帕卡 (PCAR) 2007 Q2 法說會逐字稿

Good morning and welcome to PACCAR's second-quarter 2007 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. Robin Easton, PACCAR's Treasurer. Mr. Easton, please go ahead.

Good morning. We would like to welcome those listening by phone and those on the webcast. My name is Robin Easton, Treasurer of PACCAR, and joining me this morning are Mark Pigott, Chairman and Chief Executive Officer; Mike Tembreull, Vice Chairman; and Michael Barkley, Vice President and Controller.

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 the expected results.

I would now like to introduce Mark Pigott.

Good morning. PACCAR announced solid revenue and profits for the second quarter of 2007. PACCAR's financial performance is due to the Company's balanced global diversification and continued growth of worldwide aftermarket parts and financial service revenues.

For the second quarter, revenues were $3.72 billion and net income was $298.3 million compared to revenues of $4.17 billion and net income of $370 million in the second quarter last year.

On a per share basis, earnings were $1.19. PACCAR's after-tax return on revenue during the second quarter was an industry-leading 8%. For the first six months of the year, PACCAR earned an excellent net profit of $663.9 million on revenues of $7.7 billion. And even more importantly, PACCAR's shareholders have earned a 35% return in 2007 due to stock appreciation, dividends and buybacks.

In fact, I would like to point out that PACCAR increased its regular quarterly dividend by 25% in the second quarter. And over the last decade, PACCAR has increased the dividend on a per-year basis by 18%.

Looking around the world, PACCAR has benefited from its successful global strategy by delivering increased revenues and profits from commercial vehicle sales in Europe, our DAF group, Mexico and Australia. The financial services business continues to grow as total assets expanded during the quarter to $10.3 billion and pretax profits for financial services were a record $68.9 million, a 15% increase over 2006. Growth in revenue and profits in PACCAR's aftermarket parts business accelerated at a healthy double-digit rate.

The outstanding performance of these businesses has acted as a counter-cyclical balance to the Company's truck manufacturing business in the U.S. and Canada, which had been impacted by the industry prebuy last year.

As part of our global growth strategy, PACCAR recently announced the purchase of Truck Center Hauser, Germany's leading truck rental and leasing company. This is really an important step in the expansion of PacLease into Europe, which, in time, could be larger than the North American PacLease business.

Over the past 10 years, PACCAR has invested over $2.8 billion in products, infrastructure and technology to develop and produce the industry's highest-quality products and services. As part of this ongoing investment program, PACCAR announced plans to build a $400 million state-of-the-art engine manufacturing and assembly facility in Columbus, Mississippi. The groundbreaking ceremony at the site occurred last week and construction is underway.

The facility is planned to be opened in 2009 and will be producing our PACCAR 9.2 liter and 12.9 liter diesel engines. These will be offered to our customers to complement engines available from our current supplier partners. I would just add that it was a wonderful groundbreaking ceremony and really nice to be in a state with such a pro-business atmosphere.

Additionally, in the second quarter Kenworth completed a 20% capacity expansion of its Chillicothe, Ohio, plant. This major capital investment will ensure that Kenworth is well-placed to meet future increased demand levels and maintain its excellent performance of 5% to 7% annual productivity improvements.

Switching gears, it is really heartwarming to realize that PACCAR is becoming recognized as an international environmental leader. In June, the Environmental Protection Agency, the EPA, recognized PACCAR's commitment to producing industry-leading aerodynamic and fuel-efficient vehicles by awarding Kenworth's T660 and the T2000 and Peterbilt's 386 and 387 models with the SmartWay designation. SmartWay-compliant vehicles offer customers a 10% to 20% fuel savings while also lowering greenhouse gas emissions by reducing NOx and particulate matter.

