帕卡 (PCAR) 2004 Q4 法說會逐字稿

Good morning and welcome to the PACCAR's 2004 fourth quarter earnings conference call. All lines will be on listen-only until the question-and-answer session. This conference is being recorded. If anyone has any objections you may disconnect at this time. I would like to introduce Mr. Andy Wold, PACCAR's Treasurer. Sir, you may begin at this time.

Thank you. Good morning. We'd like to welcome those listening by phone and those on the webcast. My name is Andy Wold, Treasurer of PACCAR; and joining me this morning is Mark Pigott, Chairman and Chief Executive Officer.

As with prior conference calls, we request that if there are any members of the medium participating that they participate in a listen-only mode.

Certain information presented today will be forward-looking and involve risks and uncertainties including general economic and competitive conditions that may significantly affect expected results. More information about these risks and uncertainties is contained in PACCAR's filings with the Securities and Exchange Commission.

Now, at this time, I'd like to introduce Mark Pigott.

Good morning. PACCAR had a tremendous year in 2004. In fact, it was a record year. I am very proud of PACCAR's 20,500 employees. During the fourth quarter, profits were $241.4 million, 52 percent above the same period a year ago. Earnings per share in the quarter were $1.38 compared to $0.90 in 2003. It was PACCAR's 66th consecutive year of net profits.

For the year, revenue was $11.4 billion and profits were 906.8 million, another record. As previously announced, results in the fourth quarter include a $23 million after-tax charge for the termination of a parts distribution contract in the United Kingdom. The after-tax impact on earnings for the quarter was $0.13 per share. The good news is that DAF and Leyland parts will now be sourced from PACCAR's new distribution center at Leyland in the U.K. which should increase part sales and margins beginning in the fourth quarter of this year.

As many of you know, 2005 is PACCAR's Centennial. PACCAR was founded in Seattle 100 years ago, based on three principles, which are still guiding us today.

First, we will deliver superior quality products to our customers. Second, all employees will be of the highest integrity. And three, PACCAR will be the technology leader in its products and processes and exceed our customers' expectations.

As many of you know, PACCAR is an exciting, high-quality technology Company with an impressive long-term track record, strong cash flow, and excellent shareholder return. The Company has established itself as one of the global leaders in the financial services and capital goods businesses.

The primary building blocks that we review on a regular basis are design innovation, manufacturing and product quality excellence, financial services, and software and hardware development. To further enhance the Company's competitive position, PACCAR is increasing its substantial investment in all facets of the business, including product development, customer sales, supply chain management, manufacturing finance, leasing, aftermarket support programs, and investments in our suppliers.

J.D. Power and Associates recently announced their Customer Satisfaction Survey results and I am very pleased and proud that PACCAR's U.S. truck brands, Peterbilt and Kenworth, earned the highest awards in the majority of categories. Winning the Class 67 truck award, the Class 8 Vocational Truck Award, and the medium-duty Healer (ph) service award.

PACCAR's intense focus on operating excellence has resulted in a number of performance highlights in 2004, including PACCAR achieving an after-tax return on equity of 27.9 percent, the Company delivered an industry-leading return on sales of 8.4 percent. Most companies dream of that on a pretax basis.

During 2004, PACCAR declared a record $479 million in dividends. And the Company's Board of Directors approved plans to repurchase up to 5 million shares of common stock. A longer list of the industry awards that PACCAR earned in 2004 is in the press release.

DAF, Kenworth, Peterbilt. All increased their market share to record levels during 2004. And a lot of people asked, "How do you do it year after year after year?" Well, essentially, the products we produce have excellent reliability, ease of service, and the highest resale value in the marketplace. The result is the lowest lifecycle cost per customers.

Another PACCAR goal is to provide its shareholders with a superior return, both in appreciation and dividends. PACCAR's return has again exceeded the S&P 500 results for the past one-, five- and 10-year time periods. PACCAR's annual earnings growth rate of over 16 percent for the past 10 years exceeded the annual earnings growth for the average S&P company of only 7 percent.

Now, even with these outstanding earnings performance and being the leader in its industry worldwide, PACCAR's surprisingly trades at a discount to the market, using the typical valuation measurement, the PE Ratio. And you have heard me say this before -- PACCAR's PE should be over 20. And taking a $5 per share figure, that would equate to at least $100 per share.

