帕卡 (PCAR) 2008 Q4 法說會逐字稿

Good morning, and welcome to Paccar's fourth quarter 2008 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.

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; Ron Armstrong, Senior Vice President; and Michael Barkley, Vice President, 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 earned the fourth highest annual net income in its 103 year history in 2008. And has delivered a remarkable 70 consecutive years of net profit to its shareholders. Paccar's financial results reflect the benefits of the Company's quality products and services, geographic diversification, excellent after market revenues and financial services income. I'm very proud of our 18,000 employees who have delivered exceptional performance to our shareholders and customers especially in today's very difficult business conditions. Paccar's excellent balance sheet and strong cash flow have enabled ongoing investments in capital projects such as diesel engines, new vehicles and factory productivity improvements. These projects position the Company to achieve its long-term growth objectives.

However, as we all know the severe recession is affecting our business in North America and Europe. Our fourth quarter 2008 financial results were negatively impacted by reduced gross margins, lower build rates and temporary plant shutdowns. These challenges are increasing in the first quarter of 2009. But just as with previous cycles, Paccar is rigorously reducing operating expenses and capital expenditures to align the business with the slower markets. When we compare the fourth quarter 2008 to the first quarter 2009, we expect build rate reductions of 40% in Europe, coupled with 10% lower truck production in the US and Canada.

At this time it appears that 2009 will be very similar to 2001 in terms of business conditions. It will be a challenging year for all industries. The good news and there is plenty of good news, is that Paccar's revenue is 2.5 times higher today than it was in 2001. A population of Kenworth, Peterbilt, and DAF trucks is 40% larger, we have 150 more dealer locations, Paccar part sales have doubled and Paccar Financial has twice as many assets. Our manufacturing facilities are 100% more efficient than five years ago and product quality is 500% better than five years ago.

A number of divisions are performing very well. Paccar Financial, Paccar Parts, Pac Lease and our winch group. And finally, we have essentially the same experienced management team in place today as we did in 2001. Paccar's fourth quarter sales and financial services revenues were $2.9 billion, net income was $113 million. For the year net sales and financial services revenues were $15 billion, with net income of $1.02 billion and earnings per share of $2.78. Paccar financial services revenues of $292 million in the fourth quarter compared to $327 million a year ago. Pretax income was $45.4 million in the fourth quarter compared to $76.2 million earned a year ago. Most of the decline is due to the higher provision for loan losses.

One more piece of good news, loan losses actually decreased in the fourth quarter compared to the third quarter primarily due to fewer repossessions in the US and Canada. Used truck values are about 10% lower than 3 months ago but may be close to the bottom.

Paccar's strong balance sheet and conservative approach to business has enabled it to navigate the financial turbulence caused by the global credit crisis. Paccar's AA minus credit rating promotes good access to the capital markets. Like other highly rated US companies Paccar utilizes the Feds commercial paper funding facility to complement our commercial paper and term debt programs. In addition, Paccar has substantial manufacturing cash to supplement short-term financial services funding requirements.

Reviewing the general market and our customers, the reduction in many commodity prices should be a benefit to Paccar and all manufacturers in 2009. However, commodity prices still need to decline another 20 to 40% to equal the cost levels of 2004. Other good news is that the $2.40 per gallon decline in the price of diesel fuel since last July is benefiting our customers. In fact most of our customers continue to be profitable and a few have increased their profits quarter to quarter.

In summary, Paccar's investment of $3.5 billion in the last decade to enhance its operating efficiency, develop new products, strengthen its dealer network and become an industry information technology leader has generated excellent results for our shareholders, employees, customers, dealers and suppliers. Paccar recognizes the very difficult challenges facing our industry worldwide. Our balanced approach in all phases of the business cycle position us to generate good results when the global economy recovers. Thank you and I look forward to your questions.

Operator, we would be happy to take questions now.

(Operator Instructions) Your first question comes from the line of Andy Casey of Wachovia Securities.

