帕卡 (PCAR) 2006 Q1 法說會逐字稿

Good morning and welcome to PACCAR's fiscal 2006 first quarter earnings conference call. [OPERATOR INSTRUCTIONS] 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.

Good morning. We'd like to welcome those on the phone and those on the webcast. Again, my name is Andy Wold, treasurer of PACCAR. Joining me this morning are Mark Pigott, Chairman and Chief Executive Officer. Mike Tembreull, Vice Chairman, and Mike Armstrong, Vice President and Controller. As with prior calls we request that members of the media 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. At this time, I'd like to introduce Mark Pigott.

Good morning. PACCAR announced record quarterly revenue and profits reflecting the strength of the Company's premium profit model and the commitment of PACCAR's 22,000 employees to deliver the highest quality products and the finest after market services in the industry. In addition, the Company announced today a 20% increase in its regular quarterly dividend to $0.30 per share up from $0.25 per share. Strong economic growth in North America and improved growth in Europe are benefiting our industry. For the first quarter, revenues were a record $3.85 billion, a 16% increase over the first quarter of 2005. And net income was an all-time high at $342 million. A 25% jump over earnings in 2005. On a per-share basis earnings were $2.02, a 29% increase compared to $1.56 last year.

Looking at the business a little more specifically, the financial services business continues to grow as total assets expanded during the quarter to over $8.6 billion, pretax profits for financial services were 54.8 million for the quarter, a 16% increase over 2005. And growth in revenue and profits in PACCAR's after-market parts business is accelerating to healthy double-digit growth rate. Other financial highlights during the quarter include a record after-tax return on revenues of 8.9%. Gross margins of 14.8%, pretax operating margin of 11.8. And an industry-leading return on equity of 35.1%. These outstanding returns are due to PACCAR's premium product position coupled with the Company's low-cost manufacturing capability.

Certainly one of the highlights of the quarter was PACCAR earning the National Medal of Technology from the President of the United States. It was a real thrill to receive that at the White House. PACCAR received this award for the development and pioneering efforts for aerodynamic, lightweight vehicles which have reduced fuel consumption over the last several decades as well as increasing the productivity of the transport sector. PACCAR is only the 21st company in 20 years, about one company per year, to earn the nation's highest award for innovation. A tremendous honor for everybody connected with PACCAR.

It was really exciting for our employees, our suppliers, dealers, and customers as the Company's extensive product pipeline coming to market. A number of these were outlined in the quarterly result. Some of them were PACCAR will be introducing the GPS navigation system that we developed to be standard on many models. We also talked about PACCAR's hybrid power program, another exciting development. And our goal of a 30% improvement in fuel efficiency or selected customer applications over the next seven years. Kenworth introduced their new aerodynamic model, the T660 increasing advanced electronics and increased driver comfort, continuing a tradition going back to 1985. When they introduced the first T600.

DAF trucks in Europe began production of their new flagship model, the XFf105, which is powered by PACCAR's new 12.9 litre MX engine. And Peterbilt not to be outdone introduced eight new or upgraded models at the recent Louisville truck show including a new flagship model, the 389. Well, you need to make money to keep that broad array of products being developed and introduced into the marketplace. Capital expenditures increased last year to a record $300 million and are expected to increase again this year. And a significant portion of these expenditures are really for projects three to five years out, which will utilize a lot of our sophisticated technology and design systems and rapid prototyping tools. Very exciting all the way across the board worldwide.

During the first quarter of 2006, PACCAR repurchased an additional 2.5 million shares of its common stock. Great value, terrific way to continue to invest in the Company. Bringing the total to eight million shares repurchased during the past 15 months. Total investment in repurchased shares has been approximately $550 million. The global commercial vehicle markets are continuing to grow worldwide at PACCAR's operating divisions, have a lot of new products coming to the marketplace, incredible information technology, of course financial services, after-market support continue to grow strongly. With that let's open it up for some questions.

Thank you. [OPERATOR INSTRUCTIONS] Your first question is from Peter Nesvold with Bear Stearns. Please proceed with your question.

