帕卡 (PCAR) 2006 Q4 法說會逐字稿

Good morning and welcome to PACCAR's fourth quarter 2006 earnings conference call. All lines will be in a listen-only mode until the question-and-answer session. Today's call is being recorded, and if anyone has an objection, they should disconnect at this time.

I would now like to introduce Mr. Andy Wold, PACCAR's Treasurer. Mr. Wold, please go ahead.

Thank you, good morning. We would like to welcome those listening by phone and those on the Webcast. Again, my name is Andy Wold, Treasurer of PACCAR, and joining me this morning are Mark Pigott, Chairman and Chief Executive Officer; Mike Tembreull, Vice Chairman; Michael Barkley, Vice President and Controller; and Robin Easton, Assistant Treasurer.

As with prior conference calls, if there are members of the media participating, we request 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 affect expected results. I would now like to introduce Mark Pigott.

Good morning. PACCAR today announced record revenue and profits for both the fourth quarter and the full-year 2006. PACCAR's excellent performance is due to the Company's award-winning products, innovative technologies, balanced global diversification, record market share, and double-digit growth in the Company's finance and aftermarket parts divisions.

For the quarter, net income was $380.5 million, a 22% increase compared to 312.9 last year. On a per-share basis, earnings surged 25% to $1.52 compared to $1.22 last year. On a 16% increase in revenues of $4.2 billion for the quarter. For the full year, revenues were $16.5 billion and net income was $1.49 billion, both records for the Company. PACCAR's after-tax return on revenue during 2006 was an industry-leading 9.1%.

Taking a little longer perspective in the past ten years, PACCAR has produced compound annual growth in revenues of 13.6% and income growth of 22.2%. In 2006, PACCAR produced a record 166,800 vehicles worldwide, and I'm very pleased that DAF, Kenworth and Peterbilt brands achieved record market share levels. In Europe, DAF captured a record 14.5% of the heavy duty market, up from approximately 8.5% in 1996 when PACCAR acquired DAF. DAF's goal for market share is at least 20%. In North America, Kenworth and Peterbilt increased their year on year combined market share to a record 25.3%.

Over the past ten years, PACCAR has invested over $2.8 billion in products, infrastructure, and technology to develop and produce the industry's highest quality products. Examples of major facility projects over this period include new manufacturing sites in Canada, Mexico, Holland, and the UK, new engine test facilities in Mount Vernon, Washington, a new DAF engine plant in Eindhoven, and new parts distribution centers in the United States, Mexico, and England.

PACCAR continues to enhance its reputation for the industry's highest quality products. During 2006, the DAF XF105 was named the International Truck of the Year, the third time in the last ten years that DAF's premium products have earned the award. And I'm very proud to note the only OEM to achieve that distinction.

For the second year in a row, Kenworth Truck Company earned three J.D. Power awards for customer satisfaction among Class A truck owners. And Peterbilt Motors ranked highest in customer satisfaction in the medium duty J.D. Power study. Just as an aside, PACCAR has now won 20 J.D. Power awards, while our next closest competitor has won only 4. It's a remarkable record of quality leadership.

As you're aware, PACCAR has evolved into a globally diverse capital goods and finance services company, delivering premium products and services in over 100 countries. Nearly 50% of the Company's revenue and profit is generated outside of the United States. Some of the highlight last year of our international operations include the PACCAR, and for most, the Plastics Group, joint venture began assembling DAF trucks in Taiwan. PACCAR recently announced that it's expanding its presence in China by opening an office in Shanghai in the next few months, joining our Beijing office, which has been open for 15 years. DAF truck sales not only continue to grow in Europe, they're also one of the leaders in Central Europe. PACCAR Financial Europe celebrated its five-year anniversary last year, profitably managing assets of 1.7 billion euro, and is expanding into Hungary and the Czech Republic.

In addition to our International business, I'm pleased to say that PacLease earned its 13th consecutive record profit year.

Worldwide economies continue to grow, particularly in Asia, but on a stronger note in Europe, and PACCAR has benefited from those economic growths. We continue to look at our financial services and aftermarket parts business for double digit growth this year. For 2007, the European 15-ton heavy vehicle sector should have another excellent year with a projected range of 250 to 270,000 registrations. In the U.S. and Canada, the market Class 8 will be between 200 and 230,000 units as customers adjust to the new EPA-compliant engine configurations. Our other key markets, including Australia, Mexico, and export business should experience favorable operating environments this year.