Good morning, Andy.

Good morning, Mark and everybody and afternoon to everybody over in Europe. Couple of questions, first on the capital investment guidance, if I take them at point $175 million, how should we view the implied 62% reduction from '08? Is it really that you've come to the end of your expansion cycle for now or is it more that you are being prudent in the event that what we are in lasts a little bit longer?

Well, Andy, I think we are always prudent, we pride ourselves on being conservative as you well know. We have had a lot of excellent investments with terrific ROIs throughout the Company, and capital investments for any industry have a bit of a cycle. I think we are just sort of at the end of one cycle and I'm sure in the future we'll be investing larger amounts for different products. But factories are in great shape, our vehicles in great shape, systems in great shape, now we are going to enjoy the benefits of all those investments.

Then on the start up cadence of the new engine plant in the US, is that, the implied push out which has kind of been in the press for a while. Is that mainly a reflection of lower assumed volume and you want to maximize existing capacity utilization before bringing new capacity on line or is there another reason you would like to offer?

No. I think we obviously have capacity in Europe with the slowdown there, we are going to utilize that. What sometimes doesn't make the headlines is that we essentially have a new engine factory in Europe built about four years ago state of the art. And so we will manufacture there, the buildings in Mississippi are essentially complete. And it is a first class facility that when the market recovers we look forward to utilizing.

Okay. Thanks on that, too. Then a few on the near term, we are pretty much in the teeth of what we are in, can you talk about the European used truck pricing trends, any signs of industry discounting either in US or Europe? That's about it.

When the market slows down, and I can't think of any market that hasn't slowed down in any industry, pricing is affected. On the used truck pricing, particularly in the US and Canada, we are finding that our pricing is pretty much in line with what we are selling thee units for. That's good news. We taken a very proactive approach over the last two years, and seems to be paying dividends. The good news is that the Kenworth, Peterbilt, DAF products still have a 15 to 25% advantage on used truck pricing, and that's very healthy for our customers and our dealers.

If I could follow-up a little bit. You alluded to 2001 being a pretty similar environment to what you expect in 2009, and if I go back in time in that 2001 range, we saw a lot of discounting, not necessarily from you but some of your competitors, have you seen any of that in the industry yet?

Well, every company has their own approach to the market, and certainly a number of our competitors that would tend to be their favorite approach in trying to secure orders. So for the commercial vehicle markets, the US and Canada, and some extent Mexico, we have been in a recession since the middle of '07, so we are coming up on two years so we are pretty experienced on what is going on. And as you know, we are the leading indicator going down and we're the leading indicator going up. So when things are more challenging, people resort to whatever tools they have got at their hands. So I'm sure that competitors pricing is following the normal trend.

Okay. Thank you very much, Mark.

Good questions.

Your next question comes from the line of Joel Tiss of Buckingham Research.

Joel, happy new year.

How are you doing guys?

Doing good, thank you.

I think employment lawyers are probably seeing an upturn.

I can't comment.

In the after market business can you just give us a sense of what the growth was in 2008 versus '07 and the outlook for '09?

The growth was essentially flat '08 to '07. Which could be a win if you take a look at it that way. In '09 we expect to see some growth.

Then -- well, whatever I will just ask it, you guys think you are going to be able to stay profitable in the first quarter of 2009? Given all the stress?

That's always our intention. Always our intention.

You think it's going to be close?

We don't give guidance, you know that.

All right.

Good questions.

One more, then your production all the shutdowns, you think that's going to last through February? Are you seeing the channels clearing out or do you think you are going to need to keep the shutdowns going a little bit longer through February?

Well, all of our factories are building that our -- or plan to be building. Obviously build rates have adjusted over the last two years. And we've shared with you what we think the build rate will be vis-a-vis the fourth quarter of '08, but we want our factories operating, that's good for everybody. It's good for our employees, our customers and obviously good for the business. It's something we review on a daily, weekly, monthly basis.

All right. Thank you.

Great questions.