Hey, Mark. Question I guess on the gross margins. We've talked about this a couple of quarters now. I look at the truck revenue up 15% year-over-year. The gross margins are still kind of flat. And is it -- again, we kind of talked about this a couple of times. But is it still medium duty being a bigger part of the mix? Is it parts, or are you trying to be more variable cost ahead of '07? Or what's happening there? Why don't we see the operating leverage like we were seeing earlier in the cycle?

Well, I think we're seeing great operating leverage, because what we focus on of course is 8.9% return on revenue after tax. Which is world class, as you know. So we control our cost. We reached a record low level at 3%, which we outlined in the press release. And we're growing. And we're in the premium sector, as you know. And as we grow, you're not going to be able to attain the high margins when you're a much smaller company. And I think some of the comparisons, going back 10 years, even 5 years, it's a whole different company now. You know, 14 billion, making over 300 million a quarter, it's a broader range of customers. We have a broader range of products. And I'm very pleased with where we're going. Terrific net income, increasing investment, and all-time record production worldwide. So I don't know what we're looking at.

Okay. Maybe a follow-up question, not to sound nit-picky so early on. On the tax rate, the revenue was almost 200 basis points higher in the US, yet even adding back the 6 million settlement, the rate was down year-over-year. What's happening there, what do you expect to occur going forward?

If you exclude the $6 million one-time item, the tax rate for the first quarter was just a shade below 33%. That's what we expect for the rest of the year.

Why would that be 100 bips lower than what you historically have reported?

That 32.9% is right in line with last year's effected tax rate.

And that 34.2 in the model -- okay, well, I'll circle back to that. One last question and I'll get back in queue. How do you think about transitioning into '07 production? I mean, of course you can't flip a switch on January 1, '07, but do you do most of the changeovers during the Christmas holiday? Do you do some kind of dual production towards the end of fourth quarter, or operationally how do you prepare for those new trucks coming off the line in early '07?

Well, I think it's sort of all phased in starting in the fourth quarter and going into the first quarter. And we've been -- we go through this every three years. So it's pretty routine. Obviously a lot of work by a lot of people. But we've done this three times in the last six years. And we don't do the Christmas shutdown it's more the, that's the car guys, but we're already transitioning -- well in Europe we're already developing or delivering Euro 4 engines. So it's a phase-in depending on model, depending on facility. Depending on global market.

Okay. I'll get back in queue. Thanks, Mark.

Your next question is from the line of Gary McManus with JP Morgan. Please go ahead with your question.

Good morning, Mark. On the share buyback, in the press release it says you invested 175 million. Then if I look at the cash flow statement, it said treasury stock repurchase of roughly 186 million. What's the difference there?

Just the timing of the cash payments. We purchased some towards the end of December that we didn't actually pay the cash for until January.

All right. I was just curious on that. The -- Mark, in your comments you're talking about increasing capital spending. It was actually down a little bit in the first quarter, but you talked, it's going to be higher this year. Can you give me some sense on what's the longer term capital spending you expect PACCAR to have -- are we going to -- it's been typically only a few percentage points of sales. It was 300 million last year, and that was up from like 79 million in 2002. It's already come up quite a bit. I'm just wondering, kind of ballpark how much investment do you see over the next several years?

I think we'll be looking at sort of in the 300 million range on a regular, ongoing basis. It's going to vary depending on you're developing a new product range or you're building a new factory. Major capital expenditures. But on an ongoing basis, certainly I would think it would be in the 300 million range.

Okay. 300 million per year for the next several years. Roughly it may be $1 billion or something over a three year time frame, something along those lines?

Yes, as I say, it just depends. You'll have some variation as I say, depending on major programs. A new factory, a new model. That might be 4 or 500 million. So that will get a little bit of spike going on there. But 300 million sort of year in, year out.

And the last question I had was, there's a lot of talk in the industry on a big downturn in '07 and there's a prebuy going on. We had record orders for the industry in March, 52,000 units. It appears to be that a few months from now customers will no longer be able to order a truck with an '06 engine. And there are expectations of orders dropping significantly. I was just wondering, I think at the last conference call, you didn't think -- I think if I quoted you correctly, you said you expect '07 to be a reasonable year. I mean, do you think -- do you differ materially from what other people expect in terms how this market's going to unfold over the next year?

