帕卡 (PCAR) 2009 Q1 法說會逐字稿

Good morning and welcome to Paccar's first quarter 2009 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 like to introduce Mr. Robin Easton, Paccar's Treasurer. Mr. Easton, please go ahead.

Good morning. We would like to welcome those listening by phone and those on the web cast. 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. I am pleased to report Paccar's results for the first quarter, 2009. Revenue of $2 billion and net income of $26.3 million reflect the very challenging recession affecting all industries worldwide. The second quarter production rates and margins will be similar to the first quarter. The good news is that Paccar continues to be a leader by generating profits while so many industrial and automotive companies are struggling.

In addition, the Company had positive operating cash flow and strengthened its excellent balance sheet with the issuance of $928 million of medium term notes during the quarter, resulting in a liquidity ratio of over 110%. Paccar made a cash contribution of $150 million to its pension plans, which is reflected in our manufacturing debt balance. Obviously, the commercial vehicle markets are lower as indicated by Industry orders in North America and Europe, but Paccar has proactively addressed the cyclical nature of the business by reducing overhead costs and trimming combined spending on R&D and capital by 60%. We are maintaining investments in important new product updates as well as delivering productivity and efficiency gains of 5% to 7% per year in our manufacturing, distribution, and engineering facilities.

Paccar products, as many of you know, are setting the quality, reliability, and low cost of operations standard for the industry. Our customers appreciate the recognition that the Company has earned by being honored with a J.D. Power Founders award and Leyland earning the Queens Enterprise award for International Trade. Reviewing the truck markets, industry estimates have been revised to 100,000 to 130,000 units for the US and Canadian market, which is the lowest since 1992. The European retail truck market is estimated to be 180,000 to 220,000 units, comparable to 1998.

Since it is springtime and many companies are looking for the green chutes of recovery, let me share a few positive economic signs. Number one, many of our customers are earning good profits as they right size their fleets and take advantage of low diesel prices and the abundance of drivers in the market. Number two, even though freight is down 15% from a year ago, there is a reasonable equilibrium between freight tonnage and industry fleet size. Number three, used truck pricing, especially for premium Kenworth, Peterbilt and DAF trucks is stabilizing and Paccar Financial Service's credit losses have decreased every quarter since last summer. Paccar Financial pretax income was $15.3 million in the first quarter compared to $67.3 million a year ago. A smaller portfolio, higher borrowing costs, and credit losses impacted the profit results.

The first quarter profits were influenced by improved credit losses in the US and Canada, offset by a more challenging finance business in Europe. I think it's important to remember our industry has been in recession for almost two years in North America. So many of the difficult decisions and industry realignments have already occurred. Number four, our Kenworth and Peterbilt dealers are in excellent position with low new vehicle inventory, complemented by good parts and service business, driven by the highest average fleet age in the last 15 years. The increasing industry fleet age means that there's plenty of pent-up demand for new trucks when the economy recovers. DAF dealers' new vehicle inventory also continues to improve, declining by 25% during the first quarter. Number five, suppliers that are exposed to the automotive industry have certainly been in the news but 90% of our truck suppliers are focused on commercial vehicles and industrial applications. A tough market but manageable.

And finally number six, the improved pricing and commodities will be beneficial for the global Industrial marketplace. It certainly will impact the extraordinary profits generated by commodity companies in the last several years. Paccar is in excellent shape due to the most experienced management team in the business, an excellent balance sheet, market-leading products and services, and quality leadership throughout our operations. Our balanced approach in all phases of the business cycle position us to generate good results when the green chutes begin to flower. I am proud of our employees' exceptional performance and thank them for their support as we continue to progress through the very difficult challenges of the global recession. Thank you. We look forward to your questions.

We'll take questions, operator.

(Operator Instructions) Your first question come from the line of Jamie Cook.

Good morning.

Good morning, Jamie.

Congratulations. My first question if I think about your R&D in the quarter, at about $52 million or $53 million, it was lower than I expected and I thought you were saying think about R&D on a quarterly basis relative to -- more comparable to the fourth quarter run rate. I guess I am trying to get a better understanding of how I should think about R&D for 2009 and if it's at a lower base, where are we making the cuts. My follow-up question is, if I look both at your inventory turns and your receivable turns, they are both down dramatically and I guess the inventory is troubling me the most. If you can give commentary and how we should think about that going forward.