Your next question comes from the line of Ann Duignan of JPMorgan.

Can we talk about Paccar Financial? That's where we've been getting all the questions all morning. And I suppose, what surprised us a little bit is your provision for loan losses on receivables. Yes, we understand they are up 80% year-over-year, but they were down sequentially, is that a function of lower diesel prices and correlated with the fact you mentioned that losses are actually down and that your customers are actually making money? Is it just we've reached such a low level that there just aren't many more customers to go bankrupt out there?

Well, let me address part of that, and I know Ron will have any more specifics you want. Most of the trucking companies are making money. So let's get that out there. You have seen the results over the last week from certainly the major ones that report publicly. I think that's important. I know that it's not a popular trend in the world today to talk about good news but there is plenty of good news, so most customers are making money and a number have actually increased profits, and why they manage their business well, fuel which is about 25 to 30% of their business has come down, by $2 plus, per gallon, and you have to calculate that most of them buy about 20,000 gallons per truck per year of fuel. You can do the math on the benefit of that at least on a cash flow basis. Driver turnover is coming way down because essentially the housing market is slow and people saying, well, I want to keep my job and don't have any houses to build so I'm going to keep driving my truck. So that's saving them hundreds of thousands of dollars. They're getting attractive pricing on trucks and freight is down but it's still -- let's call it 2000, 2001 levels, so even though 5% of the capacity of industry has been taken out, the 95% that's left, are doing reasonably well. So that's kind of the market overview. And Ron might have some thoughts on any financial questions you got.

If you could just comment on your outlook for loan loss provisions as we go in to '09. Should we look at Q4 as being a run rate or -- do you anticipate that with Europe falling off a cliff that we have yet to see the impact of those customers going out of business or under financial stress? If you could just help us understand what you are looking at going in to '09 for financial services?

Well, I think we continued to monitor the portfolio. And it's performing well. We don't see any particular trends one way or another. We are working with customers as needed to support their business. We will continue to do that throughout the coming year.

How much manufacturing cash are you now using to fund Paccar Financial?

Minimal.

Minimal. Okay. Can I switch back to the manufacturing side, can you talk a little bit more about the launch of the new engines and new manufacturing facility, we heard some scuttle out there that maybe there were some start-up problems or some issues out there. Can you talk a little bit about, and I know it's scuffle so--?

Ann, you're a speaking person. Don't waste your time listening to that stuff. Give us a call, we will let you know.

Can you talk about contingency plans you might have if their should be any problems and if engines are not ready on 1/1/2010? Or just give us an update on what's going on.

I don't know who you have been talking to. Things are going great. I think in our press release and in my comments we talked about 40 million miles of, these engines have run which is about 3 times more than any other manufacturer has ever run their engines before it's launched. The factory itself, I was just there two weeks ago, is fantastic, we got great employees. And as I think Andy mentioned or asked earlier we've got some capacity if in our facility in Eindhoven which we're going to use which makes sense. Certainly from a business standpoint. As the market recovers we look forward to utilizing a wonderful new factory in Mississippi. It's all green light here.

Okay. I will get back in queue.

Thank you.

Your next question comes from the line of Jamie Cook of Credit Suisse.

Good morning. My first question, can you, on the engine side, can you just talk about what you are hearing from your customers in the US in terms of the adoption of the engine for 2009, because from our perspective we are going to have to start to model that in? And then I guess just my second question, a little more color or granularity when we think about Western and Central Europe by country and even the emerging markets what you are seeing, the magnitude of the decline that you are seeing.

I think there won't be a lot of modeling in terms of engine, this will be a gradual phase in, which is very typical of how we introduce our products around the world and have for decades. Not sure that's going to have real impact on your modeling, trying to help you out here, it's going great. People are excited about it. Obviously just one more piece of the business that customers and dealers, our own people enjoy, we have been building engines for 50 years, it's pretty much business as normal. Looking at Europe it's a little hard to give a country by country because, first of all, they don't usually issue information for about six months on a country by country basis--.