As we've indicated over the last few months, PACCAR is increasing its capital investment this year. The Company's efficient operating model produces excellent cash flow, allowing for investments in product, technology, and facility projects. In addition to commencing construction of our new engine plant, other investments will come online, which include PACCAR parts who will open its 12th parts distribution center in Oklahoma City in the next few months, and later this year will begin construction of another PDC in Budapest, Hungary. Kenworth is completing its 30% capacity expansion at its Chillicothe Ohio plant, and during the fourth quarter of 2007. DAF trucks will open a $60 million 76,000 square foot world class engine test facility in Eindhoven.

PACCAR is all about its shareholders and return to shareholders. 2006 was another exceptional year for PACCAR shareholder performance. Including dividends and share price appreciation, PACCAR shareholder return was 47.2% during 2006 and again exceeded the Standard & Poor's 500 for the past 1, 5 and 10-year time periods. In 2006, PACCAR declared a 50% stock dividend, regular dividends paid of $0.77 per share, and a special dividend of $2 per share. In total, dividends of $685 million were declared.

I know a number of the analysts covering us track dividend growth, and I'm pleased to say that PACCAR dividends have increased more than 600% over the last ten years. The Company's dividend yield of 4.3%, including both regular and special places it in the top 5% of the S&P 500. During 2006, the Company repurchased a split adjusted 6.2 million of its common shares for an investment of $302 million. And in December, PACCAR's Board of Directors approved the repurchase of an additional $300 million of the Company's stock.

All in all a wonderful year, it's a great reflection on our 21,000 employees worldwide. I'm very proud of them and their daily work and innovative direction they take. I would like to open it up to any questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Jonathan Steinmetz with Morgan Stanley.

A few questions here. First of all, on the capital spending, when we think about the $400 million on the engine plant, is this incremental to the $300+ million budget that you've talked about in the past or is part of that within that? Maybe if you could just talk about where we should expect CapEx to be '07, '08, '09?

It's in addition to the 300 million, you're correct on that, and it will be spread out over the three-year time period.

Okay. And secondly, do you give a number on currency translation impact on revenue and EBIT?

We'll give you a general thought on the euro impact.

Okay.

The euro impact for the year-- for the quarter was 100 million increase to revenues and 9 million increase to profit.

Okay. Lastly, the provisions looks like they ticked up a little bit at the credit company from an unusually low level, I'm just curious, are you seeing anything in terms of credit quality given some of the tonnage data out there amongst the customer base to expect that this would persist at this level, or how should we think about this versus the 6 million in the prior quarter?

The levels are still at a very low level. One of the good things about our customers buying PACCAR products, they tend to be pretty financially astute customers who manage their business. I think we're still looking at very low levels.

Credit quality remains excellent. And the reserves tie in the with the growth in the portfolio also.

Okay. Thank you very much.

Your next question comes from Peter Nesvold with Bear Stearns.

Good morning, Mark.

Good morning, Peter.

Congratulations on a great quarter and a great year.

Thank you very much, appreciate it.

Maybe as a follow-up to Jonathan's question, can you quantify what the delinquencies and recoveries look like in fourth quarter versus third quarter? Because, I noticed a similar trend in the provisions.

There's really minor changes, really.

It's pretty small.

Okay. [multiple speakers] I'd like to ask you a strategic line of questions. We saw about a $120 million uptick in inventories in fourth quarter. Can you just maybe talk a little bit how much of that was finished product versus components?

None of it was finished products, because, as you know, once we build a truck it goes to the dealer and goes to the customer. Most of that would be in components to assist in the transition from '06 to '07 engines.

Hear you loud and clear. On the engine plans, I look at the announcement to do a 9 liter and a 13 liter, of course rounding the displacement sizes, it doesn't strike me as the high volume segment of the market. So, I guess, first, I wanted to ask you, how did you arrive at the 9 and 13 liter? And I presume you would only be selling that in the North Americas, because you have similar capacity already in Europe for DAF.

That's a great question. First of all, the way we came to the 9 and 12.9 are those are the only engines we've got. That was a pretty easy focus for us. Let me just kind of expand on that. We built a new factory about every other year for the last ten years around the world. So this is just another one, and hopefully in the future as business grows, we'll take a look at something else.