On the R&D, I think the general guideline would be the run rate would be similar to the first quarter.

Okay. And where are we seeing cuts relative to where we were last year in particular with an emissions change coming ahead?

Well, we just review all of the -- the many projects we have company-wide and determine which ones have different time factors, such as the admissions for January 1, 2010. That's right on schedule and we are in shape. Others that are medium and long-term projects we review and perhaps reschedule. We have many, many hundreds of projects as most companies do around the world and take a look at them one at a time and see what impact they are going to have in terms of reducing our expenses but also more importantly, how do we get these great products to our customers to keep our leadership?

It is fair to say, then, the fact you're lowering your R&D in 2009 that you're making better headway on the development of the US engine -- 9 and 13-liter engine for 2010? (multiple speakers)

I think we are right on schedule. I wouldn't read too much into the R&D changes in terms of the Paccar engine coming in next year. I think that is right on schedule, have been work on it for quite a few years, as you are aware and it's looking good. A lot of customers are excited about it.

Great. And then if you can follow up on the inventory turns in the quarter?

Well, I think we are doing a good job. I think the production and engineering and material people are doing fantastic in terms of lowering inventory, which is obviously reflective of lower build rates and lower incoming orders. So I think inventory -- we are making good progress and receivables, also good progress.

Yes, year-end receivables are influenced by the amount of holiday shutdown days at year end. That's a consistent annual impact.

And last, how should we think about production in the second quarter relative to the first quarter?

I think as I mentioned, Jamie, it's going to be comparable.

Okay.

Good questions.

Thank you.

Thank you.

Your next question comes from the line of Andy Casey with Wachovia.

Good morning, everybody. With the industry sales revision to your forecast, to levels we have not seen for the better part of ten years or more, are you seeing any loss of competitive pricing discipline in either of the two major markets you serve?

The first point is because we have been in this business a long time, a lot of us have seen it -- we were here in '92 so I think that is a real for Paccar's very experienced management team. When things are reacting to a market that is in a recession and it is a tough market around the world, pricing is under pressure for all competitors and certainly we are no exception to that.

Okay. Thank you. And then, if I could revisit the inventory question Jamie was asking and look at the first quarter level relative to sales -- sales were down kind of mid double-digits and inventory was down year-over-year about 15% or so. Trying to understand a little bit better the moving pieces in there -- was there any reduction year-over-year due to currency?

There was a bit of a reduction of currency. Most of it was reduction in real terms.

Okay.

We need a certain baseline of inventory just to operate the business, and certainly we are continuing to bring down the inventory and all our production facilities and I think the team is very focused on that. And it's been certainly one of the hallmarks of Paccar's proactive business approach is to reduce that inventory when times are more challenging.

Okay. Thanks on that. And lastly, in terms of input costs, pretty clearly some commodity prices have come under pressure. Have you seen any of that -- well, I guess, did you see any of that in Q1 or is that still to benefit you in the future, potentially?

That's a great, great question. I know there's probably a number of different answers that -- depending on what your company does, you can give. I think in terms of Industrial world and people who make things, these last few years have been -- as I say -- extraordinary in terms of how high the commodity prices have gotten. Unrealistic. When you say they are under pressure, the way most companies look at it is they still have a way to go to get to a normalized range. And certainly we are having some benefit but, we have a lot of our agreements with suppliers, our long-term agreements, that is beneficial for us and our supplier. Steel, aluminum, obviously oil products are all coming down and -- but I think if you ask most people who are making something, they say they still have a ways to go and that's what we are looking at.

Sure. Thank you very much.

You bet.

Your next question comes from Joel Tiss with Buckingham Research.

Good morning, Joel.

How is it going?

Good.

That's good. First, I have a clarification. What's the typical lag time between when green chutes first show up and when they turn into flowers?

It depends. If you still have snow in your garden, it could be awhile. We are getting a little sunshine out here.

That's good. I wonder if you could talk a little bit about the aftermarket business and the idea of the -- all the parked trucks. Will we see that aftermarket business pick up before the OEM business starts to pick up?