Continuing in the same vein of being an environmental leader, I would also like to report that the Kenworth Clean Power and Peterbilt Comfort Class vehicles are now available in North America. These factory-installed climate control systems provide heating and cooling, plus a 110 volt hotel-load power for up to 10 hours without the need to idle the engine, thereby reducing emissions and improving fuel economy up to 8% -- a real win-win for our customers and the environment.

PACCAR is increasing its capital investment to record levels in 2007. The Company's efficient operating businesses produce excellent cash flow, allowing for investments in product, technology and facilities during all phases of the business cycle. In addition to completing the Chillicothe plant expansion and commencing the new engine facility, a number of other important capital projects are progressing well.

We began construction of PACCAR's 13th Global Parts Distribution Center in Budapest, Hungary, and this facility will support DAF's ongoing expansion into the fast-growing Central and Eastern European markets. During the fourth quarter of this year, DAF will open a $60 million, 76,000 square foot world-class engine test facility in Eindhoven, the Netherlands.

During the first half of this year, the Company repurchased approximately 720,000 of its common shares for an investment of a little over $48 million. Over the last 18 months, PACCAR has bought back 6.9 million shares, split adjusted, for a total investment of over $350 million. Over the same period, PACCAR has paid dividends of approximately $1.1 billion for a total return to shareholders over the past 18 months of approximately $1.5 billion.

PACCAR expects that global commercial vehicle markets will continue to grow slightly faster than overall GDP, although as we know, the U.S. and Canadian markets are experiencing a weaker market due to the effect of the prebuy last year. The good news is that PACCAR is the first and currently only OEM to install 100% 2007 engines, and these engines are performing better than expected. Our existing and new customers are benefiting from PACCAR's leadership in introducing the new emission technology in products such as the Kenworth T660 and the Peterbilt 386.

Looking ahead, with a healthy economy, we expect demand in the second half for Class A industry sales in the U.S. and Canada will be in the $180,000 to $210,000 range. The European economy seems to be gathering strength and seems to be in better shape, and the heavy-duty sector should deliver another outstanding year of between 265,000 to 280,000 vehicles. PACCAR's other key markets, including Australia, Mexico and the export business, should experience another year of growth. And PACCAR Financial Services and aftermarket parts divisions are building on an impressive record of revenue and profit achievement.

Thank you. And with that, I look forward to your questions.

(OPERATOR INSTRUCTIONS). J.B. Groh, D.A. Davidson.

Maybe you could put a little finer point on this auxiliary power unit opportunity in terms of retrofit and the sort of margin potential that that might have. Is that something that you consider an aftermarket part?

Great question. First of all, we have particular pride in noting that it is not exactly an auxiliary power unit, APU, but a completely new patent-pending technology that Kenworth and Peterbilt developed. Initially, it is going to be factory installed, but over time will certainly be rolled out into the aftermarket for our customers.

But early days, it is showing tremendous results. Obviously, if you're someplace warm and used to running your engine at night to keep yourself cool, this has been a real advantage because you can literally turn off your engine for the whole night and enjoy 70 degree temperature in the cab while maintaining the full power potential you need to run everything.

So it is a very exciting opportunity. And right now, the return for the customer is about a year and a half. So it is a great ROI for our customers.

Good. And then I noticed that your North American forecast came down a little bit. Is that -- you think that is just a push-out into the first quarter in terms of a rebound on the truck sales?

Well, I think that -- and of course, we typically get asked that question every quarter, as you know, and I think our answer is pretty much in line, that we are three months more into the year and that much smarter on what the year is going to be looking like.

I think some of the return to more of a normalized order intake will be predicated on the general economy, which seems to be in good shape. I'm talking about the U.S. and Canada. And if we, say, normalize it over a two- or three-year time frame, 2008 could be a pretty good year.

Thanks for your time, Mark.

Thank you. Good questions.

Joel Tiss, Lehman Brothers.

Can you talk a little bit about the receivables, up 18%, and is there anything in there that we should take note of?

The receivables are up based on the higher sales levels. I assume you are comparing to the year-end balances.