But, couple reasons. One is, DAF is growing as we're very proud of the team there and they're target is to get over 20% share, they're at 14.5 right now. Central Europe, which is about 50,000 units a year, we have approximately 10% of that. A lot of growth there. We're looking at the DAF product to go into many, many countries around the world. So, in terms of their capacity, we think it's very likely that this engine plant could help in their engine capacity, in addition to the product we'll be selling into our Kenworth and Peterbilt trucks in North America.

Okay. So you would envision exporting product from this factory into Europe?

Yes. I think I could make a lot of sense --

Why does that make sense from a currency perspective? Because, why wouldn't you just expand existing footprints you have in Europe?

We did just expand it. It's just not Europe, it's going to be around the rest of the world. The dollar is weak right now, but it's just one of the real possibilities we're looking at with this new factory.

If I could ask a follow-up on that, in the wording of the release, it says a power train manufacturing and assembly facility. I saw that, I saw $400 million investment, and granted I was thinking 9 and 13 liters just in North America, but I have a hard time justifying back of the envelope a reasonable payback period given the volume expectations. Is it feasible when you say power train that you might consider making transmissions on your own as well?

I think within our company, we probably think of power train as engines. Of course we also make axles in Europe, not planning to build any axles in this plant. Didn't mean to confuse you. The real benefits for us, I think they've been very well explained by certainly a number of our supplier partners is, One, we do reduce our manufacturing and assembly costs significantly. Two, we get needed capacity for our DAF business, which is growing very strongly. Third, provide excellent parts and service business for our dealers. And really fourth, increase our PACCAR parts business. So you take a look at all that and this is just another factory we're building. As I say, we build one about every other two to three years.

If I can ask one last question here and I'll hand it off. Why the timing 2009? Granted, October '09 is the European emissions changeover the will leave January 1, 2010 here. So why not wait six more months and launch it after the emission regs have gone into affect?

Well, I think you started out the question asking a good one about the payback, we want to get these factories up and running so that we can start generating some of that payback. Typically, and you've covered PACCAR for a number of years, you know us pretty well. Because of our strong financial strength in the Company, we're able to make these investments in what could be considered a slower market, and thus as the market improves, we're ready with new products, new capacity and new technologies. I think this is something that we've been doing for 101 years, and it really seems to work very well for shareholders or customers in our Company.

It certainly has. I guess the question I'm getting at is, will the engine you start making in mid '09 be compliant with the U.S. emission regs effective January 1, 2010? Or, basically, are you going to be hitting the emissions deadline early? That's really what I'm getting at.

I think we'll be right in-line with every one of the other engine suppliers.

Okay. Thank you, I'll get back in queue.

I appreciate it. Good questions.

Your next question comes from Jb Groh with D.A. Davidson.

Good mornings guys. Can you hear me okay?

You bet.

Just a quick one. I think you kind of answered this with Peter's questions, but you sort of stepped up the capital spending here and in the past you've talked about potentially making a sizable acquisition, and certainly the balance sheet could support it, but has this decision changed your outlook on the potential acquisition front, or are those two things mutually exclusive, or are you still thinking that there's potential out there for some other kind of transaction?

Good question. No, we continue to look very strongly at acquisition opportunities around the world. And, of course we're very committed to an excellent return to the shareholders, as we have been for 100 years. And I think perhaps overlooked in the discussion about a new engine factory is that the special dividend distributed $500 million to our shareholders. But acquisitions very much one of the key strategic initiatives within PACCAR.

So that hasn't changed with this, what seems like a pretty significant decision to do the engines domestically?

No. The engines is just one part of a very multi-layered strategic program throughout PACCAR to redo all of our factories, accelerate the development of new products, expand financial services, add capacity on our IT side, and grow our parts business. It's just another step in PACCAR's growth.

Do you guys disclose -- what was parts of the total for for '06? Do you guys give that number out, that's in the K or how --?

It's in the press release that it's bumping 2 billion.

Going to bump 2 billion. Okay. Great. Hey, thanks for your time.

Thank you very much.

Bye-bye.

Your next question comes from Jamie Cook with Credit Suisse.

Hi, good morning.

Good morning, Jamie.

Mark, my first question, just to expand a little bit on Peter's question, just the long-term strategy of PACCAR. I guess the next question that you're building the 9 into 13 liter engine, at some point, I think the question is the market seems to be going more vertically integrated and at some point does it makes sense for PACCAR to build the 15 liter engine? Or could you comment on whether your customers are asking you to do this at some point?