Looking ahead, the Class 8 retail sales market for North America could increase about 15 percent this year. In Europe, probably, it will increase about 5 percent.

Thank you and be pleased to answer questions.

(OPERATOR INSTRUCTIONS) Peter Nesfault (ph) of Bear Stearns.

Can you guys talk a little bit about operating leverage? It felt like the incremental growth margins were a little bit lighter than what we've seen during the first three-quarters of this year. And also seemed like the inventory turns might have slowed down a little bit sequentially from third quarter to fourth quarter. Were there any supply chain things that popped up during the quarter that might have weighed on that?

No, Peter; good morning. Typically at the end of every year we have been doing this for decades, we will purchase Powertrain equipment for LIFO evaluation. And we did that again last year. But I'm glad you raised the supplier partnership because it has really been one of the strengths of PACCAR. I guess everybody else in the industry is parking incomplete built trucks. But PACCAR is delivering trucks every day and a lot of the credit goes to our supplier partners, who have done a terrific job for PACCAR.

Okay. One of your competitors has mentioned some softening out of Western Europe out of demand there. What are you seeing right now?

I'm sure it probably is softening for them. DAF continues to go from strength to strength and had a lot of exciting new products that were displayed at the Hanover show last September. Looks very promising for this year.

Can you briefly describe the real estate gain in the quarter?

The what?

The real estate gain that is mentioned in the footnotes?

It was a sale of property no longer used in the business.

And I guess last question and I'll hand it off. Maybe just a strategic question. Under what circumstances do you think you would bring the DAF engine to North America?

I'm not sure, but you'll be definitely one of the first to know.

Gary McManus, J.P. Morgan.

Congratulations on another great year and the 100-year anniversary for the Company. I'm curious, demand doesn't seem to be a problem right now in North American heavy truck. Orders are coming in above the industry's ability to produce. I'm wondering, if you assume there is not any issues on the demand side -- how much effectively can you raise production from where we run right now?

I think that will depend on, certainly, what suppliers are capable of doing. And we've talked about this over the last quarters, Gary. And suppliers are ramping up their production in a steady fashion which is very encouraging. And, as I mentioned before, the strong relationship that we have with our suppliers is putting us in a favorable position. We are hoping that there is definitely some room to move for everybody to increase production this year.

Now, Gary, we talked four or five months ago and I think you know our Company and the business pretty well. I think it is important to recognize that North America truck is about 30 percent of our business. It's an important part. But it's only about 30 percent. So lots of room to grow. And medium-duty, we are having tremendous success. And that seems to be another growth area we are about 9.5 percent market share.

And as we have indicated, our goal is to get medium-duty comparable to our Class 8 market share in North America and Europe.

Just a comment on raw material costs and how that relates to pricing. It seems to be some of your suppliers -- one major one, in particular -- talked about higher raw material costs and impacting margins. They are going to raise prices and so forth. Do you see the price -- from your standpoint or the Company's standpoint, is the price for raw material cost equation -- is it as favorable as it has been in the prior quarters? You expect it to get worse? Just some indications of how that's going to affect your margins going forward. Not just from the steel you buy directly, but also perhaps some price increases you might give to your suppliers that also buy steel.

We are celebrating 100 years. I think it is fair to say that for every one of those 100 years, there have been price increases from suppliers. For whatever reason. And, typically, it is because their costs are going up and a lot of that is commodity-based. So we see cost increases impacting suppliers which result in price increases to us every single year. I don't ever expect to see that change.

And in terms of the commodity impact, I think as you track that worldwide market, you're starting to see some leveling off and even a slight improvement in terms of steel pricing. The petroleum side kind of is bouncing up-and-down. And you can see that as well as I can. Aluminum, which is impacted by box-side (ph) and electricity, might be stable. And then you've got copper and lead and all the others.

I think it is starting to level off. During the course of this year, I think there should be some improvement in terms of lower costs impacting our suppliers.

Okay so in absence of any kind of change in volume you expect no real margin impact from what's going on on the commodity side? Is that fair?

Well, that is certainly our goal.