That certainly has been the normal flow in terms of business. Aftermarket is a pretty steady performer and we are still seeing, good performance in the aftermarket. We have 1.5 million vehicles running that have a Kenworth, Peterbilt, or DAF name on it. So that is positive. Many of our customers are really working through any parked vehicles they might have, and we know it's a tough recession out there and people are postponing purchases they might normally make, which is usually a good benefit for the parts and service business. I think in North America, as I mentioned, we have been in a recession for two year so the customers and the dealers are in good shape. In Europe the recession came on much more suddenly, really starting last September, October time. So I think they are just now coming to grips with it and many companies -- not just our industry in Europe are very cash sensitive so they are probably postponing some of the normal maintenance. But I think that will return over the next, medium term. Parts business generally pretty steady.

Okay. And just to keep it brief, I will try to glue two questions together here. Do you think the Volvo price increase announcements are going to stick as we go into 2009? And then also, do you have a prebuy built into your 2009 industry forecast in North America? Thank you.

Yes. The -- well, I can't really comment on any competitors in terms of their pricing. But when we go into 2010, there will be a price increase and I think we talk about it externally. We were just at the ATD meeting with all the truck dealers, anywhere from $8,000 to $10,000 is a range that everybody is aware of. There's certainly no secret about that. In terms of a prebuy -- it's possible. I think that typically we have some element of a prebuy. But we usually don't have a global recession that we are working our way through. So that has a bit of a dampening effect. So let's talk in the second or third quarter. We will be that much more smart.

All right, thank you.

Thank you.

Your next question comes from J.B. Groh with D.A. Davidson.

Good morning, guys. A couple quickies. I was wondering if you could address what you see as the quality of the financial services portfolio now versus how it would be in prior downturns.

I think it's -- I think the portfolio quality is excellent. We made conscious efforts to raise that quality as we came out of our last recession. We adjusted our under writing standards and we adhere to those very strictly. I think we are confident in how the portfolio will perform during this downturn.

Is part of that maybe a little bit of a shift in the customer base or has that stayed relatively constant? I know you have made an effort to do more fleet type stuff.

A little bit, yes, in that regard, but looking at all our categories and making sure we are comfortable with the quality of all categories of our credits.

Okay. And then, sort of philosophical question -- I hear this statistic about fleet age a lot and my impression is, while the fleet age is pretty old, a lot of these trucks have been -- I guess you could say -- underutilized. Does that mean the best way to measure it -- is there a better way to think about it? I'm kind of liken it to, buying a Cadillac from a grandmother that is eight years old but has two years worth of miles on it. Sort of the same thing goes on in the used truck market?

That comes back to an earlier question. You probably want to change out some of that upholstery and make it a little snappier if you're going to drive it.

I like leather. Yes.

I mean, it has an impact but as I say, you can certainly track the number of fleets. When we say fleets that might be a company with five or more trucks that have gone out of business and that information is readily available on a monthly basis. We are actually in better shape for this recession than we were in 2001, 2002. There have been fewer fleets go out of business. But still, a good number. Even though freight is down, the vast majority of customers are out running, they are getting freight, the fuel cost is down. There are plenty of drivers. Very little turnover. They are probably getting some pretty good pricing on new trucks if they are purchasing new trucks. The customers are using most of their vehicles now and they are doing okay. I mean, I know they like to do better but you can see the profits they are delivering, and a lot of them had reasonable quarters considering a global recession going on.

So I don't want to put words in your mouth but I think what I'm hearing you say is when there's some sort of upturn it would be a fairly quick snap because of the average age of the trucks.

Well, certainly that sentiment has been discussed, I think, more in the press and maybe the analysts' comments. I think for the industry we always like a gradual but steady improvement because the quick reaction is either up or down or always a little more challenging. But yes, there are a lot of factors that are indicating that when the economy improves -- and that's, a difficult one to predict -- that we are a leading indicator we should see some good demand. I think we might be saying the same thing.

Thanks a lot for your time.

You bet. Thank you.

Your next question come from Ann Duignan with JPMorgan.

Good morning, Ann.

Good morning, guys, how are you doing?

Good.

I suppose my first question starts out with -- you commented in your press release you currently have 17,000 employees. You had 18,000 at the end of last quarter, which is only a reduction of 1,000. And at the end of '07 you had 22,000 so we are looking at head count reductions of about 23% versus revenues down year-over-year of 52%. How comfortable are you that you really have right sized the business efficiently for the kind of volumes you're seeing out there? It ties to the inventory question, I guess.