Well, I think, one of the advantages that this team has and PACCAR has is we've seen -- we've seen this for decades. So we know the ebb and flow certainly for us being with such a broad footprint around the world, the US market has a smaller and smaller impact on PACCAR, as I think, you've picked up and certainly when you were out here we discussed. Next year I think will be a reasonable year. I think what a lot of people don't really talk about is, boy, the general economic growth in the US and Canada is very strong. You know, 4%, perhaps even more GDP. Europe not at that level. I'm sure they'd like to be at that level. But call it 2%-plus. But that's a very strong economy. This economy as I travel around the country is booming. You can't get that reading the newspaper sometimes. But it is very strong. And a strong economy is always good news for our industry. Whether it's financial services or after-market support or IT, or even truck manufacturing.

So will the market be down next year? Yes, probably. 15%, 20%. That's in the US. And for us, we'll deal with it as we have for 101 years. And as I say, the US is a smaller, smaller component of our overall business. So it you're a trucker, you're making record profits, pretty much across the board right now, you're passing through fuel costs, and if you're working on building a new shopping mall or residential or factories or just retail sales, you're going to need vehicles to handle that. So I -- it might be down probably will be, but I think it's going to be a reasonable year.

Okay. I agree with you about the economy. Just one last question. How much of your '06 -- your production with '06 engines, how much of it is already -- have orders associated with it, and what point will the customers no longer be able to order a truck with an '06 engine? Is it like a month or two out?

Yes, I think a month or two out. Pretty much would be filled up for the year. Of course, I'm always constantly impressed by our team, was able to -- of course, we've got 5 to 7% efficiency gain. Almost every year worldwide. That's something that, of course, contributes to our bottom line, as you guys know. So they're always able to find a way to get more vehicles out. But I'd say fair comment. Couple months out. Essentially the industry will be pretty much at capacity in terms of number of orders they can receive and build this year.

Okay, great. Thank you very much.

Thank you.

Our next question is from Andrew Casey with Prudential Equity.

Good morning, Mark, good morning, everyone. Congratulations on a great 1Q.

Thank you very much. We appreciate it.

My question is cash flow, where operating cash flow increased about 295 million, 117 of that coming from other operating activities. Can you help us understand what drove the other operating variance? Was it all working capital benefits and if so, was it primarily from inventory or was there something else in there? Thanks.

Two things. One was the fact that our wholesale flooring receivables did not grow as fast, still grew in the first quarter but not as fast as it did in the first quarter last year. And the other item has to do just with timing of supplier and interim income tax payments relative, year-over-year.

Okay, that was all in the other operating?

Yes.

Okay. Thank you.

I think I would just point out because it's a good question. Is you take a look at the balance sheet, our inventory, something that probably hasn't gotten the recognition that I know a lot of our plant people and purchasing people would like to get. The inventory is essentially flat, but we've increased production sort of, year-on-year, 10, 15, sometimes 20% yet the inventory is flat. I just want to recognize publicly the incredible job that our materials plant and purchasing people are doing. This is -- that's a story in itself.

Thanks.

You bet.

Your next question is from John McGinty with Credit Suisse.

Good morning, John.

Good morning. First question is what was the impact of currency on sales and earnings in the quarter?

For the quarter the impact of currency on revenues was a reduction of about $100 million, and on net income a reduction of about 8 to $9 million.

8 million to $9 million of pretax?

After tax. Net income.

After tax?

Yes.

Okay. And then the -- Mark, as you pointed out, your SG&A is incredibly impressive at 3% of sales. It's actually down sequentially which is not -- from the fourth quarter, which is not the last two or three years has not been the case. Is this just simply PACCAR being PACCAR, or do you all have a special program where you're focusing on it and trying to reduce it, perhaps in light of looking at '07, be whatever the decline being somewhat lower sales of whatever the magnitude? Are you focusing on it, or is this just kind of the run rate? It's an extremely impressive number.