I assume you're talking to your customers though?

Europe has slowed down as has the rest of the world. We've given you some indications on what we think at this point the end of January of 2009 will look like. And it's, we are building trucks every day. Continue to win all the quality awards in whatever market we are competing in. It's going to be an exciting year. We are looking forward to it.

Thanks. I will get back in queue.

Your next question comes from Adam Uhlman of Cleveland Research.

Good morning Adam.

Mr. Uhlman, your line is open.

Hi, good morning. Related to these new engines that are coming out in 2010, how much is Paccar going to be raising prices in 2010 in the US?

We like to look at it as raising value. But I think the range that you will hear from everybody in the industry is 5,000 to $10,000, that's a pretty broad range, obviously depends on horsepower and application, but I think that's the general industry range. Of course we have been around a long time. So '94, '98, 2002, 2004, 2007, now 2010, about every three years we see it. Of course the good news is, continues to be great for the environment, which we are proud to be a leader on and also the fuel economy for the most part continues to improve which lowers the cost for our customers.

Got it, great, thanks. Regarding the outlook for research and development expenses this year, how would you think that that would unfold through the quarters? Should we be expecting kind of an expense evenly spread across the quarters or more of a gradual reduction through the year.

No, I think pretty constant. Yes, pretty steady, I think the earlier question addressed a little bit about that. We are in the best shape in our history, we're in our 104th year. Which is a major accomplishment. And we are going to enjoy and benefit from all these excellent investments across the board. So right now it's a little bit of a lull period. But pretty constant across the quarters.

Great. Just the last small one, what was the impact to revenue in earnings from currency in the Q4? Thanks.

This is Michael Barkley. For the quarter, comparing against last quarter of '07, the impact was a on all currencies was a reduction of net income by $20 million and a reduction of revenues by about $220 million.

Great, thank you.

Thank you, good questions.

Your next question comes from Henry Kirn of UBS.

Good morning Henry.

Question about the ages of fleet in Europe today, and maybe some color around what you think normalized replacement demand would be there?

The age of the fleet in Europe is younger than North America, one of the key reasons being as I mentioned earlier that North America's recession started about the middle of '07. And the recession in Europe started about September of last year. So they have two more years of new vehicles and a lot more new vehicles coming in. So if the average age in North America is 6 to 7, probably in Europe it's 4ish, or 5.

With the rest of the world what are the trends that you are seeing, what do you watch for to see when things could pick back up?

Well, I think two key indicators for let's call it the commercial vehicle and industrial worlds are construction, you have obviously residential and commercial, you also have some of the primary industries such as steel manufacturing and then auto manufacturing are big drivers. So items, industries that utilize a lot of transport tend to be very good indicators for the requirement to buy trucks.

Okay. Thanks a lot. Save you the embarrassment from having to answer why you swung to a loss 71 years ago.

Well, the good think is you have given me a segue, about half our management team has been here for about half of that 70 years. We got a pretty experienced team. We've seen the ups and downs it's been fantastic. Thank you very much.

Thanks.

Your next question comes from the line of Andrew Obin of Banc of America.

(Inaudible)

We won't get in to that. That will be on the conference call to you.

So couple of questions, the first one I think is the first time I've heard from anybody talk about the cost of the new trucks going into 2010, the question I have, how much prebuy, I apologize if I missed a little bit of it, how much of a prebuy do you have in your forecast for North America for '09?

Well, first of all in terms of engine pricing for 2010, the 5,000 to $10,000? I think that's been discussed over the last half a year. The prebuy, there might be some but obviously it's going to be impacted by the general economy and when things are really strong with the general economy, the prebuy has typically been pretty substantial, so I think there is some influence there. But also to be fair, I think many, many of our customers and the industry associations are very experienced with new engine technology, as I indicated earlier, it's about every three years now. So I think some of the thoughts about well, what's the impact going to be on this new technology are really diminishing, people say the engines are going to be fine, yes, they are going to cost more because there's more environmental componentry on the engines. Everybody is on the same boat so you get on and do it. There is really no mystery about it anymore. The industry has adopted SCR as the standard same as in Europe. So everybody is comfortable with it.

