帕卡 (PCAR) 2007 Q4 法說會逐字稿

Good morning, and welcome to PACCAR's fourth 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. Ken Gangl, PACCAR's Vice President and treasurer. Mr. Gangl, please go ahead.

Good morning. We'd like to welcome those listening by phone and those on the webcast. My name is Ken Gangl, Vice President and treasurer of PACCAR, and joining me this morning are Mark Pigott, Chairman and Chief Executive Officer, and Michael Barkley, Vice President and controller. As with prior conference calls, if there are members of the media participating, we request 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 the second-highest level of revenues and net income in its 102-year history, and the 69th consecutive year of earning a net profit. PACCAR's excellent performance reflects the Company's global diversification, world-class technology, industry environmental leadership, and robust after-market parts and financial services business. During the year, PACCAR set the stage for further growth by investing record amounts in capital projects and research and development. For the quarter, net income was $261.1 million, and for the full year, net income was a little over $1.2 billion. Net sales and financial services revenue were $15.2 billion. What I'd like to note is that this level of revenue is remarkable, considering that the U.S. and Canadian class 8 industry retail sales were 46% lower than the previous year. Return on equity for the year was an outstanding 27.5% and return on revenue was 8.1% for the year. I'm very proud of our 21,000 employees who have delivered these incredibly great results.

In its second century, PACCAR is proactively investing in all aspects of the business, in order to continue to deliver the highest quality products and services and grow revenues and profits at the same pace as the prior ten years. PACCAR invested a record $92.1 million in research and development in the fourth quarter. Let's talk about what we're investing in. Three major growth initiatives are, number one, developing a new range of engines, as well as ramping up expenses to meet 2010 EPA and Euro 6 emission regulations. Number two, investing in a comprehensive multi-year program to design and launch new vehicle platforms worldwide. These products will update our light, medium and heavy-duty vehicles in Europe, North America, and Asia. And three, we're working on many projects to enhance our manufacturing quality and efficiency leadership, as well as developing new business programs for our after-market customer support and financial services.

To highlight our increased levels of R&D and provide more transparency in our financial statements, R&D expense is now being shown as a separate line item in the income statement. Now, a number of you have asked an excellent question. What are the benefits of these increased investments? Well, as most manufacturers in every industry in the world recognize, there are several. First, typically achieve a lower unit cost. Two, the after-market parts profit is usually greater than the manufacturing unit profit. Three, it enables you to improve assembly and service costs due to streamlined material and engineering focus. And fourth, it enhances the performance of the products delivered to our customers due to integrated systems. Finally, one of the real benefits and key advantages for PACCAR is we have an excellent benchmarking process and comparing our European versus North American production platforms, we have found that the European model is more efficient. And as a note, about half the vehicles we produced last year already used PACCAR engines.

Switching gears, one of the key enhancements in PACCAR's business over the last decade is its geographic diversity. DAF delivered a record 60,300 commercial vehicles and achieved record net profits. Mexico and Australia also experienced record demand for their outstanding products. PACCAR Financial Europe expanded its portfolio by 13% to $2.9 billion, and PAC Lease Europe was established with the acquisition of Truck Center Hauser, a number one independent truck leasing company in Germany. PACCAR also opened its sales and sourcing office in Shanghai, China. As a direct result of the strong global markets and our investment around the world, 64% of PACCAR's revenues last year were generated outside the U.S.

Now continuing on the investment theme, last year PACCAR increased its capital investments to a record level of $427 million. As you're aware, we're beginning construction of the $400 million state-of-the-art engine manufacturing and assembly facility in Columbus, Mississippi, and that's on schedule. It'll plan to be open in late 2009 and will produce the 9.2-liter and 12.9-liter PACCAR diesel engines. These engines will be available to our customers in North America, as well as the engines supplied by our excellent suppliers. In addition, these engines will be available to be shipped to DAF to meet their growing demand. PACCAR Parts opened its 12th parts distribution center in Oklahoma City and we began construction on our 13th center in Budapest, Hungary. Kenworth Truck Company completed a 30% capacity expansion of its Chillicothe plant and DAF completed a capacity improvements at its assembly plant and opened a $60 million, 76,000-square foot engine test facility in Inhoven. These investments will enable PACCAR to meet future market demand and deliver excellent net profits to our shareholders.

Turning to technology and environmental leadership, PACCAR became the first commercial vehicle OEM to implement chassis paint robotics; first in the UK in 2006 and again at our Peterbilt Denton plant last year. Other innovative technologies include enhanced material logistics infrastructure at our PACCAR plants and 20 new world-class engine test cells. One of the areas that's nearest and dearest to my heart, and many of our employees, is PACCAR's leadership in the environmental world. Peterbilt and Kenworth introduced the industry's first no-idle climate control and hotel power-load solutions that reduce emissions by 12% and improve fuel economy by up to 8%. PACCAR was awarded the EPA's Smart Way designation in recognition of the fuel-saving aerodynamic enhancements of many of the Kenworth models and Peterbilt models.

