealers and our -- and our customers know exactly the type of quality products and services they receive when they deal with our company. For us it continues to be an exciting marketplace.

Thanks.

Thank you.

We have a question from john mcbegin at the from first boston. Ask your question.

I'm just wondering if i could get a little clarification on the actual rules when we get into october. I understand that the epa regulations relate to the engines in essence having been built by october 1 or before october 1 but not the trucks. On the other hand there are some very vague regulations against stockpiling. How far into october do you all think you can go building trucks with engines that meet the regulations because they were built before october 1. Can you get a full month of production or half month or what do you think?

There is always a degree of interpretation on the regulations. At this time, those continue to be reviewed.

In other words, this is something that would be under active discussion between you, the epa, engine manufacturers and so on?

There is a lot of people reviewing and discussing the interpretation.

Okay. So, in other words, it's not a clear cut answer one way or the other?

If you got some thoughts, I'm sure we could invite you into these forums.

I was just trying to get a clarification. Thank you very much.

Thank you.

We have a follow-up question from joel advertise from lehman brothers.

I want to ask in line with your expectation that the fourth quarter might see a little weakening, should we be able to see that in the order patterns in may and june?

That's a good question. I don't think that we can make a definitive statement that way. Every manufacturer will have a slightly different approach. I think every one will continue to review and revise built rates and there are just a number of parameters that will not have been sorted out in that time frame.

But isn't there some sort of balance if you revise your build rate up a little too much, you take a chance on maximizing the pain or cost pain in the fourth quarter and maybe into the first quarter. Isn't there some sort of balance there?

Well, at some time you will have to stop manufacturing vehicles with preoctober 1 emission engines and that will be the balance.

All right. Thank you.

We have time for one more question.

Our final question comes from robert toomey from rbc.

Hi, robert.

One last question if i might. That is relating to your margins in the truck business over the long-term. Do you feel that the efforts that you are taking through siggma to improve your productivity, do you think margins in the gross margin in the truck business could be higher in the next cycle than they have been in the past? Would you care to venture a comment on that?

Certainly that is our intention.

Okay.

Okay. Great.

Okay. Thank you.

Thank you for joining us in this conference call this morning. We will talk to you in the next quarter.

That concludes today's conference.