Yes.

At year end, we have typically holiday shutdowns where we aren't producing trucks, and our receivables dip down.

So there's nothing to read into there. Can you talk also a little bit about the mix of the engines that are in the trucks sold in the first half of the year in the U.S. and Canada, between Cummins and Cat?

Well, I think, as I mentioned, both engine suppliers are having good success in the marketplace. I'm old enough to remember and see the swings and roundabouts over the last 40 years in this industry. So I would say right now, it is probably returning more to the '60s, when Cummins was the leader in terms of our customer demand. And as you know, it's completely led by customer demand. But overall, both Cummins and Cat, with slightly different approaches to meeting the emission requirements, seem to be doing a good job in the marketplace.

And the last question -- maybe I will glue two of them together -- can you talk about the impact of the German acquisition on future financial services? And also, the equipment on lease was flat in the quarter, and I just wondered if that is going to have an impact on the Financial Services business growth in the future. Thank you.

Two great linked questions. Taking the European one first, our intention is certainly to grow PacLease in Europe. We have had a number of press releases indicating that, that we will be doing it on a sort of two-pronged approach. First will be a number of, as you might call it, bolt-on acquisitions as we target different countries and different marketplaces, and then of course, growing the lease business organically throughout Europe.

What it does is first of all it sort of gave us an instant footprint in Germany, which is the largest truck market in Europe. It also allowed us to pick up some excellent managers and lease professionals. We are assembling our own team to manage the enterprise and sending some of our top lease people from around the world to Europe for the time being.

So I think that is going to be very, very exciting, another way to grow the Company. Leasing, as is commonly known in North America, is becoming more prevalent in Europe, and certainly PacLease has established itself as one of the leaders in North America and will be one of the leaders in Europe.

This is Mike Tembreull. The business continues to grow for Financial Services worldwide, including the leasing business, and we expect that to continue.

Peter Nesvold, Bear, Stearns.

It is a tough market to beat numbers in, huh?

You know, we have been around long enough. I think PACCAR is doing a great job at dampening the cyclicality. But we appreciate your insightful reporting.

I guess I would like to talk about the gross margins a bit because they came in about 100 basis points lower than what I was expecting. You could say, well, that is relative to my model, but when I look at the detrimental operating margins in 2Q, it was about 26%, which is the worst second quarter for PACCAR in my 10-year second -- my quarterly model, which only goes back 10 years.

So I guess I would like to get a little more color on what happened to the margins in this quarter -- was it particularly disruptive as you moved from '06 to '07 engines? Is the European mix lower margin with their incentives? What was driving that margin lower, so much lower this quarter?

Let me take a slightly different tack on a very good question. I think the margins were actually pretty good, considering the economic cycle. When we take a look at the -- let's call it peer year comparison, you go back to, say, 2001, and you can see that gross margins were actually quite a bit higher than they were in a similarly lower market in North America. So I think there has been a lot of margin enhancement because of the investments and the productivity we are getting in the manufacturing side and better product.

Now, that said, yes, there has been significant cost on transitioning from '06 to '07 engines. I think that is pretty well-known in the industry. It is a very competitive marketplace, particularly in the U.S. and Canada. So the overall margins that I think any manufacturer is able to obtain have been lower. You can't pass through $8000 to $10,000 cost increases. It is a difficult thing to do.

The third section of the answer -- in Europe, not only has the productivity gone up, but DAF's production is at record levels and the margins are actually continuing to improve. So that is sort of a triple win, if you will.

So all in all, when we look at the total global performance, we are saying that was a pretty darn good job. So hope that answers your question.

Perhaps two quick follow-ups on that, then. You said it is hard to pass through $8000 to $10,000 price increases. Would you qualify that by saying in this environment, or it's just -- you can't pass through the higher price of the engines, period?