I think you summed it up. It's a little PACCAR magic. It's always been cost control. It's all been a very important part of PACCAR's success. Actually, the total expenditure increased a little bit. But of course our sales increased, too. So the percentages went down. And I think as we pointed out in the press release, we're looking and we'll see some increase in our expense side as we continue to increase our capital investment and really take advantage of PACCAR's strong results, gosh, for the last decade and before that on developing many new products, increasing capacity in a very structured way. Going into the new marketplaces, IT programs, parts distribution centers. The list just goes on and on and on. To allow us to continue to maintain the strong growth rate. So you will probably actually see some impact on the expense side. And we've got -- we've got to bring on talented people. We've got to increase our cost to pay for a lot of these projects.

Okay. Then in your press release when you talk about the capital investment increases companywide, one of the things you noted was the 20% increase in Kenworth manufacturing capacity. Was that the increase in Kenworth, Mexico, that happened last year, or is this a new increase in the States, and if so, where?

It's two things. One, it is Mexico which actually just came on line this week. And if you ever have a chance to get down there, you'll enjoy it because it's fully air conditioned, which is nice when it's 120 degrees.

Right.

As we say it's the finest facility in Mexico, and probably one of the finest in North America, period. And then we're also embarking on a -- an increase at our Kenworth, Chilicothe, factory. And that will allow us to not only reduce overall per unit cost but increase the capacity per day.

When is that supposed to be available or on line because these things obviously take time?

Yes, it will be at least a year out.

Okay. Thanks very much.

Our next question is from J.B. Groh with D.A. Davidson.

Good morning, guys. Congratulations on the quarter. Could you maybe address raw material pricing and impacts there and your ability to pass through those costs. It looks like that it's happening.

Well, there certainly has been an impact due to raw material. I think many of the commodities that we track and obviously purchase whether it's aluminum or steel or petroleum products have had dramatic increases over the last five years, anywhere from 100% to 300%. And we have to absorb a lot of those. I'm very interested to see the profits being generated by the raw material companies who are having a heyday right now. And they're very proud that they're able to pass these through. Obviously companies such as ourselves, GE, and others are working with them closely saying, hey, we just can't absorb all these. We see you're having record profits, but we're sort of catching the brunt end of the stick here.

So we work with our suppliers very closely. We invest in our suppliers. We have trained most of our suppliers, the big ones and the small ones on six Sigma to allow them to become more efficient. But certainly at the end of the day, companies such as PACCAR and others are having to absorb a lot of these costs. Which does have an impact on margins, too.

So would that partially explain the reason you had a pretty nice increase in sales on a pretty tough comp and kind of flat gross margins?

Sure, there's an impact there. As I told you, and shared with you when we had our conference, $8.9% return on revenue is world class.

No, I agree.

There aren't many companies in diversified industrials that are getting that. Yes. We've had to absorb as many, many companies have, Illinois Toolworks, the list goes on and on of great companies with the jump in the commodity prices. It's been an exciting time for our purchasing and material people.

Then on the capacity front in light of this increase in capacity in Mexico, where are you operating in terms of capacity now, pretty close to full bore?

No, I don't think we ever say we're operating close to full bore. We don't typically publish that figure. But as I responded to an earlier question, I think it was from John, but we're going to be essentially sold out in the next month or two in North America, in Europe. We will still have some slots available towards the end of the year. But I say I'm always impressed by our team. They can always find a few more openings for great customers. But I wouldn't wait too long to place the orders.

I'll get mine in this week.

I didn't say that.

As for -- in terms of the share repurchase, continue at the same pace, you're going to be completed with this program pretty rapidly. What are the Board's thoughts on share repurchase out a year or so?

Well, we don't -- we don't typically, -- when the Board makes a decision, obviously we let the rest of the world know. So we're just working diligently on this 5 million share authorization. And as you've seen we're making good progress at a very attractive stock price.

Thank you very much.

You bet. Thank you.

Our next question is from Robert Toomey with E.K. Riley Advisors.

Good morning, Robert.

Good morning, Mark, how are you? Hi, Andy. I just want to check up on -- you were commenting earlier that thought the North American market could potentially be down 15 to 20% next year. Yet, -- you said that your rate in production in Mexico and at Chilicothe -- and I'm trying to reconcile those statements. If you thought the market's going to be down, why would you feel confident about raising production at Kenworth?