And as you've seen in our last few press releases, PACCAR's medium-duty hybrid vehicles will be in production mid year and are expected to deliver up to 30% better fuel economy. Finally, PACCAR and Eaton have teamed up to develop proprietary class 8 hybrid technology and that'll be introduced in late 2009. And as a final note, probably what I'm most proud of is that every PACCAR manufacturing facility worldwide earned the prestigious ISO 14001 environmental certification. I'm not sure of any other manufacturer that has every one of their facilities meeting that strict regulation, very proud of our teams.

Moving to the business, two of PACCAR's fastest growing businesses are After-Market Parts and Financial Services. Parts' record revenues of $2.3 billion last year surged almost 18%, as PACCAR vehicles in use around the world grew to 1.5 million units. That's a lot of trucks. PACCAR Financial Services earned a record $284.1 million last year on record assets of $10.7 billion, and with PAC Lease now in Europe, we expect to see continued Financial Services growth in Europe. Looking at the global marketplaces, for 2008 we expect the Western and Central European 15-ton vehicle sector to have another excellent year. It will be in the range of 330,000 to 350,000 units. Registrations last year were 340,000. And as a note, this is Western and Central Europe, and Central and including Eastern Europe is almost comparable to India in their growth of 6% to 8% GDP growth, so a very exciting marketplace where DAF is doing very well. The U.S. and Canadian market should be in the range of 175,000 to 215,000 units, reflecting continued economic softness through the first half of this year. PACCAR's other key markets, including Australia, Mexico and our export business, should experience favorable operating environments this year.

Now, as you know, PACCAR is all about quality, quality, quality, and even though the class 8 industry retail sales softened in the U.S. and Canada last year, Kenworth and Peterbilt achieved a record retail market share of 26.4%, up from the previous record of 25.3%, as well as a record 12.6% in the class 6/7. Kenworth became the first truck OEM to sweep all three major product segments in the 2007 J.D. Power customer satisfaction study, and Peterbilt was ranked the highest for the second consecutive year in the J.D. Power medium-duty customer study. If there was a J.D. Power light duty and we were in it, we'd be hoping for a win there also. As we've shared previously, PACCAR is the quality leader in all markets and we're increasing our investments to extend our quality advantage.

PACCAR's focus on its shareholders and return to shareholders is legendary. 2007 was another exceptional year for PACCAR shareholders. Including dividends and share price appreciation, PACCAR's shareholder return was 29.8%, and again exceeded the Standard & Poor's 500 return for one, three, five, and ten-year time periods. In 2007, PACCAR declared a 50% stock dividend, we increased the regular dividend by 35% and declared a special dividend of $1 per share. Now I've been around a long time and I'm pleased to say that PACCAR dividends have grown over 300% over the last ten years. In addition, during 2007, the Company repurchased a split-adjusted 6.9 million of its common shares for an investment of $360 million. As PACCAR enters its 103rd year, it has a very bright future.

Thank you. I look forward to your questions.

(OPERATOR INSTRUCTIONS) Our first question comes from J. B. Groh with D.A. Davidson.

Morning, guys.

Good morning.

I appreciate you singling out the R&D costs for the year and I assume that the '07 numbers are going to show up in a filing on a quarterly basis, but could you -- when I look at it year over year a pretty significant increase. Is that -- do we attribute that to the new facility, and is that level of spending what we should expect? Understanding that you don't give guidance.

(LAUGHTER) You've been around.

Yes.

The, the R&D -- well, I think we've gotten to a size and scale and sophistication that it made sense to break it out, so I do appreciate your comment on that. The facility, I'm assuming you're talking about Columbus, really is not even a factor in the, let's call it the capital and R&D that we shared with you. I think as I outline the three major -- and, of course, there are many, many projects under way -- but the three major areas, the one that we've been working on and certainly investing in, is brand-new product ranges around the world. That's been the driver and over time other projects will come in and take their share of the investment.

So when I look at hybrid, your hotel power stuff and new engine technologies, those sorts of things, it's safe to assume that this level of spending is probably par for the course?

Yes, I think -- that's a great question. I think the R&D will be comparable to the last few quarters of '07 going through '08. We've got a lot of exciting projects and some of it's timing. We're working on all new products at all of our major divisions at the same time, and over the last 20 years, you're able to sequence those slightly differently, but it just came up that at this time, all of them are working on brand-new products, so very exciting. It'll be great for the customer.

Okay. Thank you.

Thank you.

Our next question comes from Jonathan Steinmetz with Morgan Stanley.

Great, thanks. Good morning, everyone.

Good morning, Jonathan.

Just a few follow ups on the R&D so -- I hope I have this clear. What was it specifically that, I guess, kicked up between fourth quarter and third quarter, because it looked like you were spending in the range, if I average the first three quarters, at about $55 million or, so give or take a quarter and it kicked up to over $90 million, and I'm just trying to understand when you say this range, do you mean $90 million-type quarters, or when I average out for the year $250 million for a year?