Would you by any chance share with us your GDP assumption for US in '09? Is that something you would disclose?

Not typically, I'm sure we always hope it's better than other people might think it is.

Let me ask you another question. Just going to finance and sources of -- I am a little bit -- it's a two part question, am a little bit surprised that just by how little I guess in terms of debt you issued particularly compared to peers like Cat and Deere given you reliance on short term financing, in your sub versus (inaudible) here? And the part two of the question if you could comment on that. And part two on the question, could you tell us where your in terms of renegotiating your credit facilities that backs off your commercial paper issuance? I believe it expires sometime in the summer.

Well, okay, Ron will cover that. We got on the back up facilities , there is a couple of those over this year and next

e have a $2 billion back up facility that comes due in June. We are in the process of very initial discussions with some of the banks. We expect to renew that for the appropriate amount based on our debt position and asset size. First part of your question?

The first part I guess goes to the same question, the fact that you are not issuing as much debt as some of your peers because it seems some people are sort of more worried about credit environment going into '09, just trying to issue as much debt as they can when they can. Yet if I look at your debt issuance, I guess you said it was less than $200 million in 4Q I understand that your financial position is much stronger than that of your peers, but having said that, how good an asset is truck, particularly in Europe, and do you truly really have a positive view for recovering in North America in '09 that you don't feel the urgent need to refinance a lot of your paper or to back up your credit lines as soon as you can?

We have a continuing approach to the market to have commercial paper and medium term notes as our primary funding source. Over the last four quarters, second quarter of last year, we issued in Europe, the third quarter we issued in Mexico, the fourth quarter we did some term debt in Australia. So far this year we've done the $178 million term note in the US. We are very comfortable with our funding approach and our access to the debt markets at this point.

I guess it's fair to say that you will stick to the same sort of short-term debt versus medium term debt that you're not likely to change the composition in terms of how you raise the money for the business? It's always a balance, and we monitor that on an ongoing basis.

Picking up on Ron's comments that on the medium term we will go in to that market on a very regular basis as we've done over the last 18 months. Going forward do the same thing.

Do you have an exclusive expectation of significant improvement in your guys credit market in the second half of '09?

I wish we knew the answer to that Andrew.

Can't comment on that one.

Thank you very much.

Your next question comes from the line of Kristine Kubacki of Avondale Partners.

Just a bigger picture question, we all know the current freight trends and the impact on truck demand at this point. My question is concerning a structural change with the US fleets have been emerging, as the truckers have reported. Truck fleets are shedding trucks and have made comments that they're not going to bring the size of their fleets back and this regards to shorter length of haul, the cost of new trucks and they're also elongating their trade cycles. How do you see this recovery as we think about moving through '09 and '010, versus prior cycles and could a normal replacement cycle be normal going forward from here?

I think that's a good question, good macro question. We have been in business a long time, I think what happens is that when things are going good, many companies many industries say, well, they are always going to go good, and when things turn around and aren't going as good, people say gee, this is never going to get better. I think one of the strengths of Paccar, we have a long-term view. Is there a structural shift? I don't think we can say that there is. Are people concerned about the economy? Certainly. Rightfully so. It is challenging times as we've said in our press release and many other industries have commented.

So a year ago some very very bright people in New York and around the world said that oil was going to be hundreds of dollars, and now it's less, and who knows what is going to happen. I'm not sure anybody's crystal ball is absolutely sparkling right now. But our goal is to produce the highest quality product in all the industries we compete. And that's what we do every day. And if there is any sort of evolution we will be in good shape to meet it.

On a piggy back on that, maybe more near term, your industry outlook in North America and Europe and I should say I should preface that with a trend not too different from any other industrial company at this point has been revised lower fee times over the last few months. What's your confidence going forward in your forecast and do you view them as conservative at this point and perhaps they'll be at the high side of those ranges?