Well, very good question. First of all, we just completed the Kenworth new factory in Mexico. And the Mexican market is booming. And they don't have the same emission timing as we do in the US and Canada. So that's really an independent market. And of course also out of Mexico, we sell worldwide. We sell into Central America, South America, Asia, and those markets as you know are booming also. I think we just -- we got 50% market share in Colombia. And Asia's growing, and we're selling more into Asia. So it's -- the timing is fantastic.

In terms of the Chilicothe investment, of course, you followed us for a couple decades, I guess. PACCAR has always done a terrific job of investing when things might get slow. So when you come out, you're ready to go. And so this investment per an earlier call will be ready probably the middle of next year, maybe even the third quarter of next year. And by that time, things could be steaming along pretty well. So I think the timing looks very good all the way around.

So you think this proposed downturn that everybody's talking about in '07, I guess everybody's pretty convinced it is going to happen. Do you think it's temporary? I mean, do you see a pickup by the second half of '07 if the economy remains strong?

Absolutely. Of course, the most people that talk about "this downturn" seem to be financial analysts. But when we talk with customers their business is booming. They're making record profits. They're investing, they're growing. Yes, there's going to be a cost increase because of the -- the engines are much more complicated. I think perhaps too complicated sometimes. We've got the whole cooling element and new front ends of the vehicles. But it -- this is the third time we've been through this, what, in six years? So it's just -- we've taken a lot of cyclicality out of the business in terms of what PACCAR does. And in terms of the industry, we'll absorb it. The economy's still strong around the world. Move on and companies have to invest and continue to grow. Very -- very normal.

Do you think that given the growth in some of your other businesses, particularly, you're growing in Europe, you're growing in the medium duty after market parts and services growing double digit, do you think that growth in these other areas could offset a potential downturn in the North American market in '07? In terms of your total top line?

Well, I think what it is doing, and I think what we have proved it's doing is certainly dampening the cyclicality. And I think it's a very perceptive and insightful question. It's dampening it. Which is a positive for us because obviously we're -- PACCAR is 67 years in a row making money. And it allows us to make huge investments. Essentially pull away from the rest of the industry in just about every measurable aspect of the business whether it's the quality or resale value or costs for operations or new product development or engine development. Certainly all the services that are bundled around that. Stand up there in the White House and get that technology medal from the President of the United States. Was quite a thrill. Quite a thrill. And--.

Congratulations on that.

Could be the only industrial automotive-related company in history to get it. That would be a headline, I would think.

That is a great honor, Mark, congratulations on that.

Thank you, thank you.

One last question if I may. You talked earlier about capital spending. We all know how much you've done in that area and how much you're investing in technology to improve your competitive position and your products. Is there anything that you look out over the next couple of years, what are you most excited about in terms of your capital spending and technology spending that you think will give you a significant advantage or sustain your advantage?

I think in Europe it's certainly power train development. We are now the acknowledged leader in Europe, and I think that is tremendous. Very, very exciting. I think the growth of the financial services and leasing and let's call it ancillary financial opportunities is just going to be tremendous for this company. And then as we've said publicly and -- and at the conferences, IT is one of our fastest growing divisions. And the development of software solutions, of course, logistics is certainly the buzz word. I don't think anybody knows what it really means. But be that as it may, really helping our suppliers, our customers, and our dealers deal with their own business complexity through some very sophisticated algorithms and software programs we've developed and we sell at a profit to them is another huge growth area and it's tremendous across all fronts of PACCAR.

Great. Thank you very much.

Thank you.

Our next question is from the line of Andre Obin from Merrill Lynch.

Good morning, Andre, how you doing?

I'm doing okay. I haven't been called that ever I guess on a conference call. We at the Mid America truck show, you were displaying the Kenworth truck with -- the Mexican I guess truck with the PACCAR engine. Could you give us an update on bringing this truck into the US market? And I'm talking about I guess the cab over truck.

I'm sorry, Andrew, we dropped the line for a second, could you repeat?

Sorry. At the Mid America truck show you were displaying the truck with PACCAR engine that you I believe manufacture in Mexico. I was wondering if you could give us an update on bringing this truck into the north area, into the US market?