I think the last -- the third and fourth quarter, that range.

And what was the third quarter number?

It was a little bit less than the fourth.

Okay.

Yes. And I think to the first part of your question about what accelerated, just taking on a lot of talented people, you've got 2010 emissions are just two years away -- well, they're less than two years away, and DAF has a tremendous track record of being one of the first manufacturers to introduce to the marketplace their new emission regulations. And so even though year '06 is really 2012, we'd like to get it out perhaps a little bit sooner. And then just having a lot of new product development, a lot of factory enhancement, a lot of parts distribution centers being invested in and adding people there. So it's really across the board, very, very exciting. Of course with the great balance sheet, we're able to do that.

And if you had to pinpoint when you think you start to get a payback from some of this investment, what years would you highlight as the timetable in which you really think a lot of it gets a return?

Well, I think a lot of it starts happening in the next couple quarters. We look at the investment in parts distribution centers, those start returning almost immediately. The new products take a number of years to develop, and -- but it's on -- it's ongoing. As the markets -- the markets already strong in Europe, so we're getting the efficiency investments right away, and as the markets in North America return, those improvements will drop to the bottom line in short order. So it's sort of near term, medium term and long term. It's just over a number of different cycles.

Okay, and last question is on the, the Financial Services side. The provisions look like they kicked up here. Of course your book has gotten bigger, but anything you're able to share with us in terms of either charge-off rate or delinquencies. We read a lot and hear a lot about truckers having some problems, given the freight environment. Any statistics you could share with us?

Sure. First of all, obviously even though freight is down, it's still one of the highest years in history and many of our customers are still generating very good profits, but the financing environment is uneven, to be kind, and we have seen a slight tick in some of the losses, but on a very low level. Ken?

Yes, our finance company portfolio continues to do well, and we've seen some modest increase in past due and credit losses in the United States and Canada, and particularly in the housing sector, but overall portfolio performance is good. Now, our write-offs, net of recoveries globally, moved from $14 million in 2006 to slightly over $26 million in 2007 on an asset base in excess of $10.7 billion.

Terrific. Thank you very much.

Thank you. Good questions.

Our next question comes from the line of Joel Tiss with Lehman Brothers.

Morning, Joel.

How are you?

I'm good. How are you doing?

All right. Happy birthday, almost.

Yes, you're very kind. I appreciate it. Everything's out on the internet, isn't it?

Yes, exactly. I wonder if you could just give us us a much color as you can as maybe factors causing the easing of your North American industry forecast a little bit, and maybe -- or another way to ask the same thing, what would be some of the factors that would drive us toward the bottom end, or toward the top end of what -- what people are looking for?

Sure. That's -- that's a great question, obviously something that is discussed at great length in many companies, in many industries. But, well, Ken briefly mentioned it, but you've got the housing impact and I think we're all aware of the many industries that's effecting. So, President Bush outlined some stimuli package and hopefully those will work, that'd be good, as certain segment of our customers are directly effected by the housing industry, whether it's sort of concrete or carrying lumber or white goods going to furnished homes. So,when that starts to recover, it'll be positive.

Car production, pretty much, let's call it the big three, is going to have a lower year and most things that get brought into a car manufacturing facility are brought by truck, so that'll have some impact. And then just I'd say consumer confidence, and let's call it the retail mall sales, what effect's that going to have. So if one of those gets better, then there should be some benefit. As you know, Joel, you've been following us for quite a while, we try to be conservative and every month that goes by of course you get a little bit smarter on what's happening in the marketplace. I would just point out, and we've talked, that North America is an important market, but due to the growth around the world,Europe and of course the benefit of the Euro versus the dollar are -- well, 64% of our business is now outside of the U.S., which is probably a record. Does that help you out?

Yes, that helps. Are you able to give us any - even just very ballparky on the profitability of those revenues, 50/50, North America versus not or just any help there?

Well, I would say that because of the volume and production levels in Europe, which is our DAF group, as you know, versus the lower levels at Kenworth and Peterbilt, U.S. and Canada, that on a unit basis Europe will be more profitable, because of the efficiency, but also more importantly just because of the volume going through the factories.

Okay. And last question, do you think you're going to be able to help your customers ease into higher prices before 2010 to just to help them cope with whatever changes might be coming so they don't have to absorb it all at once?

Well, I think we always work very closely with our customers. I think what we've learned as an industry from 2007 and many of our customers -- obviously we spend a lot of time with our customers -- is that 2007 went probably better than almost anybody expected. If you -- if you really look at the adoption by the customers of the new engines and after the -- let's call it the initial break-in period, the engines are performing well. Many customers would say, probably shouldn't have bought so heavily in the, quote, pre-buy and just had more of an even several-year purchasing cycle. I think that will play into '09 and '10, so I think that's actually -- it's good for the customers because they don't have money tied up in vehicles that may just be sitting in their yard. It's certainly good for the OEMs and the suppliers, because you don't get into the ramp-up/ramp-down scenario. And the cost -- I think the industry's very efficient in terms of being able to parcel the cost out ultimately to the end consumer, which is pretty much how the industry works. And I think it's -- I think we've learned a lot and people are taking much more pragmatic, balanced view.