I am not sure I would equate people with inventory so we will put that one on the side. We are very confident. Many companies ballyhoo the number of layoffs. I'm not sure what the benefit is for either the Company or the employees. Our employees make this Company a great Company. And if we do have to let somebody go, it's a very sad process. And -- but we do make those difficult decisions. We've got a couple factories, as you know, that are essentially closed or not making product and we downsized many of our facilities to -- what's called, equate to the current market demand. So Paccar has always been a leader on reducing cost and I guess I would just say, let's see who is making money nowadays and you certainly have access to the world tables as well as we do in terms of the automotive, industrial sector. So our employees are very important to us and they are doing a great job and we are still making money.

And you think the current headcount is appropriate, particularly I guess I'm thinking about in Europe and how it can take and reduce your headcount in your --

I'm not sure what the question is really asking here.

I am just curious if you think you have taken sufficient headcount out of Europe, given the significant decline that you have seen over there and just given how long it takes to take headcount out in Europe.

Well, I lived in Europe for many, many years and I probably know Europe as well as anybody and the team there is doing a fantastic job working with political leaders in different countries and being part of Industrial Federations and Associations and everybody is taking the appropriate action. So I would just say that we are in excellent shape and not sure what other companies are saying but our employees make this company a great one. We welcome you out here and we can share that with you in person.

Okay. And switching subjects a little bit, your leverage in the financial services side has increased. (Inaudible) these are about 7.1 times at the end of the quarter. Can you explain what is going on there?

I'm not sure what exactly measure you are looking at, but it just has to do with the level of our assets and our funding levels. I'm not sure --

A little more color on that question, please?

Has there been any delays in paying off commercial paper borrowing from the fed? I'm just curious why your leverage would increase in this environment.

We have had good access to the credit markets and we continue to fund with a balance of short-term and medium-term funding, as Mark said, we got $900 million of medium-term notes issued in the first quarter so our funding position is quite good.

Okay. I'll get back.

Thank you.

Your next question comes from the line of Henry Kirn with UBS.

Good morning, guys.

Good morning, Henry.

Question about the finance portfolio. Is it possible to talk a little bit about how the delinquencies are trending in Europe and North America, especially given the hire repossessions in Europe.

I think the delinquencies in North America are pretty steady. In Europe they are trending upward and we have seen some trend upward in Mexico.

Okay. And you mentioned that used prices had stabilized in North America. Is it possible to give a little color around where they are today versus where they might have been a year ago and maybe a little color around what might be a receptive market or who is buying the used trucks at this point?

Yes, I think used prices from a year ago are probably down 10%, 15%. The great news, as Mark said, is that the Kenworth, Peterbilt and DAF quality products continue to demand a premium relative to the competition. So that's a big plus for us.

And for our dealers. And for our customers.

If I can squeeze one more in --

Please.

Can you talk a little bit about how many of the 2010 units are already in the field and maybe the customer response to your engine so far?

Well, it's a good question, sort of a two-parter the response to the engine has been excellent. And I think a number of analysts need to recognize this is an engine that has been running in Europe -- and we have been building engines for 50 years. That's 5-0. And we have won all sorts of awards including -- was please to see we just won the Asian Bus Engine of the Year for the third year in a row with the Paccar engine. So that could be good overtime. And -- so the engine is doing very well. In terms of number of units, I think, comparable to many of our can competitors, there's a number out running, being tested, being evaluate and that all seems to be making very good progress and right on schedule.

Okay. Thanks a lot.

Thank you.

Your next question is from the line of Adam Uhlman with Cleveland Research.

Good morning, Adam.

Hi, good morning. I guess just a clarification, Mark. Will Paccar be bringing over both the 9 and 13-liter diesel from Europe? You keep saying engine. I wonder if it's only the 13-liter diesel now.

It's the 13-liter is certainly the primary focus. I am probably saying engines because I am so proud of the whole team.

Okay. Great. Thanks.

Thank you.

And another clarification in the release. It was called out there was an expense of $22 million, $23 million from hedges. Could you talk about what exactly that was and how should we think about that expense going forward?