Well, you have been following us, as you say, for a decade, and never say never. We pride ourselves on delivering and exceeding our customers' expectations. But I think it is the combination of a slower and lower market in the U.S. and Canada, which I think you even pointed out in one of your reports, is now significantly less than 50% of PACCAR's total business.

We have very dedicated people that are working to continue to reduce the cost of the product that is now installed in our trucks. And so I think we will see some improvements that way. Plus it's not a boom market, so people are scrambling around for the lower orders that are out there. So like any business, if you have a cost increase of -- let's call it 10%, and you are going into a lower market, that is tough to get all your costs covered.

I guess as you think through the rest of this year -- and I appreciate the fact that you don't give guidance -- however, if you see a firming of the freight environment, do you think your pricing power improves, number one? And number two, we are coming off a low mix right now for North America, and as the North America mix contributes more, would that be accretive or dilutive to the margins from here? I guess what I am ultimately trying to understand is should I look at this as kind of the baseline going forward, now the we have '07 engines in here or is this a function of, well, Europe is a little bit lower margin, and when North American catches up, that will improve the margins, plus our pricing power will improve as freight gets better?

That is a great question. I think freight -- freight is good. Is it at historical highs? Most likely no. But is it one of the top three or four years in history? Definitely.

So retail sales -- by that, I mean going to the shopping mall -- there is a lot of business out there. And things get moved by truck, and trucking still has 80% of moving the commodities in most industrialized markets. So I think freight is good. I would almost take freight out as a factor. You can't completely, but it is good.

So going forward, we have many great customers who are doing well. Some are reporting record results. A number still have vehicles that they purchased last year that probably aren't being fully utilized. So over the next six months, it will probably be similar to what you have seen so far.

Last question and then I will get out of the way.

No, great questions.

The way you define your Class A outlook, you look just at U.S. and Canada, which is, in this circumstance, really where the weakness it is concentrated. Most market participants would also include Mexico and exports. So I guess if you were to include Mexico and exports into your view, how are you seeing '07 versus '06 in all of North America?

Well, Mexico has a real opportunity to be at another record level -- very strong. The investment of $75 million we made to produce or to build a brand-new Kenworth factory in Mexicali has really paid off. The timing has been superb. And the export business -- of course, we're selling into 100 countries, which have a real variance in terms of their own economic cycles. But the Mexican market is comparable in size to the Canadian market sort of year in, year out. So it is really the U.S. market that dominates. It's almost 10 times the size.

But I guess under the ACT definition, which is more production than sales, they are looking at 225,000 to 228,000 builds for all of North America, including export and Mexico. Do you guys internally have a number that is kind of apples-to-apples to the ACT definition?

Yes, we do. We just typically don't share it. We really look at each market individually, because that is where our plants are located, that is where our sales and engineering efforts are, and that is where our dealers are located. So I think you're on the right path, but we just don't break that number out publicly.

One of these days, I'm going to get that secret black book that you guys keep.

You are doing a good job. Keep it up.

Jonathan Steinmetz, Morgan Stanley.

A couple of follow-ups from the discussion you just had with Peter. When you think about passing through the cost increase, as you talked about, throughout the quarter was there any increase in the ability to pass it through, or it's just sort of stayed stable? And maybe do you think we're stuck with this for the next six months if the freight environment is kind of choppy?

Well, you guys are really going to get us to try to give some guidance. I love it. I think it looks about what you have seen. Obviously, we are continuing to be pleased that the economy is good. But we have been through these markets and these cycles for many, many decades, and I think the benefit for PACCAR and shareholders and employees and dealers and customers is the strong global diversification, and I think as you have rightly pointed out, strength in Western Europe.

And I think another important area that would merit some review is the growth of Central and let's call it Eastern Europe -- from a market of, say, 10,000 units a number of years ago to 50,000 units now and 100,000 units a few years out is a very major development that certainly DAF and PACCAR are taking advantage of, as we are market share leaders in a number of countries, including Hungary, the Czech Republic and Poland, and very exciting. We would love to get you guys over to see this new PDC we are building in Budapest.