Okay, thank you very much.

Thank you, appreciate it.

Our next question comes from Peter Nesvold with Bear, Stearns.

Morning, Peter.

Hey, Mark. So you're proud of the results, as usual. I look at the stock chart, when your 52-week low, stock's down 4.5% today or so, so there is a bit of a disconnect, I think, with how people externally are looking at the results these days versus how you guys are looking at them internally, and I think that one thing that jumps off the page is the truck gross margins being the worst this quarter in six years. What I want to understand a little bit better -- I know it's been touched on a couple of times -- but the elevated R&D spend -- I don't want to put words in your mouth, I just want to clarify it -- it sounds like this runs through perhaps the end of '08, coincident with several new product introductions, bringing the new engine over to North America, investing in order to hit 2012 in Europe, but that perhaps as we exit '08 or there about, we start going back to what the R&D looked like before. I just want to make sure that perhaps we haven't hit some kind of structural inflection point where gross margins are going to be lower in the intermediate term than what we've been accustomed to.

No, it's an excellent question. PACCAR is doing well, as I say, second best year in 102-year history and most companies would be proud to have these results and I'm very proud of the team for delivering them, so thanks for your kind thoughts. In terms of the investment, this is -- this is a much more global, diverse Company than it was, well, ten-years ago, 20-years ago, and we have many more projects going on. So I think one thought is the U.S. and Canadian truck marketplace is down 45% or more, and that has an impact on the type of margins you're able to get in the marketplace. There's not a huge amount of demand because there's not a huge amount of business, so that has -- that has a definite impact and I think we need to be aware of that. Good markets tend to lead to good margins.

The investment we're making and have made -- I mean, we've invested a lot for 102 years -- I think it's just at a -- more of a little higher level, but looking to deliver higher profits, so it's not an either/or. The investments we're making throughout the Company are -- first of all, it's nice to be able to make these investments, most companies cannot but we are able to. So we're investing it for really a couple simple reasons. One, to generate increased profitability and growth for our Company, and two, to really deliver to our customers a very exciting range of products and processes and services that will allow us to continue to grow and generate, again, more profit. So it's a -- it's a virtuous cycle.

Okay. On the engine strategy, I'm not really surprised to hear you're going with SCR in North America. That's what you use in DAF, as I understand it.

Right.

Doesn't this im -- but one thing I've struggled with is aren't you going to encounter a relatively complex engine extra in 2010 with three different engine makers. We know that Cummins, which I believe you're going to continue to use, although I guess it's a little unclear, but --

Excellent supplier partner.

Okay. So you're going to have Cummins, which has the existing footprint of the engine, but no SCR. You're going to have the DAF -- or I'm sorry, the PACCAR engine, which will use SCR, and CATs technology, we're not quite sure what it's going to look like just yet, but CAT has gone down its own proprietary path in the past. So can you support that level of complexity now that you have three different engine families as opposed to two historically, and is the com -- is really -- do you get that payback in 2010 from supporting three different engines, is that sufficient to pay for the complexity that'll probably be required to cover all three different families?

Well, the good news is we've been supporting three different design packages for quite a few years.

North America. I respect DAF is on its own path, but North America?

But -- but you can't really segregate them, so our engineering teams globally -- and there's quite a bit of benchmarking and sharing and collaborating -- have been supporting three, let's call it platforms for over a decade and doing it very, very well. So for us, there's really not a change. In fact, I'd say there's almost no change.

Okay. We don't have into a lot of detail on an earnings call on this, but I just -- physically the pipes and everything is so different, it would seem --

I know, but we've been doing it for over a decade.

Okay, okay.

And as far as the cost, typically the suppliers bear the cost of preparing their engines for installation into whatever vehicles they happen to sell them to.

Okay, and if I may last -- slip in one last final question.

Sure.

Another thing that's weighing on the stock today is the outlook for no growth in Europe -- and granted, it was the same thing you were saying last quarter, so it's not really a surprise -- but I'd say that your outlook for Europe is perhaps more muted than what we're seeing out of the European OEMs. Anything you can help me understand there, why you're expecting -- taking the midpoint of your '08 range for flattish production Europe '07 versus '08?

Well, of course we didn't say we're having flattish production. We're just saying the market will be -- we're saying the market could be another record, which is always a good thing, but we're increasing our production in Europe, and as well as continuing to invest to increase our capacity. And as I mentioned also, Central, Eastern Europe, and DAF is the market share leader in Poland, the Czech Republic, Hungary, and now moving into Turkey and other countries, as well as being the leader in many Western European. So, we're conservative, always have been, but what we've said in the press release, and comments is that DAF is increasing capacity and we're looking for 20% share. We're at 14% right now and we're putting in that capacity and capability and efficiency to deliver that over time, so we're very excited about it.