Andy Casey, Prudential Equity Group.

Congratulations on the Centennial as well. On the Financial Services revenue growth, it was pretty strong both sequentially, up 18, and year-over-year up around 28. Can you help us kind of understand why the acceleration there? And then, can you break out the expense items within Financial, please?

Well you would think worse of me if I didn't tell you we've got an outstanding team led by Mike and Ken and Tim and Bob. The whole team is doing a fantastic job. Our Finance business is linked to the number of trucks that we produce. And as we produce more trucks, even if we maintain the same percentage market share that we finance, that is going to go up and, obviously, the team's goal is to keep increasing that percentage.

Also the market is strong for the economies in general, both Europe and North America. So you don't have the losses and the repossessions that you might have had in the '01, '02 time frame. And then, we are really seeing some very strong progress and improvement out of the PACCAR Financial Europe Group, which is only three years old. And we've got a great team there. They are expanding into more countries. I think that was highlighted in the press release.

And even in the countries they have been in, typically Holland, Belgium, the U.K., Germany -- that is starting to gain some traction. So I think those are really the main reasons.

And could you break out the expense line items, please?

You bet. For the financial services segment, interest and other, 85.6 million. SG&A was 20.9. And the provisions 7.1 for a total of 113.6.

Thanks. And the last question if I could, kind of go up to 3000 feet. You have an emissions standard coming around the pike in North America but that's not what the question's about. Also have one in Europe that seems to have a bigger risk of disruption, given the introduction of UREA (ph) and all that. Can you kind of talk about the risks?

I realize this is a little bit in the future. Not risk related to PACCAR, but for the European truck industry, in general.

Well, every few years, the emission requirements are made a little bit more strict. And the industry is certainly always investing in new technology and processes to meet those requirements. And this has been going on for -- gosh, 20 plus years. And Europe has decided that the course they are going to travel is using the UREA, they have the infrastructure set up in the Western European countries. So they're really pretty much set for it.

In North America, the decision has essentially been made by the governments that UREA is not the preferred way to go although they continue to study it. Exhaust gas re circulation, EGR, is being reviewed. So I think for both markets, the industry knows which way it is going and has been working hard for quite a few years to meet those requirements. I don't see any difference in the approach for year '04 year '05, year '06 than there was for year 1, 2 or 3.

Andrew Organ, Merrill Lynch.

Have a question looking at your industry forecast for next year. This is us trying to extrapolate it to NAFTA. It seems the production rate is expected to remain fairly flat to 2005 versus where we were sort of at the end of the fourth quarter. A, is that the correct reading of your number, and B, does this indicate and this goes to the previous question that you think the supply base will remain constrained in 2005?

First of all, I can't really comment on the entire supply base. But I think as I mentioned in the earlier answer, we have a great relationship with our suppliers. Most of the suppliers I know of are making investments and have been making investments for the last several years. And we expect to see some increased capacity from the suppliers.

The bill rate per day at the end of last year, '04, was roughly 1100 trucks a day. And I think most industry analysts would say that they are expecting to see about 1200 plus a day towards the end of '05. So you are talking about some increase.

Sure. And the second question is on order book -- could you comment in any way how far in the future your order book extended this point? Do we have any slots available in the first half of '05? Anything in '05? '06? What are you seeing in terms of ordering patterns from your customers? Who's ordering right now? Who is trying to get slots?

I think in general, the entire industry is growing and that goes from the owner operators to the small, medium, and large fleets. The economies are good in Europe; they are good in North America. Consumer is still spending. And you've got certainly North America light goods, house construction is still at these strong levels. As is car production.

So I think for most of the industry, they're probably essentially sold out until -- I would say the end of May time frame.

I guess what I'm trying to get to -- have you seen anything in the order patterns that would change your opinion about pre-buy in '06, one way or the other?

Well, I never really thought there was going to be a pre-buy. I think this is a growth industry and it is looking to grow as it has for the last 50 years. And I think with the strong economy in which we are looking at and have looked at for the last couple of years and looking out to the future for the next two years, I think you're going to see some pretty steady production levels for the next several years.

Joanna Shatney with Goldman.