I would like to get the chance to go see it. And it is a perfect segue. I had a question on Europe. You mentioned that the margins were higher, which I guess we would expect, given how robust the volumes are. But are there any costs to deal with all the volume that would be constraining the amount of growth you'd see in the margins there versus what you might expect, given the operating leverage, or are things sort of -- you are able to keep up with the volume as planned?

Well, I think we're keeping up the with the volume. DAF and the team there, led by Aad Goudriaan, have done a tremendous job. You have seen a dramatic ramp-up of almost doubling production, certainly in the last five or six years, and strong backlogs, as a number of our competitors have in Europe.

There is ongoing turmoil in the marketplace as different companies are trying to figure out who owns who. And DAF just keeps moving along with by far the best product range -- three Truck of the Year awards and a dramatic increase in the number of dealers, and as you say, a real strong investment, Western, Central and Eastern Europe, all the way to the Middle East. So right now, it is a great position and it looks like it should continue for a time.

Thank you very much.

Thank you. Good questions.

Justin Ward, Wachovia Capital Markets.

This is Justin in for Andy Casey. I have a question. I would like to ask you about truck market opportunities that you appear to be forgoing, specifically the U.S. government MRAP program. Some other manufacturers are indicating that this program is very lucrative. Considering that, I would expect PACCAR to be participating, especially considering PACCAR is the most efficient truck manufacturer in the world. I was hoping you could help me understand why you may not be participating.

Absolutely. Great, great question. We are very proud of our strong heritage supporting the armed forces throughout the world for many countries that we are involved with. And I always love watching the PACCAR history video, where we built 1500 Sherman tanks during World War II. I don't know if you have a copy of it, but we are happy to send you a copy of that nice video.

In terms of the different truck and truck-related -- let's call it transport programs that are currently in the news, we do evaluate them. Of course, over the last 10 and 20 years, and that is the time frame you really need to take a look at, the manner of -- let's call it selection, bidding, evaluation has changed dramatically. There is obviously a huge cost burden on any manufacturer. And there is a lot of demo units, quite rigorous testing that is obviously done on your own back in the hopes of eventually being selected. And much of the selection process can be -- it's not always, but can be reduced to a low-bid operation.

PACCAR, as you rightfully say, is the low-cost manufacturer. But we're selling a premium product at a premium price. And we are exceeding our customers' expectations. And that is the philosophy that has guided us for 102 years. And certainly, that will be my one forecast note during this commentary -- that is going to guide us for the next 100 years.

So we just -- the numbers that are currently quoted in the press typically involve some 10- and 20-year forecasting -- spare parts, repair and refurbishment. All that glitters is not gold, let me just put it that way.

Jamie Cook, Credit Suisse.

Two questions -- one will be on this cycle and one -- I am going to try to get past 2007, for once.

I guess my first question -- when you're talking to some of the dealers, you have lowered your forecast a couple of times for 2007. And when I talk to some of the truck dealers, their concern is they have no orders in the fourth quarter and they are concerned that the downturn could be extended into 2008.

So first, can you sort of give me -- when you are talking to dealers, how concerned are you that 2008 isn't a great year, it's just sort of an okay year, with 2010 in front of us?

Well, typically, we like to be able to present to our customers the opportunity to receive their custom-built truck in six to eight weeks. That is during all phases of the cycle. And that is what we want to be able to deliver to our customers. So whatever the order situation is in the fourth quarter, I would say that is pretty normal during any parts of the cycle. So I don't --

But you're not concerned or you're not hearing anything from the field to suggest that the recovery could be pushed out maybe till first quarter of 2008 or latter half of first quarter 2008? You're still assuming that we have the pickup in the beginning of the year or late 2007?

Of course, we have never said anything about any timing on -- let's call it forecast market. And I think we will continue to maintain that same stance.