And book-to-bill, north of one in fourth quarter in Europe, so bookings still growing faster than production?

In Europe?

Yes.

Yes, in fact, we're quoting a year out.

Okay. Thank you, Mark.

Good, thanks. Good questions.

Our next question is from Jamie Cook with Credit Suisse.

Morning, Jamie.

Good morning. I guess my question, just to follow up on what everybody else is asking, you talked about the investments you're making and how that should lead to improved levels of profitability. And I guess what I'm just trying to figure out, you said you had the near-term, medium and long-term buckets, and I guess I'm just trying to figure out which one is biggest because the thing I'm struggling with over the next three years, it seems like your costs are going to be up -- your R&D costs are going to be up for some period of time and it also seems like, as we look at this cycle or we look at the pre-buy leading into 2010, that that's going to be lower versus where we thought. So I'm looking at this and saying the Street's too high, so I'm just trying to figure out, if you could help me, how to identify those three different buckets to see what I'm missing?

Well, first of all, let's talk about the pre-buy. It'd be great if 2009 did not duplicate 2006 because it meant 2010 would be better than 2007 and that's a win for everybody in terms of a more moderated demand, and increased profitability over the cycle. It'd be great for our customers, it'd be great for our suppliers, and it'd be great for the OEMs, and that's really what you want. We want the profitability over the cycle, and I think that's probably what you're looking for also, that more consistent profitability. In terms of the benefits -- when we bring on parts distribution centers, there's a benefit almost right away because we're able to stock and ship and satisfy our customers' demands right away. Capacity enhancements at the factory can once again benefit you right away. There's even more benefit as -- as the build rates improve and that's a function of typically the general economy. So we'll see how the U.S. and Canada -- Canadian economy recover.

And then adding capacity in Europe, well, there's so much demand there, everybody is just trying to build as many vehicles as we can, so as we bring on more capacity, that benefit's going to happen right away. So that -- I would say that sort of short and medium term. Longer term, ever -- anybody that manufactures anything in any industry in the world is always working on new products. We've always done it and we've set many, many standards and keep winning the quality awards. So we're working on brand-new products and as I say, light, medium, heavy duty, North America, Europe, and even products that we can sell into Asia. So, we got a lot of product development. As those come out -- and those take a number of years, as you're aware -- we look for great benefit there. So I think it's actually each -- each sequential bucket, if you will, pulls its own weight and will make a positive profit enhancement.

And then I -- just next, back to Peter's question on your European forecast, while it's still pretty good and PACCAR will do better than the industry, is any of your guidance, the flattish year-over-year growth reflective of increased concerns about the Western European economies?

No.

No?

I think Central and Eastern will pick up anything that Western doesn't have, but right now on the -- in the truck world, there's the -- well, the GDP growth in Western Europe is still good. It might have slowed somewhat, but the trucks are not being impacted and Central and Eastern Europe will more than pick that up.

Okay. a nd then just to -- actually, you know what, I'm all set. Thank you.

Okay, thank you. Appreciate it.

Our next question is from Andrew Casey with Wachovia Securities.

Morning, Andrew.

Good morning, Mark. How are you doing?

Good, thanks.

Good. Got a couple of questions about top line and then a margin-related question. First, on the top line, just mainly in terms of growth rate, in Europe your reported all-in growth rate was 38% in the quarter. That's down a little bit from Q3's 46%, but up from Q2's 28%. I'm trying to understand the variance in quarterly growth rate. Was it Q3 performance really was due to easier comps in the '06 time period that then became more difficult again in Q4? Can you help me with that?

Okay.

I think what you're getting a is the European growth being slightly lower in the fourth quarter, and that's reflective of factory shutdowns that occurred over the holiday period that were used to improve capacity going forward.

Okay. So there were actually fewer production days in Q4 in Europe?

Correct.

Okay.

And the good thing is we increased our efficiency and capacity so we can make more and generate improved margins and more total units. You have to invest in order to grow. That's the key.

Completely understand. Thank you.

Excellent. Good question. Thank you.

And if I could for a few more.

Sure.

On the other region, same type of question; Q4, 3%, Q3 was 7%. Is that a function of Canadian/Mexican earlier comps or did you take a shutdown there as well?

Well, the other would have Mexico and same sort of scenario as we saw in Europe. Mexico introduced some new tax legislation, which impacted, well, the entire country, not just our industry, and so there were fewer production days fourth quarter '07 versus fourth quarter '06, and I think that's really what you're seeing.

Did that persist in Q1?

Well, the tax legislation is now in effect, and this is an inventory valuation tax that is effecting, well, anybody that has inventory in any industry, so that's now being worked through the system and I think people are starting to get more comfortable with it.

Okay. And then lastly, on the margin, in Q4 it was down a little bit from the Q3. Part of that has to do, I'm sure, with the lower unit production days in Europe and unit volume declines North America, higher R&D expense.

Correct, correct.