I just wanted to ask you. One of your suppliers made a comment about December '04. That they had thought the industry experienced some level of pre-buy had to be accelerated tax depreciation outlook. And I was curious if that's the reason why you haven't raised your forecasts for the North American market in '05? Or if it was some other reason because the year in '04 did end a little bit stronger than the last time we spoke.

Did you enjoy your tour?

I did. Thank you.

I think, actually, in our press release we talk about an increase in both Europe and North America. I'm just doublechecking that. Yes.

Your prior forecast was -- basically the numbers are unchanged for '05, but because '04 came in higher, we are thinking the percentage change is about 15 percent or before where it was about 20. My thought processes was fourth quarter clearly ended on a stronger note than the last time you guys issued that outlook. And I was curious, why you haven't upped the outlook if the year in '04 ends a little bit stronger.

Now, Joanna, you know we are a conservative group. So -- how it ended at the end of the year, there's always a number of different factors. Some companies want their product at the end of the year, or could be capital or tax reasons, or there might be contract that they are working on our starting up in the new year. I think we're looking at, as we say in our release, 270, 280. If it is more than that, then we will certainly respond to that. We've got 11 more months in this year.

Okay. Also going to throw up a big picture question here -- and I know that we're all hopeful that the '07 downturn, if there is one or whenever the next downturn is won't be as terrible in the pricing environment as the last cycle we go through. I was curious in your view, what happens in your models or your own thought process with your earnings numbers, when we go through the next downturn. Europe is such a much larger contributor to your overall revenues. You've got Eastern Europe growing double-digit and that potentially makes Western Europe a bigger chunk than maybe people think.

Does that get us to a point where the cyclicality upon earnings is worse the flat year or do we still have the earnings decline?

This is at the 20 PE?

Right.

Well you know in our comments, we did start out indicating that we had made money 66 years in a row. And so certainly, going forward, we're working very hard to make sure we've got great products that customers want. And continue that the strong trend. Europe, as you know and a number of your colleagues understand, is an increasingly important part of PACCAR's business and we are growing there. We've got a great team there at DAF and Leyland in Foden. Essential Europe, Eastern Europe is continuing to expand as they look at joining the EU. The infrastructure's growing. So we see a lot of exciting potential for PACCAR and DAF and Leyland and Foden.

One last very exciting question. Can you tell us what kind of tax rate to use for '05?

For '05?

Yes.

I don't think we typically share that particular number but you know, certainly going to be in the range that you've seen over the last few years. Nothing too different.

John Magenti (ph) with Credit Suisse First Boston.

I add my congratulations on the year, very very impressive. Mark, one thing isn't clear to me as you end the year as you raised the year all long. Is PACCAR in the United States raising the Class 8 build rate from the year end or do you go through the first kind of March April timeframe before you try to raise build rates from the current run rate?

Well, regardless of any time of the year, it usually takes a number of months to coordinate build rate increases with the suppliers. And that has been true through history. Nobody can just turn around and say, "We want to increase build rate next week." That's just not going to happen. Because of the logistics change.

So we take a look at the backlog. And that question was asked earlier -- looking out to the end of the May timeframe -- and really coordinating with our suppliers in terms of "Okay, you have made a certain investment, what does that translate into in terms of the number of increased components that you could supply us?" Recognize that a number of these suppliers apply the rest of the industry also.

So there's also always that balance going on; that's why we continue to invest in our suppliers and work to bring things like Six Sigma out to their shops.

So you go essentially -- because as long as you're going at the current rate and there's not much of a supply chain issuance; as you try to increase it it's going to be where the questions come in. But we go through May before we get any kind of a meaningful build rate at PACCAR?

Well, I think, no, to be fair to our really excellent production and material people, we have seen tremendous efficiency improvement for decades. And I think we have talked about a 5 percent range every year that we work at, so our factories continue to be very, very efficient. Very high-quality product. If they are making X trucks per day they are always looking to see if they can make X plus 2, plus 5, plus 10 a day over time. There's always an ongoing dialogue with suppliers.

Absolutely. And I'm sure that's the case particularly if you have a kind of build and growth and efficiency. But in terms of a meaningful step -- we don't see that in the first quarter?

I think the run rate will be comparable to the fourth quarter. That's really what you are looking for?

Exactly.