You're talking about the small vehicle.

That's right, yes, the cab over.

That's the DAF LF that we sell in Mexico and we've sold it in Mexico for just a few years. It's doing incredibly well. I guess, you know, was truck of the year three -- four years ago in Europe. And we're just bringing that product around the world because it's the best small truck period in the world. And we worked with Cummins on the development of the -- the 4 and 6 litre engine and it's just a terrific power train and is really doing well. But it's only in Mexico and, of course, all over Asia and all over Europe.

I guess I was wondering if bringing it to the mid America truck show was a sign that are you going to bring it to the US market sooner rather than later?

No, I think what we were doing is just showing a breadth of product because I think we also had a brand, new international truck that we're developing using the DAF larger cab that--.

That kind of looked weird, yes?

Well, you may need to take another look at it because it seems to be the hottest seller in Asia right now, a lot of people can't get enough of them.

The truckers loved it. The truckers loved it.

Yes. That's the group we work with.

No, that's the right kind of -- another question, I've been hearing sort of more chatter from various dealers about OEMs stockpiling engines ahead of 2007. And I was wondering if there are any regulatory requirements that would prevent you from doing so? Not to comment whether or not you're doing something like this. But if there are regulatory requirements by EPA that would prevent you from stockpiling engines.

I don't know anything about what dealers are talking about in terms of stockpiling per se. We go through the emission requirement program every few years. And it's pretty much -- it's pretty much a regular program that people in the industry deal with. And I think it's going to be the same as in '04 and '02 and '98 and '94, and pretty normal.

But if you were going to choose to stockpile an engine, would there be any legal reason for you not to be able to do so? Not to say whether or not you guys are going to do it, and what your strategy will be. If there's anything legally precluding you from doing so.

Yes, I don't know about that. But I'd just point out as I mentioned earlier that our inventory has not changed essentially in the last year. We're making 15 to 20% more product. So we're not in the habit of stockpiling. We like to turn that inventory faster than anybody else in the world in terms of manufacturing or capital goods industry.

Fantastic. Thank you very much.

Thanks. Appreciate it.

Our next question is from Michael Regan with Janus Capital.

Good morning, Michael.

Good morning, Mark. Was wondering if you could address two issues for me. PACCAR obviously takes pride in terms of being conservative in terms of your outlook. I was wondering if you could just reconcile your views around '07 which at down 15 to 20 seem a bit more aggressive than other industry participants which are talking about are down 40. And you've given us the reasons. The economy's strong, US globally, PACCAR has a better mix, you're gaining share. But reconcile that with an '06 outlook of North America or US and Canada class A up only 5% when it looks like, if my numbers are right, industry retail sales were up 18% or so in the first quarter. And all the things that you say are going to go well in '07 are going well in '06, plus we're at record orders and backlog. So there seems to be a disconnect between your '07 outlook, which is a little more aggressive than the industry, but your '06 outlook, which is a lot more conservative.

Well, I think, of course, we never take one quarter and multiply it by four and get the yearly quarter sales deliveries or registration. I've been in this business too long to fall into that trap. So yes, the first quarter sets a lot of records for the industry in the US. But will that continue? I've been around here too many decades to say it will. Particularly pretty soon people are saying, Gee, I can't really get a vehicle this year because it's sold out, then they say, Well, maybe I'll just hold off and run what I've got and let's see what happens next year, there might be more availability.

Next year, nobody knows, first of all, what's going to happen next year. I think that's -- that's an important point. There's lots of people out there that would like to say they know, but I know most of them, and -- you just don't. I think the strong economy is certainly an important element in the ongoing strength of this industry. The commodities industry, the home building industry, I mean a lot of industries are impacted by a strong economy. If the economy weakens for whatever reason, that will be an impact. If the economy strengthens, that will be a positive impact. So here we are, the end of April, it's an ongoing program, and every month people get a little bit closer to '07, a little bit more information. Even the pricing on the engines is still in flux a little bit as people try to get their last-minute testing completed and make the necessary modifications to meet all the new requirements. So yes, we're conservative, proud of it, and certainly have the track record to back it up. So I hope and I think everybody in the industry hopes it's 15 to 20%. Nobody's certainly pulling for anything worse than that.