We called that out. We had certain economic hedges in Europe with respect to currencies and we had some hedges in finance companies with respect to interest rate swaps that had some changing value during the quarter that was significant enough that we wanted to call attention to it but it should be viewed as more of a one-off deal.

Okay. Got it. Thanks. That's helpful. And then -- the profitability within the truck operations was pretty strong in the quarter, considering sales were off so much. Obviously you did a good job in taking down R&D expense and SG&A. Can you talk about one, were there any one-time items that helped margin in the quarter that would not be repeated? And then also, could you talk about maybe directionally were you profitable in the truck operations in Europe? Were you profitable in the truck operations in North America?

Well, we typically don't break that out, as you know. It's always a good question and certainly something that we track religiously. As far as one-off impact in the first quarter to positively benefit margins, no, I think it was pretty much normal business. We certainly would like to have been building more trucks around the world, but that is just the nature of the business we are in right now.

Okay. Great. Thanks.

Thank you.

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

Good morning, Kristine.

Good morning. I just have one question. To drill down a little bit more on the repossessions in Europe -- can you give us a little color on the geography. Was it central Europe, western Europe? What size the fleets were. Were they small fleets? Larger fleets?

Think mostly the small and medium-sized operators -- and I would say the higher percentage was in the southern markets, they have been the most challenged. So that's been the trend we have seen.

The smaller, mid fleets under 100 trucks or so?

Yes.

Any guidance on the trends for Europe? Do you see it stabilizing or getting worse as we move through the year?

We have a good portfolio and we will continue to manage it, work with our customers to find a way for them to pay their bills and continue business and for us to get paid at the end of the contract.

Okay. Thank you very much.

Thank you.

Our next question is from the line of Andrew Obin with Banc of America Merrill Lynch.

Good morning.

Great quarter given the environment.

We appreciate you. Thank you very much, we have a great team.

Just a question on used equipment values. Could you comment what you're seeing in terms of the trends in North America and Europe and given a sudden sort of collapse in production in Europe and sort of drop in demand for used trucks in Eastern Europe, are you seeing something unusual going on in western Europe in terms of used equipment values vis-a-vis, North America?

So North America used equipment, we talked about that and mentioned it in the press release. Stabilizing and -- so that's healthy. Europe, as you indicated, has certainly seen a much faster decline. I don't think it's any steeper -- well, it's steeper because it's been a shorter duration. But used trucks, probably, are still declining in value there as people work through a recession that for Europe, is really only six or seven months old versus two years old in North America. Over time they will stabilize and once again, as Ron's mentioned, in Europe, the DAF trucks are the premium quality leaders, the resale leader, and that's all very healthy, once again, for our customers and our dealer.

I guess what I'm just wondering, what kind of order magnitude declines we are seeing in Europe and are they in line with your expectations? What does it mean for any residual value risk in your portfolio going into the second half of the year?

We have been through cycles before. We always establish or values on a conservative, long-term approach. So we continue to monitor that and we make adjustments every quarter. There are challenges with our residual values so we continue to monitor that very closely.

Adding a little bit to Ron's comment, Paccar, 104 years, always conservative so on the residual value, which affects the leasing and the finance business, we have always had a conservative approach and after the last recession, we even made it more conservative. Quite a few of our competitors use that as a sales tool and they will give unrealistic residuals. I'm sure they are being impacted. We try to approach it on a very conservative basis because the market is cyclical and you have got a couple of good years and then you've got a couple of tough years. That's the business we are in.

I appreciate it. Thank you very much.

Thank you.

Your next question comes from Meredith Taylor with Barclays Capital.

Good morning, Meredith.

Hi, good morning. I would like to start with a question on Paccar Finance. First in the US, there seems to be an expectation among fleets that given the current pricing pressures there is another wave of bankruptcies that is likely to come. Can you address how you might be thinking about your provisions for losses in the context of that perspective?

Well, we monitor our portfolio and adjust our reserves and provisions every quarter based on what we expect, how we expect our portfolio to perform and we continue to make those adjustments each quarter as we move through the year.

Well, then, I guess the question would be, is your expectation that you're going to see an increase of bankruptcies as we move through the back half of the year? I realize you talked about the relative health of the fleets in context of the current environment but how are you expecting that to trend as we move through the year?