We've got a great relationship with our two supplier partners, Cummins and Caterpillar, and they're about 50/50 in our backlog. Customers love it and our dealers love it and this will just expand our customer's choice in terms of product. In terms of integrated, of course, in Europe we, and pretty much the rest of the world, we only have our own engines and axles. In North America, I don't -- I'm a little bit intrigued by the discussion about this. We're really the last one to the dance in terms of the integrated approach.

But I guess my question is, you're integrated on the 9 and the 13. At some point, does it make sense to be fully integrated and go to the 15 liter?

Well, I would say right now we've got great supplier partners and I think you're going to see a lot of growth in the 13 liter size. That's certainly the prevalent size around the rest of the world, even though fuel is about the same price, say $2.50 that it was a year ago. We've all lived through the spike earlier -- or last year. And the 13 liter can deliver very excellent horsepower, great torque ratings, and good fuel efficiency. So, the rest of the world is really adopted to 13 liter as the primary larger power plant.

Okay. And then I guess my next question, I've been hearing some conflicting comments about how peoples' order books are looking for 2007. I mean, I think if you've heard, some companies are suggesting that the order book looks a little better in 2007 than they originally anticipated, but you hear quite a different story when you're talking to dealers or when you're talking to the actual customer. So I guess, as you look at the order book so far, can you just speak sort of directionally about how things are relative to your expectations, orders for '07 trucks with '07 engines will you have any?

Yes, well the only orders we have coming in now are for the '07 engines. We will probably be one of the first to convert to 100% '07 engines. I'm not sure what the competitors are doing, but they seem to have a slightly different timetable for some reason. So, the general economy in the U.S. and Canada is pretty good, Mexico is strong, and we're -- we share the forecast as pretty consistent as what we talked about in October of 200 to 230,000 in terms of retail sales. Right now, we're staying with that. Maybe the next few months, that might be modified, but seems reasonable. We've made the necessary adjustments, but on the other hand, we're increasing our investments to make sure that when the market does return, we've got exciting new products and even more efficient factories.

Okay. Just my last question, I'm also hearing -- I guess -- are you providing incentives to any of your customers, whether to order trucks earlier in the year versus later on in the year?

Well, the primary incentive that we offer is the best residual value in the world. So that when they purchase our products, they're seeing 15 to 25% better residual value after three, four, or five years of use and that's a very powerful incentive.

But no pricing incentives, things of that nature?

Nope. We're just out competing as we do every day and have for decades.

Great. Thank you very much. I'll get back in queue.

I appreciate it. Thank you.

Your next question comes from Robert Toomey with E.K. Riley Advisors.

Good morning, Bob.

Good morning. And congratulations on a great '06.

Thank you very much. We're already focused on '07.

Yep. Part of my question was already asked by the last person. I just wondered, Mark, if you could give us -- if you could, or if you would give us a little color on how you see, sort of the quarters playing out in '07, and have you adjusted production levels in the first and second quarter, or how have you adjusted production in the first and second quarter of '07?

Well, we went public with the announcements in November/December time frame in terms of the adjustments that we're making at our U.S. plant, so that's all public.

Okay.

You may have seen some of that in the local papers.

Yes.

And I think in-line with the rest of the industry for the U.S. and Canada, if the general economy continues to be reasonably good, we're hoping that like we've seen about every three to five years, the customer base will begin to absorb the increased cost and recognize that they need new product, that there's freight to be moved, and we'll see a gradual increase in the amount of orders in the second half of the year. We've seen this about every three to five years and the industry absorbs it and passes it along to their end customer and grows about 1% faster than G.D.P. So, we like to say that we're in a real exciting growth industry.

Okay, great. Thank you.

Thank you.

Yep.

Your next question comes from Joel Tiss with Lehman Brothers.

Hi, guys. How you doing?

Hi, Joel, good morning.

Well, we certainly appreciate you guys not stepping on our toes and trying to take our job away and give us forward guidance. I think that's very well appreciated.

Joel, as you know, we've been consistent for 101 years.

Well, you can't argue with that.

[laughter]

I wonder if you can give us any sense of some of the steps that you've taken, and I know you've enumerated some of them in the past, but just a little bit of review on some of the steps you've taken to minimize the negative operating leverage or the potential for negative operating leverage in North America?