Is there anything about production for the next three quarters of the year that would lead to a much softer total year than we've gotten off to in the first quarter start? In other words, retail sales may be a bit higher than production? Inventories got drawn down but bottlenecks seem to be relieved, suppliers are taking away there bottlenecks. Is there any reason to think that production shouldn't grow at the same rate it did in the first quarter?

Well, as I say, I've been in this business a long time. I wish I could say, no problems, but when you say that something jumps up. So we approach this day by day, week by week, month by month, and certainly hope it is going to be another great year, certainly the first quarter is a nice, strong start to the year. But things can change either way.

And the second issue was you talked about taking cyclicality out of PACCAR. And I just looked back at some numbers. In '05, North America -- US and Canada revenue was about 60% of total. Europe was about 31. But at the trough in '01, North America or US was -- and Canada was 53 and Europe was 37. Mexico, Australia, all other was 10 in both periods. So peak to trough 99 in '01, total PACCAR revenues were down 35%. And your overall mix of business hasn't really changed other than the US has just grown much faster than Europe and the Mexico, all others. So has the cyclicality really changed? It's hard to see that in the numbers from what I'm looking at?

Well, if you look at our after market it's probably doubled in terms of pretax profit contribution the last six or seven years. Parts business, last year we published a figure of $1.7 billion. I don't have the figure in fronts of me for 2000, but I'm sure it was a lot closer to 1 billion than the 1.7. Financial services has, gosh, almost doubled in terms of contribution to profit. And in Europe, we had, see, 2000 probably we're at about 8, 9% to market share. We're bumping 14% market share. So yes, huge difference. And look at the cost side. 3% ratio this quarter. And I don't know if we're back there, but probably 5 to 6%. So yes. I see a dramatic -- I mean, that's not even including the 5 to 7% efficiency gain we've gained every year in the last six years. Yes. Very dramatic. Exciting. Very proud of the team.

Thank you.

Thank you.

Our next question is from Jonathan Beagle with Manning and Napier.

Good morning, Jonathan.

Mr. Beagle, your line is open. Our next question is from the line of David Bleustein with UBS.

Mark, you seem to have danced around the issue, but can you touch on inventory of 2006 engines in front of '07? Aren't customers demanding it?

I don't hear any customers demanding it at all. Inventory menus, no.

Two, you described the Cat product on the last conference call as complex. I guess the question is, has Cat done anything to change that characterization, and is the Cat product complex in and of itself, or is it complex relative to the competition?

I mean, we're all working on new emissions. I mean PACCAR is obviously a major engine manufacturer, designer. We're -- of course, we're already delivering year '04 products to the marketplace. I think most people have -- are approaching the engine, opportunities with an EGR type of solution. That seems to be sort of the industry standard in North America. And I think for all these engines to make the simpler the better. They're -- engines have gotten increasingly complex over the last 30 years, I'd say. And I think the approach is simpler the better. So Cat's product certainly, we hope it's going to be a great one. We're a major customer for Cat. They've taken a different route than almost everybody else in the industry. And hopefully that's going to be a good one.

Okay. Terrific. Thanks.

Our next question is from Joel Otiss with Lehman Brothers.

This is actually Henry Curren in for Joel, today. Good morning. Question for you. Can you talk a little bit about pricing and how it compares this year to last year in North America and Europe.

You mean pricing to the customer?

Right. Right.

I think it's -- it's pretty flat.

Okay, so not much in the way of pricing power between last year and this year?

No. There's lots of competitors out there. And there's plenty of people willing to give their product away for whatever reason. There's always plenty of competition, plus I think as one of the earlier questions indicated, we've got a lot of costs to absorb in terms of the commodity side. So when you kind of get all that in there, customers say, well, we can pass through fuel costs, but, steel, aluminum, brass, copper -- that's for your account. So I mean, what we do is we continue to become more efficient in how we design, how we build. How we manufacture and how we service. So that's where the efficiency gains that we're getting. And you see that reflected in our bottom line net income percent. But it's an ongoing, exciting opportunity.