Well, we just give a range. Obviously through the year we get smatter and smarter as the year goes on. So we feel good about the range right now and when we chat in three months we will be that much smarter but seems to be reflective of what is going on in the world right now. Final question that's been in the press you guys pulled out of the mid America truck show, caught me a little wide eyed and I was just wondering what the strategy behind that was? As you may know, and I know you have been tracking the industry for a while is most of the trade shows have been canceled in Europe. And because they're expensive and may not be the best way to reach our customers. They are certainly fun and -- but just like any other trade show, boat show, RV show, cooking show, home improvement show, sometimes in interesting times it's good to stand back saying what is the real return for the companies and for the industries and so I say I think every major show has been canceled in Europe. And we are proactive on that. We are going to be actually having more of our customers visit us at our factories atour technical centers at our regional office, in fact that will probably be a record for us this year in terms of great customers we'e spending real quality time. In the future, we will look at shows again. But I think Paccar is again a leader in setting the quality standard in reaching our customers.

Thank you very much.

Thank you.

Your next question is a follow up from the line of Ann Duignan of JPMorgan.

I just wanted to back on financial services again. It looked to us actually like your leverage went up, not down in the quarter. Equity actually went down in financial services and on the manufacturing side. Can you just walk us through what is going on, just from a modeling standpoint and so that we understand what are all the moving parts are in finance services and manufacturing.

Sure. Let me start out and then Ron will give a little more color on it. As you know, in any type of industry where you've got a financial component as production goes down as the market eases back, that has an affect on the financial. Same with us. It tracks sort of things are slower, our assets are going to be lower, we are going to do less financing when things improve more people want to do the financing and that will go up. That's sort of the 30,000-foot level for more specifics, over to Ron.

Just to further comment on the asset side. We saw lower [Deider] inventories as the Deider's managed through their inventory, made some nice reductions and able to manage their positions better during the quarter and we will continue to see that. On the debt side, reflects the lower asset balances and just normal activity with our manufacturing cash flows.

The lower equity in both--?

Just the top--.

Lower equity on the manufacturing side what was that driven by?

Equity on the manufacturing side?

Yes.

Yes, the equity on the manufacturing side was during the quarter was impacted by two main things, one is we had currencies went down during the quarter, so we had a currency translation affect. And we had our pension balances went down. So we had a equity impact from a pension funding standpoint.

Are you contributing to your pension in 2009?

Yes.

We do that on a regular basis.

And do we know how much?

Well, it will depend on the markets, it will depend on our views of what our funding requirements are from our pension trustees.

Probably be in line with last year. You tell us what's happening in the stock markets, Ann, we will all do well.

Appreciate that. We shouldn't expect it to be too dissimilar to last year.

Very normal.

It will be similar pattern to last year.

Then that just brings up my final follow-up, and that's on working capital side. Your days of inventory went up slightly, year-over-year they were down sequentially, same with day sales outstanding, how should we think about working capital management particularly in Q1?

Well, I think you should think good about it. Couple of little factoids are interesting our dealers and we actually put in the press release a section on our dealers, because we think that's important. Our dealers inventory, I will just make a note is probably at a four to five year low, our dealers are doing very well. And all credit to them, and obviously with our teams that are working with them. I think that's important just in terms of managing the business.

Will working capital be a source or a user of cash in Q1?

I'm sorry repeat that question.

Will working capital be a source of cash or a user of cash in the first quarter? I'm just thinking about how quickly Europe has slowed and how cut in manufacturing going to do, you probably have a lot of inventory in-house, so my question is really around what's the operating cash flow going to look like in Q1?

We expect to generate positive operating cash flow in Q1

Okay.

Good questions. We appreciate it.

Your next question comes from the line of [Eklam Carlin] of Blue Bay.