We really look at it on a global basis, obviously, that's how we're reporting revenues and income. You can't really fight against an overriding economic change. Our strategy is very simple. We're going to produce the highest-quality products in every market in which we participate. The result of that has been very good market share growth for decades. We also have a lot of investment in technology, which allows us to be closer to the customer, whether it's on the financing side, it's on the lease side, on the parts side, or even selling them IT services to manage their logistics or business systems. That's a pretty exciting growth area for PACCAR that's developed over the last five years. We continue to invest in, as I say, factories and systems and parts distribution centers, because we've been doing this, as I say, for over a century and the market might be a little bit slow in one segment of the world, but eventually it recovers, sometimes quite quickly, and we always want to make sure we're ready to take advantage of that. You make the difficult decisions in terms of reducing some head count at some of the factories, but always with the intention that we'll bring those excellent employees back and they'll come back to an even more efficient facility next time.

Okay. And you mention that Cummins, Cat mix is about 50/50, didn't that used to be more like 75/25 Caterpillar? Is there any reason for the change?

I've been around this industry for so long, I remember in the 60s when Cummins was almost 100%. So, as we like to say in the UK, it sort of swings in roundabouts. Both companies are excellent supplier partners and now it's about 50/50. So, it just sort of ebbs and flows over the decade, I find.

Okay, so there aren't any specific reasons. Can you give us any hint on the size of the APU market? That seems to be growing very quickly and a big opportunity.

The total size is still relatively small. I'm very pleased that Kenworth and Peterbilt are doing some pioneering work in terms of what we call a 'clean power' to be able to run vehicles in the evening, or all night without actually having the engine operating. That will be launched this year, and it's got about a 1.5 year payback for our customers, because they'll be able to save, well essentially, 10 to 15% of their fuel bill every year by not running it at night, yet maintaining electrical, what we call hotel services, in their cab as well as a cooling feature.

So that's a new patent-pending technology that you'll see at the Mid-America Show in March that is really receiving a strong response by the customer base. The cost of it is a number of thousands of dollars, but as I say, there's a great payback in about a year and a half. It's growing, and in that same line, next year, don't have exact timing, but in 2008 we'll be launching our hybrid diesel electric in the medium duty product and selected applications, which we're targeting for 30% improvement in fuel economy. So a couple of exciting, new technologies that PACCAR is taking a lead on.

Okay. Thank you.

Thank you.

Your next question comes from Andrew Obin with Merrill Lynch.

Yes. Good afternoon.

And good afternoon, Andrew.

Just more questions on the engines. In terms of the applications for the proposed 9 liter engine versus the 8 liter by Cummins, on which they have an exclusive with you right now, how much overlap there is?

Overlap? Well, we have a wonderful partnership with Cummins which is really going from strength to strength in terms of them being -- supplying a PACCAR-branded engine in the 6 and 8 liter engine size, so there's really no overlap.

But there was no overlap between Cummins' 8 liter engines and Caterpillar's C9? Don't they both go into Class 7 trucks, or am I wrong on that one?

As we explained quite a few -- six months ago, this is really a natural evolution. And what we have in Europe, we have the rest of the world, and we just extended it to North America.

I just want to confirm that the 9 liter engine will also be available for Class 7 applications. That's all I'm asking, actually.

Our 9 liter?

Yes.

-- [multiple speakers] it's going to be available in the products that will sort of fit into. I mean it's a couple of years down the road, so obviously products and engines continue to evolve. But, the 9.2 is a larger engine than the 6 and 8 liter PACCAR engines. So, it really depends on the application. Is there the fuel economy, the weight sensitivity, just the packaging of the engine inside the chassis itself, all criterion that have to take into consideration.

Another question regarding your future capacity in the new engine plant. In terms of -- I actually -- my view is that the 400 million price tag that you are citing seems to be a bit too low for your entry into North America. I'm just wondering if there are additional R&D costs that will be associated with building this plant, as well as will you need to expand capacity in this plant down the road, sort of in the middle of next decade if the customer acceptance of the PACCAR engine is up to your expectations?

Well, one of the wonderful things about working at PACCAR, and certainly a consistent theme for many decades, is the incredible efficiency and productivity growth that we're able to get out of each of these factories. And it's really down to the dedication of some very talented teams. As we've indicated, we're achieving 5 to 7% productivity growth every year, which is certainly got to be one of the top for any type of manufacturing industry. So when we look at initial footprint, we certainly anticipate that footprint will continue to become more efficient and over a ten-year time period, that could be 50% more efficient. So that really does play into how we approach these capital investments. Hopefully you're going to ask me a great question about the XF105 and what a wonderful product it is.