Were there any other factors in Q4 that you'd like to talk about?

Well, yes, and I think -- no, I think you've got it. Some factory expenses to keep enhancing them, but I think you pretty much have encapsulated it there.

Okay.

And the good news is, second best year in our history.

Congratulations.

Yes, thank you very much.

Thanks.

Our next question is from Andrew Obin with Merrill Lynch.

Good morning, Andrew.

Yes, good morning. Just a clarification on your engine. You said that you're going to be using both SCR and EGR, so does that mean that there will be a PACCAR-brand engine that will not utilize SCR technology in 2010?

That -- no, our -- the PACCAR engine will use a combination.

Okay. So --

-- of SCR and EGR. So, no, we'll only have a unitary, a single approach to emission regulations.

So all PACCAR-brand engines will require UREA, is that a fair statement?

That is a correct statement. And if you'd like to talk in much more technical detail, would be happy to take it off line and we've got a lot of incredible engine designers that would love to share their thoughts with you.

Sure. The other part of the question, you've highlighted significant investments in capacity expansion, in particularly in North America, and the question I have for you, just theoretically, how high do you think PACCAR's market share can go in North America, while maintaining its premium brand?

Our number one focus is quality and return to shareholders, and that's guided us for 102 years and what is very satisfying and rewarding to our customers, our shareholders and employees is by adhering to that strategy, market share increases because more and more people recognize the value of quality in terms of lowering their operating costs, higher resale values, and just ease of attracting and retaining their drivers. So I, I don't have an answer for you because it's all about quality and return to shareholders.

But in the calculation that you make about better throughput through your factories and all the efficiencies that you gain from that, do you think that the price gap between Peterbilt and Kenworth and the rest of the industry will have to narrow somewhat over the next several years for you to utilize this capacity? Or do you think you can gain this market share with current pricing structure?

We're investing to continue -- we're the low-cost manufacturer and the high-quality deliverer of product. And that's what we keep investing in; new products, higher quality, lower costs. So certainly our teams are very focused on extending their advantage versus our competitors, in meaning higher-quality products, continuing to be recognized by J.D. Powers, lower costs, more efficient, faster time to marketplace for new designs. That's where our energy and investments are really focused.

So you think you can close the gap on just being the most efficient manufacture in the industry?

Pardon me?

You intend to stay ahead just be being -- having the lowest costs and you can always -- you will be competitive against anybody because your costs will be better than anybody else's?

That's certainly one element of it, and the highest quality. It's all about quality for us. Quality, quality, quality.

Well, thank you very much, Mark.

Thank you. Appreciate it.

Our next question is from Stephen Volkmann with JPMorgan.

Good morning, Stephen.

Hi, good morning. Just a couple of details here, I guess, since a lot of this has been asked, but can you -- you commented in your release about the UREA distribution system. Can you just comment a little more on what you're doing to get that in place?

Absolutely. That's a great question. Certainly we're working with organizations, such as the American Trucking Association, the Manufacturer's Association, other industry associations, and also recognize that most of our competitors will also be introducing UREA, so this is very much an industry-driven initiative. So then we're working with the chemical companies. We're working with oil companies. We're working with the independent truck stop operators. We're working with a wide range of different OEM dealer networks to present a comprehensive and coordinated supply platform of UREA to people driving on the highways of North America.

Okay. Would you anticipate that that would take any investment on your part, on PACCAR's part?

Well, I think our investment is producing the highest-quality product. Typically the -- well, as I say, the chemical, oil and independent distributors, truck stop operators, they look at this as another customer service and profit opportunity, so I think they're the ones that are going to be investing.

Okay, great. And then just with 2007 now in the rear view mirror, do you think that your customers saw any performance difference amongst the engines from your various suppliers?

I think when you boil it all down and there was, as we say in England, swings and round-abouts, the performance was better than anticipated, and coming back to an earlier response to another good question, I think many of the customers we talked to would say, I probably should not have purchased so many new vehicles -- yes, in the pre-buy and just had more of a moderated approach. So I think the technology is performing and people are happy and customers are making excellent profits, so I think we've all learned from that.

Okay, but just to push that one half step further, there's no major difference amongst your suppliers in terms of performance and so forth from your customers' viewpoint?

It -- not that we can see. It's very much comes down to local support, and typically what dealers and customers are used to in terms of selling to the marketplace.

Great. And then DAF in Europe, do you think DAF's market share in Eastern Europe is roughly similar to Western Europe, or is there either an opportunity or perhaps some outperformance in Eastern Europe?

Well, it varies by country. In some countries, we have -- in Western Europe -- I'll just kind of answer in two part -- in Western Europe we're one of the fastest grow -- probably the fastest growing OEM and our shares will vary from over 30% in the UK, Holland, Belgium, to 15% Germany, France, and then maybe 10% Italy, Spain. When you look at Central Europe, we're at 20% share in the Czech Republic, Poland, Hungary, and probably less than that in Turkey and some of the Stans and going into Russia. So there is so much opportunity, it's very exciting.