That doesn't mean there won't be improvements.

Just ballpark.

We're looking for growth in Mexico and Australia. In Europe. You also have certainly a number of days in the first quarter versus the fourth quarter. And of course, the fourth quarter has typically more vacation or holiday, shutdown days. Which -- when you compare fourth quarter first quarter, there should be some more days in the first quarter. So there's a lot of things that kind of go into it.

And if I could go to the gross margin for a second, one of the sets of comments you made last quarter when we were talking about the third quarter showing a sequential decline from the second quarter, you talked about, obviously, the seasonality with the vacation shutdowns in Europe.

But you also talked about the increasing portion of business going to fleet with some margin implications for that. You talked about material cost pressures as being a factor in the third quarter. We looked at the fourth quarter and as somebody correctly asserted earlier, the incremental margin in the fourth quarter, sequentially, was the lowest of the year. It was lower than the incremental margin in the third quarter. Is that a function of price-cost issues? Is that a function of more fleet business? Or is there something else going on in the fourth quarter?

Their gross margin in the fourth quarter was the second-highest in the year for us.

Yes, but the incremental year-over-year was the lowest of the year compared to the year earlier. Because the other issue is -- is there a finite level of gross margin -- a ceiling, if you will -- that you hit and that kind of becomes as high as it goes?

Well I would point out that, in terms of the records that we keep for 2004, our operating margin and truck income margin was a 100-year record.

Absolutely.

I wouldn't want to so easily dismiss that.

And then just the one other kind of follow up on that with regard to the operating profit, because there we dropped from the gross profit to include the SG&A.

First of all, the 3.5 percent SG&A is phenomenal by historic standards and I don't mean to --

By any company --

By any standards --

In any industry, by the way.

Absolutely. But this is the first time I think in about eight or nine quarters where we went up, even if it is only marginally, from the 3.4 percent in the third quarter to 3.5 in the fourth. There was a 10 million jump. Was there anything -- sales went up dramatically, fourth quarter versus third, I understand that too. Is there anything unusual in the SG&A in the fourth quarter?

I think you just answered the question.

Which is volume?

Right. You got to have somebody on the street going out and selling product and taking care of customers.

Absolutely. And then final question -- you talk about and you have talked very successfully about the success you have had as we go into looking for more dealers in Europe, particular in Germany, as the rules and laws have changed and so on. Are you willing to give us any kind of a benchmark maybe on an annual basis, about the numbers of dealers you have picked up over there? You might even end up doing it later because you might not be prepared to do that. But I think it would be helpful for us to understand, as you are moving into your strategy and as the distribution laws are changing over there, giving you the opportunity which would be interesting to see how you are doing and monitor that over time.

Yes, we typically don't break it out by region. But we certainly are adding dealers -- we are adding dealers worldwide. We are adding dealers in North America and Australia. And certainly in Europe. You look at the opportunities in a number of those countries where they are, how shall I say? their home-grown suppliers are struggling. And so, if you're a dealer and you rely on getting product and services, you've got to be scratching your head thinking, "Boy, I don't know how long that home-grown supplier's going to be able to supply me. Who else is out there?"

Now, not only do we have great product but we are 3, 5, 7 years ahead of everybody else globally in terms of just our IT systems, our parts delivery systems, our leasing programs, our finance. So as a potential dealer, when you look at all that, it's like deciding who you want to support in the world of PCs.

And by the way, we are 100 percent Dell. You know, you go with a winner. PACCAR is a winner. But you knew that.

Brian Rayle, FTN Midwest Research.

Question about pricing going forward. Have you seen an acceleration in the delta of pricing, going into '05? And would you expect to see that go into '06 as we see freight guys continue to struggle with needing more capacity to handle the tonnage? Just any comments with regard to pricing?

Now which pricing are you talking about?

Pricing on the end truck for domestic Class 8?

So your question would be -- what is truck pricing going to do?

Has the year-over-year gross weight rate and truck pricing domestically accelerated? Into '05?

No, I don't think it's accelerated. As I mentioned earlier, in terms of our suppliers seeing cost pressures, it has been going on for 100 years. Expected to continue to go on. Their costs impact them, they are going to increase prices to a certain extent. We are going to try to increase prices. Our customers will increase prices. And end of day you are going to pay another nickel for the sweater you buy or the food you purchase. That's sort of the economic cycle we see.