What I was going to ask you a question, you're probably not going to answer, would you share the unit capacity of the new plant? And I know that PACCAR -- I mean, I understand we've visited your Kenworth factory. I mean I understand that you guys do a wonderful job of sort of expanding it over time, but initially, would you be willing to share the initial thoughts on capacity for it in terms of units for the engine facility?

We don't really have that broken out. Every one of our factories -- I really appreciate the attention paid to this factory, but as I say, we build a new factory about every 2.5, 3 years. So for us, it's just sort of the fourth one we've done in the last ten years. The capacity will be-sized right to meet the demand. Let me just put it that way.

Let me ask you another question, which I wonder if you will answer that or not. In terms of fourth quarter pricing -- and, what I'm looking for, did it exceed your expectations that you had earlier in '06? Was it in line, or was it a bit lighter than you thought? If we went back earlier in the year, if we went back first quarter of '06, did the pricing in the last quarter pan out the way you thought it would, was it a little bit stronger or was it a little bit weaker?

I think it was pretty much in line with what we anticipated, recognizing that pricing is a very fluid element of the business. I would be hard-pressed to think that anybody could predict pricing 12 months out. But I'd say it's pretty much in line.

Thank you very much.

Thank you. Good questions.

Your next question comes from Andy Casey with Wachovia Securities.

Hello, Andy.

Hey, Mark. Good morning, everybody.

Good morning.

First, just a clarification on '07. Do you -- should we expect the same tax rate, basically as occurred in '06, or should it change as your revenue mix probably shifts away from the U.S., at least temporarily?

We'd expect the tax rate to be between 31 and 32% for '07.

Okay, thanks. And then, a couple of questions on the engine announcement, if I can. I know we're kind of beating it to death here.

[laughter]

But, when you look at the announcement and look at some of the other investments you've made, your North American fixed asset intensity is expected to increase a little bit. Is this totally just PACCAR evolutionary growth, or is there any change in how you think about North American end markets' cyclicality?

Well, I think -- that's a great question. I think what we've been able to demonstrate through our results over the last few decades is, I think PACCAR and say the teams that are involved in it, have really done an admirable job of [inaudible] the cyclicality in terms of North America. And then, of course, when we acquired DAF and Leyland ten years ago, it's been a quick ten years, some of it is almost counter-cyclical, not completely, but there's certainly an element of that. So as a result, the earnings growth, which we've talked about at 22% per year every year for the last ten years -- once again, you can put that in the very top sphere of any industry, any company and we'd be looking good.

So we've taken what is sort of typically a North American mind-set about well, you know every three to five years there's going to be a down cycle and then there'll be a strong market and have smoothed it out. I'm very proud of the team for achieving that. Obviously, we're starting to dip our toe into Asia, which those major economies, particularly China, India growing anywhere from 7 to 10% per year could be interesting for us. But, expanding financial services, which have pretty much a steady stream of profits, the parts business, and the very innovative technology that's been introduced to assist our customers and our dealers and certainly has helped us continue to grow on a double digit pace, a lot of that has really smoothed things out on a very positive note, I think, for our company, our shareholders, and probably for you reporting it.

Great, and thank you for that. A question kind of specifically on the 13 liter growth rates. You alluded to you'd expect that to grow going forward. Can you help us with your experience in North America in the past? And then should we expect the 13 liter to basically outpace whatever the North American volume growth is going to be going forward?

Okay, I think I understand that question, but why don't you try that one more time.

With the 13 liter, you talked about the better fuel economy potential. Has your experience been that, for instance, versus your total Class 8 North American volume that 13 liter has outgrown it over a period of time? Meaning if your Class 8 volume has grown 10%,13 liter equipment has grown at 13% or something like that?

I think -- I can't really comment on that. I understand what you're driving at. I think, obviously, different economic factors come into play during the course of any decade. Ten years ago, if you talked about fuel being at $3 a gallon, people probably would have looked a little bit funny at you. Now people are saying, okay, it's 2.50, but maybe it could go lower, but maybe it could go to $5, which is what it is in Europe. And if it does that, that's going to bring a new set of economic factors into the purchasing decision. And I think customers will say, hmm, fuel as a percentage of our operating costs is increasing, I still need to grow the business, perhaps I should take a look at a more economic power plant to deliver what I need to deliver.