Recognize that the emission-induced impact on the marketplace -- that is what it is -- the economy's still growing 2%, maybe a little over 2% GDP. Europe is growing 2%, a little over 2% GDP. So all the -- let's call it the factors influencing our marketplace, and then of course we've got the aftermarket is strong for us, financial service is strong, information technology is strong -- all those basic macroeconomic factors are still in place and still looking positive. So it is not a matter of timing of when things will change, improve or evolve; it's just working through a current number of wonderful new vehicles that are not being fully utilized. And when they are fully utilized, we will see an increase in orders.

But it doesn't sound like -- I mean, I understand you don't want to give a forecast for 2008, but it doesn't sound like you're seeing anything at this point for you to be less optimistic.

You know, if you had asked this question to me at any -- July, any of the previous 11 years, I would say the same thing. I don't know what is going to happen next year. And I don't think anybody really does.

Okay. Well then, let's -- all right, I will switch gears here, and let's get past 2007. I guess as you look at PACCAR and you look at their history, each cycle, I would say, PACCAR performs at a higher level of profitability. You are constantly evolving as a company and probably doing better than any of us ever estimated. So I guess as I look at --

Thank you.

As I look at the next downturn, what are the -- over the next three or four years, what are the three or four things I can look at that I should measure PACCAR against in terms of positioning yourself for the next downturn, whether it is in 2011 or '12 or whenever, whether it is more aggressive in Asia, Eastern Europe, going into sort of adjacent truck markets -- what are the key couple things I should be looking out for?

That is a great question. We will have to pull out the magic black book that one of your colleagues referenced in an earlier question.

But we continue, as you rightfully so, and we appreciate your thoughts on that, continue to evolve as a company. So you are going to continue to see growth in the financial services. And that -- I think we have shown that. In fact, I made sure that I commented on the PacLease growth in Europe. There is a whole world out there that is an opportunity for us in financial services. We sell into 100 countries. We don't have 20% to 25% market share in too many of those countries. Why not? Opportunities -- with that, of course, is aftermarket, and information technology.

And I think we have been able to rightfully prove and demonstrate and deliver to the market a very strong IT platform where we are developing software, hardware packages for our dealers, our customers, our suppliers. We are leading in teaching Six Sigma, lean management. That is a whole growth area that is very exciting, because we are doing it every day and we have established PACCAR as a leader in the world in terms of that -- let's call it science. And then we are in a very strong position for different acquisition opportunities. And we continue to evaluate those, and periodically make some.

So there is a lot of upside and a lot of exciting things going on in PACCAR.

But it sort of sounds like a continuation of more of the same.

Well, I can't really comment on that any further. But if we had more of the same, this would be the finest company in the world to work at.

Andrew Obin, Merrill Lynch.

Just a question -- a little bit more color on the significant technology partners on the new DAF engine for North America, if you could share anything about that.

PACCAR engine, you mean?

Yes.

The PACCAR engine.

Sorry about that, PACCAR. I misspoke.

All PACCAR engine.

PACCAR engine, yes.

So what would you like to know?

If you could disclose who your significant technology partners are on this endeavor.

It is our own engine.

But who are significant suppliers to you? That is what I am asking.

Well, we have a number of suppliers. But we design, test, build, evaluate and service our own engines. So I am not sure I understand the question.

I will take it offline. Just another question -- could you comment for the use for the extra capacity at Chillicothe? Should I assume that it partially will be utilized to serve the export markets? Or is it all for domestic consumption?

I think that is a great assessment. Certainly, Chillicothe is well-positioned to service any of the markets we have in the world. And as we continue to enhance its productivity by 5% to 7% every year -- and that also ties in with the improved margin enhancement we see year on year and the improved productivity, improved profitability. But Chillicothe -- great facility, great people. And they are building trucks that are going a lot of places in the world.

Brian Rayle, FTN Midwest Research.