Okay.

Of course we got the highest-rated product, keep winning these truck of the year awards. It's just a great, great product range.

Okay, great. And then just one quick one on this whole R&D and CapEx outlook. I guess my assumption was that both R&D and CapEx were likely to be elevated through the end of the decade, as we work on the new engine and product platforms and so forth. And then the -- at least on the technology payback comes post 2010 when you start getting your vertical integration out there, you get to start to play in the parts business from the new engine and so forth, but that is clearly going to be a little further out there. Any comment on that observation?

Well, we're looking for excellent profit return on all these investments and have a great track record of achieving excellent profit return, and as I mentioned to one of the earlier questions, there are different sequences and cycles, depending on which capital investments and which expenses associated with different projects. Parts returns almost immediately. You build something and you go out and work with the customers and sell more parts. Factory capacity and efficiency enhancements are short term, medium term, and long term because they don't go away. New product development is more medium/long term. So I think you're right in the assumption that -- you know, we're growing. We're $16 billion, $15 billion, $17 billion in, that range. We're looking to grow. That's certainly always been our focus. We want to grow our profits even faster than revenues. We've been able to achieve that for about many decades, and you have to invest in order to grow. So I know that some people were interested in, let's call it breaking out of the R&D, and -- but we've always had strong R&D, strong capital investment forever. I guess we're just maybe making it a little more transparent and that's what's maybe causing a little more interest.

Great. Well, transparency's always appreciated. We thank you.

Well, good question. Thanks a lot.

Bye-bye.

Our next question is from John Kohler with Oppenheimer & Co.

Morning, John.

Good morning. How are you?

Good, thanks.

A quick question, can you give a figure on 30-day delinquencies for the on-balance sheet credit ?

We typically don't break that out for public consumption.

Okay. Is it comparable to PACCAR Financials' credit performance? Is there a material difference between the two?

Okay, I'm a little bit confused on the question, then.

Well, if you don't break out the 30-day delinquencies --

We break it out internally.

No, but if you don't allow it for public consumption, is it -- can I draw an inference from how PACCAR Financials' credit performance is, as filed in the Q's with the SEC?

Okay, good question.

Is it comparable?

As Ken mentioned, we are experiencing somewhat higher past dues in North America and very strong performance and lower past dues in the rest of the world. So, on balance, our past dues on the overall portfolio are up compared to last year, but not a significant amount.

Okay, because the --the September figure showed 30-day delinquencies at 1.34%, which is up from 0.84% in the year-ago period in September. I imagine those got a little worse?

Yes. I think as we've mentioned, we've doubled the size of our portfolio in the last five, six years and very conservative in terms of the funding requirement that we're looking at from our customers and -- but we're in excellent position and very proud that PACCAR financial delivered another record year.

Okay. So is it safe to assume, then, that the overall portfolio is running about 1% or so, 30-day delinquents?

No, not at all. I'm not sure where you're getting that figure from.

Okay.

The portfolio's in fantastic shape.

Okay, thanks.

All right, thanks.

Our next question is from [Reshi Suneck] with TCI.

Good morning.

Good morning, Mark, thanks for your time. I had a question similarly on the financing side, I was wondering if you could tell us what proportion of your U.S. sales you actually finance?

Typically 20%, 25%, 30%.

Thank you. That's helpful. Of the ones that you don't finance, do you know if that's because people don't want the financing or is it more because you've turned them down as being poor credit quality?

No, it's a whole range of answers. There's no one. I bet there's ten different scenarios on -- on the finance selection by the customer.

But if you have to pick the largest explanation, is it more -- is it more you turned them down or more --

Probably typically a relationship with a home bank.

Right. Do you think [that they're the] lower credit quality people than the purchase4s that you finance yourselves? Are you worried about a potential source of buyers exiting the market as the credit standards tighten?

Not really. No, I mean -- no, no, got great customers. We love our customers and we're working hard to provide a full service to them and that would be financing, leasing, we'll even manage their inventory for them.

And the last one I had was on your own standards -- we keep hearing that bank and mortgage providers and consumer credit, (inaudible), the standards are all being tightened across the U.S. Have you guys implemented a tightening of standards yourselves yet, or is that something you'll (inaudible) to do this year, if need be?

Well, I think we pride ourselves on probably having the most conservative standards in the financial industry and have for decades and decades. When you get into a turbulent financial market, as we've seen, around the world, certainly we review it and make some enhancements to our programs. But they're very, very conservative to say -- they're probably the most conservative in the industry. So we'll make enhancements, but as Ken indicated, a very strong portfolio and we're moving forward.

Excellent. Thanks for your time.

Thank you. Appreciate it. Good questions.

Our next question is from David Bleustein with UBS.

Good morning, David.

Good morning. Quick question for you. How do you sketch out PACCAR's growth path, or do you have any designs on getting bigger in the military business, and/or in Asia?