I think that's why you see, really, the rest of the world the largest engines powering vehicles are 13 liter, because they've been operating in an economic environment, which, more than likely North America will get into over the next decade. So once again, I think PACCAR is thinking ahead strategically and for the benefit of our shareholders.

Thanks very much.

Thank you very much. Appreciate it. Good questions.

Your next question comes from Fritz von Carp with Sage Asset Management.

Fritz, good morning.

Yes, good morning. Thank you. My question has been answered.

Thanks for being here.

Your next question is a follow-up from Peter Nesvold with Bear Stearns.

Hey, Mark.

Peter, you're going to talk about the 105, aren't you?

That's right. I have a couple of other ones first. The EPA has been soliciting comments from the engine makers whether or not the guidelines they've put out for using SCR in 2010 are commercially practical. I'm curious, given that you will be a North American engine maker starting 2010, what is your position on SCR? I don't know if you've seen the specific guidelines, but do you think that's going to be the likely technology that's used in 2010?

That's a great question and certainly with our decision to produce our own engines, we are becoming much more involved with the EPA discussions with the engine manufacturers group, all excellent forums and we've got some of our best and most talented people involved. I don't think I can really answer that. Obviously, there's two camps out there, SCR, EGR. About every year there seems to be a little bit of a bend in the direction, I would say, coming out of the industry and the government. All I would say is that we're comfortable with either solution and we'll be ready.

And when do you think the industry, the fleets start getting test trucks ahead of 2010?

Well, I would say hopefully sooner than they have on all the other previous changes. We're working hard internally and obviously with our supplier partners to achieve that, but I don't have a specific date.

Okay. In the release, you mentioned a 20% market share target for DAF. Do you have a North American market share target?

Well, we're very pleased at 25.3%, and obviously we're working hard to always have profitable growth in all of our markets.

Where do you think North America -- where does that balance between a premium product and market share break down? Is it 25, can you get it to 30, is there room to go above 30?

The wonderful thing, as you read these industry surveys, is we fine that about 75% of the operators, fleet owners, and people involved in the industry would love to have a PACCAR product. So maybe that should be considered the upper boundary.

I would like to have one. [laughter]

Well, call us up, but you have to work through an independent dealer.

I'll follow-up with you off line and maybe we can talk about the new product.

Thank you very much.

Your next question is also a follow-up from Jb Groh with D.A. Davidson.

Just kind of a housekeeping question on the SG&A, a little sequential bump. Safe to assume that's year end incentive comp type issues?

It's a couple of factors. One is we have some euro strength comes into play, and we have some growth to support the higher sales levels.

Okay, so -- okay, great. Similar -- [multiple speakers]

-- we've got a lot of projects going on, as we've talked about a few of them this morning.

Okay, thanks.

Thank you very much. Appreciate it.

Your next question is a follow-up from Robert Toomey with E.K. Riley Advisors.

Bob, good to have you back.

Good to be back, Mark. Question, you may have mentioned this before, but I missed. Did you give CapEx guidance for '07, or do you do that?

Typically we don't. I think the only guidance would be in terms of the new factory, which I think we've talked about at length, and that we'll be increasing CapEx. Last year --

Last year was 312.

Which was very strong.

Very strong.

Okay. And that 400 million on the new factory will be spread out over three years?

That's correct.

Okay. And again, someone asked a question that partly answered my question after I queued up again, but when you look at your long-term return on investment, you mentioned earlier, Mark, that you're looking at 5 to 10% productivity gains per year, and that that has contributed to the long -- at least partly to the long-term growth in your margin. I would suspect going forward -- would you believe that that relationship will continue as long as you continue to improve productivity, you should see improving ROI as well?

Well, it's 5 to 7%.

5 to 7.

Is what we've achieved over the last decade or so, 5 to 7.

Mm-hmm.

All of our projects are very rigorously screened and evaluated, and aside from necessity projects, the ones that are going to have an enhancement are looking to make a positive impact on our efficiency and the growth of our company. That's how we evaluate capital projects.

Okay. And the last question I have, again, housekeeping. You said that parts surged in '06, and I assume that again they achieved in excess of 10% or double digit growth in '06?

That is correct.

Okay, great. Thank you very much.

Thank you. Appreciate it. Good questions.

Thanks.

There are no further questions at this time. Are there any additional remarks from the Company?

No. Thank you.

Ladies and gentlemen, this concludes PACCAR's earnings conference call. Thank you for participating. You may now disconnect.