Question on the European leasing opportunity -- you said it was a little bit less of a developed market. How is the relative profitability between North America and Europe?

And then also, I know while you haven't set a target for when you are expecting to reach the 20% market share with DAF in Europe, but should we consider these basically coincidental events, or do you expect leasing to get to the size of North America before the truck builds or after, and just how you're thinking about that.

I think in terms of the comparability of margins, I think they are very comparable certainly between all of Europe and throughout North America. So they are good margins, and it's a great service that we provide to the dealer and then to the customer.

DAF will achieve a 20% share. It is certainly a medium-term goal that they have been very public about. And they've made great strides, essentially doubling their market share in the last 10 years. And we don't have a specific time that we've publicly shared, and we will continue to set that target, and we are confident that we will meet it.

Do you think the lease will progress along the same market share lines as the builds? Or will you grow the lease business faster than that market share? I know you won't give a timeline as to when you expect to get 20%, but should the two move coincidentally or one will lag the other?

That is a great question. Obviously, leasing in Europe, PacLease in Europe, will enhance DAF's growth, particularly as you work with customers who maybe have a mixed fleet. And our intention is to share with them the benefits of the best vehicles and services in the world, which are provided by PACCAR and DAF. And as we do that and customers see the light, that is going to help DAF towards its goal of 20% in a very expedient fashion.

Stephen Volkmann, JPMorgan.

Kind of a big-picture question -- one of the areas in which you have led your industry is return on invested capital. But as I listen to you talked today, I'm struck that we are growing things like PacLease, we are building an engine plant, we are growing engine -- well, not engine, but all parts -- distribution and building additional distribution centers, which requires some working capital and so forth as well. And it just seems like we're moving into a phase where the returns on capital may actually start declining, given where we are putting our efforts now.

And I guess I wonder, A., would you disagree with that, and B., is that particularly important to you? Is that one of the metrics that you use to manage the Company, or is it sort of a byproduct of how you do the rest of your business?

It is obviously a point that is one of many financial metrics that we review. I think I would point out that return to shareholders, net income, productivity, engineering excellence are some of the real primary metrics that we review. And these investments -- and PACCAR, as I say, has got a 102-year history of making investments in a wide variety of businesses -- I think these investments are necessary to drive the growth and to service the customers. And I think the impact is going to be very, very positive for PACCAR.

Michael Regan, Janus Capital.

Where are you located now?

Denver. So if we look at the way you have helpfully reported revenue geographically, European revenue, up 28%, a little bit more -- what would that have been ex-currency?

On the currency, you mean the euro impact?

Yes.

Are you talking about for the quarter?

For the quarter, European revenue, ex-currency -- so like for like.

The impact from currencies in the quarter compared to the prior-year quarter was to improve revenues by $90 million approximately, and pretax income by about $13 million.

Is that what you're looking for?

Yes. And then second question, again, Mark, the disclosure around the parts business on an annual basis has been very helpful. And the last two years, obviously, you have had a lot of success with revenues growing worldwide -- over 15%. I was just wondering, through the first half of this year, if the parts business has sort of followed the overall slowdown in demand for new equipment from your customers and if the rate of growth through the first half of the year is lower than the 15% we saw last year.

We don't break it out. I did indicate that it is double-digit increase. So if you look at that compared to, I guess, the U.S. and Canada truck order intake, obviously it's doing much better, and I think it is in line with the growth we have experienced over the last decade. And we have got to keep building these distribution centers so that not only are we able to handle the increased volume -- we have 1.5 million vehicles out running now. I think that is an interesting statistic -- 1.5 million PACCAR vehicles are out running, which is an all-time high.

And we pride ourselves on making sure that we are taking care of our dealers and our customers. Some of our competitors might measure it in days; we are measuring our response time in hours. So we need to be able to be close to them for that very fast turnaround and wonderful service.