Great. And one other housekeeping question -- did you guys have a finalized number for the percentage of truck that you did finance for the full year '04?

No. That will be out in the annual report.

John Rogers, D. A. Davidson.

Congratulations on all the awards as well. Just a couple of quick things in terms of your cash flow for the quarter and year. Do you have what your total capital spending was, for the year? And any comments on what it looks like for '05?

Sure. For the quarter, John, 97.2, which translates into an annual figure of 232.2.

Okay. And Andy, what was the depreciation in the quarter?

84.3.

I think, John, as was pointed out in the press release, we are increasing our capital spending. We are in a strong financial position. And we have been able to continue to really be a leader in every aspect of the business. We just want to broaden that gap between ourselves and the competitors. And also bring a lot more new products to the marketplace for our customers and/or dealers. So we are going to continue to present this year. Which is very exciting.

Yes. Then just to the one other clarification -- in terms of share repurchases during the quarter ended. Was there any activity there?

For the fourth quarter?

Yes.

That information is disclosed in the quarterly statements, John.

Okay. So that will be out later?

Correct.

I guess you cannot give us a final share account then?

No.

Robert Toomey, RBC Dain Rauscher.

A number of my questions have already been asked, but I will ask kind of a simple one. There's been a lot of concern, discussion about when the cycle ends -- '07 -- when is the peak? Let me just ask it this way -- if the economy remains good for the next several years, do you believe you can continue to sustain year-over-year topline growth in that scenario?

I don't think we have ever answered that question and I'm not going to start now.

Okay. Let me ask this way -- how confident do you feel about your ability to gain market share? Let me ask it that way. And if so, where do you see that coming from?

Well, John, we are at record market share levels in every market in which we compete. Which is a wonderful testament to a lot of hard work by so many people, Canada, U.S., Mexico, Australia, all of Europe. Unbelievable. Just a great team effort. So, do we want to have record market share? Certainly. But it is not the be-all, end-all. We want to provide our shareholders the best return and be the highest quality Company that we can be.

We have seen a lot of growth over the last decades. I don't want the analysts to just focus so much on market share growth. Because market share by itself doesn't mean anything. And certainly there's many companies and many industries with good market share that are essentially going out of business. So our focus for 100 years and moving forward is to produce the highest quality products and to generate a superb return to our shareholders.

Now we are going to do that by producing the highest quality products in the industry. Hopefully, that will see customers saying, I want your products. And certainly that has been the case. So I think that's really how I have to answer that question.

Okay. Looking forward, how much of the growth do you think is coming from, how much of the demand for Class 8 do you feel is coming from growth versus replacement? Need for new capacity versus replacement? Do you have any sense for --

It is a good question. Both elements are making a positive contribution. There are fewer truck companies operating, both in Europe and in North America. The ones that have survived are much stronger than they were 6, 7 years ago. The economy is growing. And has been growing. Typically grows most years. So I think the companies that are purchasing, can be from a small owner operator to a larger fleet, probably are seeing a little bit more new growth than replacement. There is a replacement cycle. The good news for us is that that replacement cycle is usually out longer because our trucks last almost twice as long as the competitors. I think you're seeing an element of both.

Do you expect that to continue?

Well, you know, we are an industry that grows typically about 1 percent faster than GDP, so if GDP is 4 percent our industry is going to typically grow 5 percent. And it's been that way for decades.

And then, lastly, my question, Mark, is just regarding diesel fuel. It has been very high, as you know. Do you see that as an impediment to growth going forward?

That's a good question on the fuel. Because, obviously, you know all of the industries in which PACCAR competes and it is not just trucks. But a lot of people look at fuel, high fuel -- it depends, it could be $1.00 gallon, $2, $3 -- it depends what you think is high. And say, "Wow, that is going to have an impact." The real impact is the rate of change in terms of the price of fuel. And this is true, worldwide. Because once the fuel is at a price, $1, $2, $ 3, $4 a gallon, whatever. Then the economic structure and the rate schedules which set trucking companies have other customers function quite normally. But the rate of change is what causes the flux with trucking companies and, ultimately, with the customers. Because if you've got a contract that says you are going to reimburse me at $1 a gallon and all of a sudden it jumps to 1.30, then, gosh, that's an increase cost that is hard to absorb.