First question is on the truck gross margin. In the quarter, came in 10.7%,and in the quarter European sales were down about 25%. Looking ahead given the Q1 guidance and given the full year guidance for Europe, should we expect margins for the full year to come in below 10.7%?

Well, I think we have given some indications that the production is going down, and typically there is some tracking of some margins and production. So there will be some impact.

So we should expect margins hit lower than the 10.7 for modeling purposes.

I think that's probably a fair assessment.

If we end up producing at the lower end of our range the margins will probably be lower, the higher end of the range probably better.

It really follows, the more you can move through your factory, your margins tend to be better. Where are you calling from with that accent?

I'm calling from London, but I'm Irish originally. One more question, just on, within your financial services assets, can you tell us if you have any exposure within that to Eastern Europe and could you quantify what that exposure is?

Eastern Europe?

Yes.

No, we have no exposure.

Thank you very much.

Your next question comes from the line of David Raso, ISI.

Hello David.

Quick question. Historically your trucks have had a premium retail value.

They still do.

Well, I was just curious, with Cats decision to exit the truck engine business, the majority of your trucks three to four years ago were powered by Cat engines, particularly, of course, the Peterbilt brand, how would you characterize your dealer's appetites right now for trade in values? I know the Cat dealer network is -- it's supposed to self support and service the installed base but obviously exiting that business could raise some customers desire to buy a Cat powered truck. Can you articulate what you are seeing from the dealers on trade ins?

Let me rephrase that for you, it's a Kenworth in Peterbilt with a Cat engine. That's where your resale is.

The drive train isn't just the engine but obviously the drive train is a critical aspect of the engine.

Just one small part of it. It's the vehicle. I say minimal impact.

Okay.

Still in Kenworth, it is still a Peterbilt, still with DAF, and it's still the best--.

On the margin a little impact but you're not seeing any notable change under the dealer's willingness to take the trade in at the 3 to 4 year old trade in value.

You're still getting a fantastic vehicle that's worth 25% more than any competitor out there in the world.

Thank you very much.

Thank you, good question.

Next question is from the line of [Likas Tanden] of BTIG.

Good morning.

Thanks for taking the question and congrats on the quarter.

Thank you very much. We are proud of it, we got a great team working at Paccar.

I just want to circle back and make sure I got the data right and then ask a question. The indication was, was that Q4 '08 versus Q1 '09 builds were down 40% Europe is that correct?

In Q1 '09 we expect them to be down versus Q4 that's correct.

What would that translate to on a year-over-year versus Q1 '08. Just out of curiosity.

Let's see if we have that data.

I guess the question would be, I'm assuming the year-over-year data is going to be a larger decline, obviously since Q4 '08 already had some slow down in it obviously. The overall annual guidance is for 200,000 to $240,000, so pick in the mid point of $220,000, the overall industry guidance you guys had in the press release is for a 33% decline in Europe. Are you expecting the second half of the year to be better, and the declines not be be as strong? I'm trying to reconcile at 40% plus drop in the first quarter with annual guidance of a 33% drop?

You got a lot of percents there. Let's go back to the first part of your question, that is Q1 '09, versus Q1 '08, on build rates in Europe will be probably half.

Okay.

Of course you kind of lost me with all those percents. So what's your question.

I guess basically if we're down 50% year-over-year, let's say Q1 '08 versus Q1 '09. The guidance for the industry that you put in the press release was for more like a 30% decline. So if we're down 50% in the first quarter--?

We are looking to continue to grow some market share as -- DAF picked up about a point of market share per year over the last six or seven years, and they got the best product out there. That's going to be an important part. I think our dealers in Europe are in very good shape most of them. And we still only have 14% share and our goal is to get to 20. A lot of our competitors are struggling and there are some opportunities.

So it's not based on a thought of macro economic trends in Europe that there will be some rebound in the second half of the year?

Well, possibly way out there, the higher end but, yes, I think pretty steady right now.