Well, excellent question. Asia, of course we've been there over 100 years. We're a steady supplier in Asia, particularly in the more rigorous, off-road applications, but also component sales. We've opened an office in Shanghai to compliment the one we have in Beijing. We're taking a strong look at India and with the world-class powertrain that we have, we're getting ongoing inquiries from people saying, like to purchase it and so we're selling some to bus manufacturers and other end customers. We're also starting to sell some of our, let's call it on-highway product into Asia. So that's -- it's an exciting growth market. I think everybody is aware that Asia's strong, but particularly China's still dominated by state-owned companies. So over the -- over time that will evolve. In the military, we've had a strong presence in military, particularly in the 30s, 40s, 50s. We do some military in Europe, but don't really have any plans to do military in North America at this time.

Terrific, thanks.

Good. Thanks a lot.

Our next question is from Michael Reagan with Janus Capital.

Morning, Michael.

Hey, Mark, how are you?

Good, thanks, how you doing?

I missed some of your earliest comments. Did you actually give the R&D by quarter for the first three quarters of the year, and can you give us any R&D numbers for the past few years?

No, we did not give -- you mean -- are you talking about for 2008?

No, R&D by quarter for the first three quarters of '07.

We did not give those out, and, of course, you'll get them in the quarterly comparisons of '08/'07.

Well, Mark, in the spirit of disclosure, let's not wait until the first three quarters of '08 to get the last three quarters of '07.

Good.

And in the spirit of disclosure, it would be really helpful if we could get R&D broken out going back -- I would ask for ten years just so we can get some perspective through the cycle of what R&D's looked like. That would be very helpful.

Appreciate your input.

Thank you.

Thank you.

Our next question is a follow-up question from Jonathan Steinmetz with Morgan Stanley.

Hi, Jonathan.

Thanks. Mark, just a few others here. In the other bucket of revenue, which is about $3.5 billion for the year, can us just talk a little bit -- you gave a forecast for Europe, a forecast for the U.S. and Canada market. Can you talk just basically what you see in Mexico and Australia, which are pretty important markets for you in the other bucket?

Well, of course Australia and Mexico both either have or have had their own emission regulations, and so last year, Australia, very strong, maybe a pre-buy, but that continues to be strong down there. Mexico has the emissions coming up mid year this year. They're working through the new tax capital inventory legislation. That's really impacting every, every industry in Mexico. But over the next month or two that'll work through, so there will be, I think, another strong market in Mexico. Of course, Mexico continues to grow. So I think both good, solid markets.

Okay. And did you give the impact of currency translations, specifically the Euro, on revenue and also EBIT in the quarter year on year?

Okay, we got those.

Yes, the impact on revenues for the quarter was about $240 million and on net income, was $25 million. And for the year, it was $630 million and income was about $70 million.

Great, thank you very much.

Thank you. Good questions.

Our next question is from David Campbell with Owl Creek.

Morning, David.

Morning, thanks. I've got a currency-related question, too. Could you discuss what effect on you the long-term currency exchange rate is, like the dollar, Euro has, and how you expect market share and cost competitiveness to change over time?

Well, I think -- that's a great question. One of the -- PACCAR is in a very fortunate position because, first of all, we're the low-cost manufacturer in every market in which we manufacture, so that's Mexico, U.S., Canada, Holland, Belgium, England. And we are -- we're typically not really shipping too many parts or components back and forth, so we're not -- we're not trying to arbitrage the currency change. Now, one of the potential benefits is as we bring our Mississippi engine plant on-stream it could be -- I just say could be a source of engines for DAF if there's some -- maybe the currency is -- exchange rates the correct way.

I guess in speaking with your North American competitor, who's going to address 2010 engine emissions without SCR, they claim that SCR adds as much as $10,000 to the cost of the -- of making the truck. I wonder if you could --

I don't know who that is because Mercedes is using it and so is Volvo. There aren't a whole lot of other competitors out there.

Navistar, and again, I'm not an engine engineer, so I just --

I can't really comment because I don't think they publish financial results, so I'm not sure what they're doing.

Can you tell me your opinion on the difference in costs between an in-cylinder solution and an SCR solution in class 8, for example?

Well, I think we've had great success with that strategy and as every other major competitor has also adopted it, so I think it really stands that seems to be the preferred solution going forward.

Directly to my question, I mean --

We don't have that cost broken out at this time.

Can you -- maybe this is going to -- perhaps people who've followed your Company more closely are going to know the answer to this, so I apologize if this is kind of a one-on-one level question, but why did you decide on SCR, considering it's more complex?

Well, I'm not sure it's more complex, and also, of course, we are standard with it in Europe and having great success.

So is it fair to say that the fact that you're already using it in Europe made it kind of an unfair playing field between the two technologies?

No, I wouldn't say that's fair. I would say that it's a very proven engineering solution to a complex problem that we've done a great job of engineering and it's providing excellent benefits to our customers. Are there anymore questions?

Not from me.

Thank you.

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

No, we thank the participants for their excellent questions and thank you, operator.

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