On the other hand, if you have a contract says you're going to reimburse me at $1 a gallon and it drops to $0.70, you've got a little bit of extra profit flowing in until your contract kicks in and your customers get to some sort of equilibrium.

So I think for the industry, obviously, people would like to have lower overall cost. Once the costs are established, the customer is going to pay. At the end of day, you and I and people who go out and buy anything are paying for the transport. Does that answer the question?

Yes, it does. And one last question, Mark. Are you adding dealers in North America as well?

Yes we are. We add dealers in North America every single year. And you've got to ask yourself -- if you have any interest in this industry, who else do you want to represent besides Peterbilt and Kenworth?

A good question. Thank you.

Peter Nesfault with Bear Stearns.

Just a quick follow-up question; I don't expect you to quantify it, based on an earlier question. But can you tell us if you are in the market in January to repurchase any shares given the softness in the stock? Number 1, and number 2, how do you think about the timing of doing repurchases?

Well, any repurchases are always reported on a quarterly basis. And I think that was laid out, you are saying versus the price of $100 where it should be? That softness?

Yes exactly. Can you talk to us at least conceptually -- when do you repurchase shares? Do you wait for a pullback? Do you do it evenly throughout the year? How do you think about that?

I can't really comment on that. But thank you.

Andy Casey, Prudential Equity Group.

I've got a few questions. Two of them are fairly brief. (MULTIPLE SPEAKERS) The termination agreement with the parts distributor over at the U.K. I realize that it's not a near-term benefit per your press release. Could you kind of help us ballpark what sort of benefit we should be looking for, like, in '06?

Well, we really can't break that out. But I'm glad you brought it up. First of all, the RAC is a wonderful company and they have been a partner with us in a variety of different endeavors for the decades. In fact, they're our largest DAF and Leyland dealer group in the U.K. It's a wonderful company. We build a 11 million hound distribution center at Leyland, which opened up last year. And it is state-of-the-art. I think a number of the analysts have had a chance to go through it.

We are real experts on distributing, particularly our own parts. So after we built that, it just made logical sense to talk with the RAC and say, "We would really like to resume control of this" -- which Leyland and DAF had before the mid '90s. So everybody was upbeat and understanding and worked out the program and so going forward, instead of having a third party distribute we will bring our efficient program to bear on it. And that's where we will see the enhanced margins.

Okay. In the past, kind of flipping back to North America, you talked about the age of fleet. I don't know, about a year or two ago in the 5 plus year range. Has there been any meaningful reduction in that over the past year or so?

Not appreciably, no.

And, lastly, if I look at your investment in the engine development test center that you mentioned in the release and kind of view that against the component price increases from the external suppliers that a number of questions have alluded to, a couple of questions on that. If there a point, specifically in North America, when you make buy decision changes for components? Or should I view the investment as a vehicle for PACCAR to become an even more active partner with your external powertrain supplier, specifically?

That's an excellent question. When you look at PACCAR, we sort of de facto, because of competitors' actions, have really become the largest global integrator of independent powertrain components. And by that I mean the size of the Company, the number of products that we produce, and the amount of components we purchase from our suppliers, we have to do the most integration versus our competitors, who really rely primarily on their own in-house component trade.

As an example, we are Caterpillar's largest customer. We are a very strong partner with Eaton (ph), Dana and Cummins. And then a lot of the smaller suppliers. So the reason that we continue to invest in -- I would call it powertrain development worldwide -- that's in Europe, here, Australia, wherever is that integration takes a tremendous amount of work. And we need to make sure that we've got the facilities so that if we want to get an engine and a transmission and axle and air management and exhaust supply altogether, first of all, there's a locale to do it. But we've got the state-of-the-art equipment that they all have, to be able to seamlessly put this thing together.

It's just ongoing investment and because of our profitability, we are able to make that very important investment.

There are no more questions in queue.

This concludes the fourth quarter call. Thank you for participating.

This concludes the PACCAR earnings call. Thank you for your participation.