I thought you might be commenting on the good-looking picture we included in the press release of our new engine plant.

It had better be good-looking for $400 million, Mark.

We appreciate all your design input, and we will try to incorporate it.

So again, worldwide aftermarket parts revenues growing double digit, but not quite at the rate for the last two years, more in line with the longer-term growth rate? Is that clarifying what you said?

I am not sure we've said that. I think parts -- are you talking about --

Mark, I am never sure what you say when you answer a question.

I think it is looking good.

And again, relative to not being sure how you have answered a couple of the questions, people have asked a couple times how to think about profitability, again, be it through the first half of this year or for all of 2006. Europe truck manufacturing or Europe truck and parts versus North American truck and parts -- is there a difference in the margin between the two? If so, which is more profitable?

I don't think we typically break it out into that granular a point. But every element of our business, we work very hard and invest to make sure that it has good profitability, regardless of where we are in the economic cycle. And I think one of the strengths of PACCAR is the continual and I would say hourly benchmarking between all of our facilities worldwide on a whole host of metrics. So that is the benefit of being a company that is involved in so many countries around the world, that you're able to continue to grow and dampen some of this cyclicality.

[Tom Bodry], Rockhampton.

Most of my questions have been asked, but let me ask you about your priorities for cash and where buybacks would line up in the ranking.

Absolutely. Buybacks continue to be certainly one of the avenues that we pursue to enhance our shareholders' return. And as outlined in the press release, we continue to have an active program authorized by the Board of Directors. Combined with the share appreciation and the strong dividend growth, it's been truly a remarkable story for our shareholders, obviously underpinned and driven by strong growth in net income that PACCAR has achieved for 102 years.

So we use cash for that. Cash is used for our strong and record level of capital investments that we have outlined, I think in some detail. Cash is also an important factor in the strong AA- credit rating by the rating agencies, which according to the latest statistics places PACCAR I think in about the top 30 companies out of several thousand that are rated, certainly in North America, which is a tremendous, I think, achievement by the Company and certainly benefits us by reducing our cost of borrowing that we do in matched funding for our finance company.

And it gives us the opportunity to basically have no manufacturing debt. As a company, we have no debt. I know some of the analysts sometimes -- I don't know, they look like they might include our financial debt as Company debt, but that is really debt that is matched to an asset in the marketplace. And then gives us the opportunity to go out and take a look at possible M&A activity. So that is really the uses of cash.

What sorts of M&A things are you thinking about?

The list is long.

Garrett Stevens, Giovine Capital.

Actually, it's Tom Giovine. I have a couple of quick questions. One is, will you just refresh my memory -- if the North American number comes in at the low end of your forecast of 180, where does that rank in the industry's history?

I don't have it right offhand, it is just obviously higher than some years and lower than other years, but just kind of where we are in the cycle.

Right, but is it -- it's still probably one of the top 10 years in the history of --

I don't have that information right at hand. But it is certainly accessible on any of the many websites that track the industry.

The other question I had was, given today's global economy, where, I guess, in North America maybe you have seen some decrease in manufacturing, but maybe an increase in the transportation needs, given that we ship stuff to the coast and finished goods come back and things need to be redistributed. Would you say that there has been a secular change in the growth rate of demand for Class A trucks, either positive or negative? And if so, would you think that there is a secular increase of 1% or a secular decrease of 2%, given today's global economic environment?

The ATA, American Trucking Association, and then [ASEA], the association in Europe, obviously, tracks the overall industry benefit to the local and different country economies. Trucking is a very strong contributor to the growth of all economies worldwide. And we see that continuing to be enhanced, particularly in China, India are investing strongly in their highway systems, which will generate strong demand for trucks. And trucking continues to be the most efficient way to move a wide range of product in a very time-sensitive fashion, as well as it being low cost.

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

I would just like to thank everyone for their excellent questions. Nothing further. Thank you, operator.

This concludes today's conference call. You may now disconnect.