Okay. So are you able to pass through at least the cost increases to you, to the end customer, or is it basically you've got to just absorb them and there's nothing you can do about it?

Well, Henry, this is Andy. You should just look at the year-over-year and quarterly margins, relatively stable and trending up. Which gives you a good indication.

Okay, thanks a lot.

Thank you.

Our next question is from Peter Nesvold with Bear Stearns.

Hey, guys. Round two. When do you plan your '07 capacity? When do you determine how many trucks you're going to make in that year? Is it third quarter, is it fourth quarter? How quickly can you adjust your production speeds to accommodate whatever the market dictates?

Well, the way that we approach it and have always approached it -- because we only build products that are sold. Unlike let's call it the consumer industry or even the car industry, where they're trying to keep a sense, a process stream loaded. I think really to your question. We build to order. So if orders slow down, we've been able to process an order and deliver it to you in two weeks. It's hard to do, but we do it. When we get a lot of orders in, obviously you can't just magically have unlimited capacity. So the delivery time will stretch out for 8, 12, 16, 20 weeks. Depending what it is. So the -- in terms of planning for what we'll do in '07, that's not really the way we approach our business. So to get the kind of inventory turns and efficiency gains, we're always investing so that regardless of the number of vehicles we produce we're going to be more efficient year-on-year. But if orders increase, we'll build more. If orders decrease, we build less. Although we try to build more by increasing market share.

Okay. Follow-up question on your medium-duty push which has been really successful. I mean, it looks like Peterbilt is still growing pretty significantly year-over-year. Kenworth in the medium-duty segment may be lagging there. What do you think is driving the relative performance between the new -- the two nameplates? Is it customer focus? Is it product? Or is there something else that's happening?

I think they're actually both growing. It depends on the market you look at. If you look at in Canada, where I think we've got close to 17% share. Which is pretty amazing in about seven years or eight years. Peterbilt had launched a couple new products. The 335 in the last year or so. Kenworth has some new products shown at the Louisville shows. I think they're pretty much battling back and forth and have got the two best products in the marketplace. Customers love it. We're finding more and more small, medium, and large fleets are coming in and just saying boy, these are products that are lasting twice the life of the competitor's products, and we're going to pay more, but we're going to get, twice as much more. So I -- as you say, it's been a tremendous success story. We now have the LF in Mexico, and that's starting to really sell. We're also bringing the LF into Australia and that's starting to sell. So the whole, let's call it light and medium duty product line is an increasingly important segment of PACCAR's product lineup. Now at the same time, there are lower margins for that product versus the class 8.

I'm looking at the data, and it shows Kenworth class -- 5, 7, and you focus on 6, 7 sales down an average of 16% since July while Peterbilt is up 29%. I guess what you're saying is there have been new, more recent product launches in Peterbilt's product cadence is driving--?

Exactly right.

Okay, thanks again.

They're both doing well. Thanks a lot.

Our next question is from Andrew Casey with Prudential Equity.

Hi again. As I'm working through the puts and takes on the gross margin, can you help me understand how I should think of or about the size of -- the relative size of future growth investments and launch costs versus the raw material input costs headwinds. Are they roughly the same size, half the raw material, or less than half?

One more time. It sounded like a good one. Could you ask that again.

Well, you've got a lot of stuff going on in the gross margin line. And I'm trying to understand how I should think about the relative size of the growth investments for future growth that you're making, launch costs, relative to the raw material input costs headwinds that you're seeing now. Are they are they similar, both -- the future growth and launch costs relative to the raw material, are they half, less than half? I mean, if you can ballpark it for me, I'd appreciate it.

Well, I think on the commodities, obviously, I think there probably isn't too many people around the world that wouldn't like to see commodity prices go down, except for perhaps the commodity manufacturers. So they're all at historical high levels. And so working on how we can help them reduce that cost, we are going to see more investment and some impact in terms of expense side for all these new products and factories. And distribution centers that we're building. In terms of just the percentage, I think I'd be hard-pressed to share that with you.

Okay, thank you.

You bet. Thank you.

There are no further questions.

Great. Thank you. This concludes PACCAR's first-quarter earnings call.