Just one more question about Europe, then I'm done. Just looking at the impact currency translation has on the business with the strengthening dollar, is there any guidance you can give for sort of how much if the current spot rate on the euro persists for the entire year what the impact year-over-year on profitability would be?

You guys are asking some great questions. If we had answers like this we'd all probably be on the Fed Board or something. I don't think anybody knows what is going to happen with currency. Or exchange rates. And certainly interest rates don't have a lot further to go down. So we are just like everybody else we are just responding to what is going on out there.

Understood, if the currency rates stay where they are right now, have you guys looked at what the impact on profitability would be? I'm not asking what you think currency rates are going to be.

We do different scenarios. But I'm not sure what -- yes.

Thanks a lot, guys.

Your next question comes from the line of Peter Nesvold of Lazard.

Good morning Peter.

Good morning Mark, how are you?

I'm good thanks, how are you doing.

All considered I can't complain.

That's better than most right now.

Ron, just a point of clarification on the lower loan loss reserves, is there relationship between that and the fact you shrunk the book, the finance book during the quarter?

It's mostly driven by lower losses.

Okay.

Which means our customers are doing better than you might expect.

How would the accrual compare today versus where it was a quarter ago, two quarters ago.

Our reserve percentage has -- it's relatively static, it's about 2.1%, and it's very conservative.

Got you. Okay. That was it.

Good. All right. Thank you.

Your next question comes from line of [Daniel Johansson] of NBIN.

Good morning Daniel.

Thanks for taking the question. I was wondering, you referred to this year becoming like an '01 type of year. If I look back at history and see in '01 you did some [255] in terms of pretax profit.

We only look at net income.

But the way you have showed it in our 10-Ks, and anyway the distribution of that pretax profit was that you were roughly break even in North America or in the US I should say and you did some $1 billion less in our estimate than you did last year in Europe. If I think about this year, why should the profits go down less in Europe than $1 billion if you are back to the same kind of levels?

We shared that the general world and our industry, we should be thinking about 2001 just in terms of the challenges out there. When we look at what we did in 2001 versus say 2008, you can extrapolate some of that to 2009, we are a significantly larger more diversified Company. We're just saying, it's going to be challenging like 2001. Of course we all were here in 2001 managing it and I think the team did a great job and once again it was a great profit year in 2001. We're looking forward to a reasonable year this year but it's going to be challenging. That's really the guiding force between that analogy to 2001.

But in essence if you were a larger Company and had more installed base and you had less volume, or the same volume (inaudible) isn't that--?

We've got more parts business, we've got more finance business, we've got more winch business and our market share is a lot higher, and we are a lot stronger in all different parts of the world. Pac lease is doing very well. The vehicles we do make, as I said, they are 100% more efficient in terms of the factory utilization than certainly six, seven years ago. That's all good.

Secondly, if I may I might ask, the market share gains we've seen, obviously you have had a pretty beneficial mix in terms of geographies in your UK account so some 20% of your DAF deliveries, I guess, and the Benelux countries it's another 15, 20%.

And moving into Scandinavia in a big way.

Yes. And both these markets, they were increasing nicely I guess in '08. Will this work as a head wind for you going forward more than the industry as a whole or how to think about that?

Well, if you look back at 2001 in the UK, we been the market share leader in the UK for 10 plus years, we had about 23, 24% share. We have now 33% share. So we have gotten a bigger chunk of that. Obviously if the markets are shrinking which they are it has an effect on us and has an effect on everybody. But the good news is that we are one of the largest players in the largest market versus being a small player in a big market or a big player in a small market. DAF got great product, probably the healthiest dealer network, in fact, one of the few independently owned dealer networks versus a number of the competitors out there, so that's a real benefit. I think it's a challenging market but we are in good shape.

How much of your trucks you sell in the UK do you import from Holland or wherever in Europe?

Not too many we just build them up at Leyland. Good questions.

(Operator Instructions) There are no other questions in the queue at this time. Are there any additional remarks from the Company.

I would like to thank everyone for the excellent questions and thank you operator.

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