As I mentioned earlier, we saw probably about a third more bankruptcies in the 2001, 2002 recession, which -- even though it didn't have the global context but certainly had a very negative impact on North America. So we are encouraged that way. A lot of people that were impacted by 2001 and 2002 have not reentered the business because they realize it's a tough business. Many of our customers are doing reasonably well. In any year, good years or tough years, there are always some companies are going out of business, whether they lost a major customer or lost a contract or didn't manage their business well. That tends to strengthen the survivors and I think this year will be no different than any previous years. So I don't know about a next wave; probably typically the people that are doing well might hope for a next wave and get more freight business but we certainly haven't heard that.

Okay. That is a helpful perspective. And then I'm wondering if you can talk about your production levels in Europe compared with your sell-through in the quarter. We certainly have talked somewhat about the inventory issues, but, I'm just wondering if the rise in inventory days might have been a function of you producing ahead of an anticipated pickup in your sell through to dealers as in Europe they work through excess inventory.

That's a great question. Of course, we build to order so we don't ever build ahead or build to stock or build to some projected demand. We build if we have an order. If somebody orders a truck, we build it for them and that's a very healthy business approach, which has certainly put Paccar in good stead for, as I say, over 100 years. With the sudden slowdown of the general economy in Europe, a number of our dealers had more inventory as customers canceled their orders and they are working through that. In fact, I mentioned in my opening comments that inventory is down 25%, which is healthy. And I think it's just like any business. You can put the dealers on a normal curve. Most of them are doing okay. Some are doing well, and others are certainly struggling. And the build rate that we have in any of our factories reflects the incoming order rates so that's adjusted on a very realtime basis. So Europe is probably a year behind the US and Canada in terms of where they are on the recessionary cycle, if you graph it or plot it. And that's just -- it's the way that the recession has rolled out around the world.

Okay. And then one last follow-up from me and then I will pass it along. Can you talk about your inventory of cat engines at this point?

That continues to decline and we have got some good customers that love the CAT engine and keep working with them and that -- business as usual.

But, any specifics in terms of how much it might be down quarter-over-quarter, year-over-year?

No. Just general steady decline as we anticipated.

Okay. That's helpful. Thank you very much.

Thank you, good questions.

Your next question comes from the line of Peter Jacobs with Ragen MacKenzie.

Good morning, Peter.

Good morning, Mark. Good morning, gentlemen. Could you update us on the loss reserves in the financing business? I believe at the end of the fourth quarter -- and I don't know if you gave this number on the conference call or it was from my discussions with Robin or I deduced this from the 10-K. I don't have my notes in front of me. But I'm showing the last reserves were 2.1% of assets at the end of the fourth quarter and losses were running about 1.2% of assets. Can you give us a sense of if those loss reserves are building or are you comfortable with where they are now? I'm not even sure if I am reciting the right numbers.

As we mentioned earlier, we do take a look at those every quarter. The loss reserve in terms of absolute dollars was down slightly but the percentage was up in the quarter from 2.1% to roughly 2.3% at the end of the quarter.

Okay. Great. And I am going to just obviously deduce the loss reserves for the European portfolio are built in.

We take a look at each and adjust each geographically accordingly.

Do you think you're comfortable where you are in North America if the credit losses have stabilized would that -- could I deduce that the loss reserves then for the North American portfolio are not building any more as a percentage of assets?

As I said, we review them quarterly and we maintain them -- we are a very conservative approach to our reserves and we will continue to maintain that position.

Okay. Terrific. Thanks. And that's the -- all I have.

Good. Thank you.

Good quarter. Thank you.

Thank you very much.

Your next question is from the line of Jerry Revich with Goldman Sachs.

Good morning, Jerry.

Good morning. Congratulations on the strong cost control here. A lot better than your European peers.

Thank you very much. We appreciate it.

I'm wondering --

Good job on your company.

I'm wondering if we could start the discussion on the European business where we have seen some pretty weak order numbers from your competitors in the quarter. With book to bill below 0.5, are you seeing similar order trends in your business?

Yes, in Europe it's -- we are at the first half of a very difficult recession and that is when the adjustments are most dramatic. And certainly, I think, orders across the board for the whole industry are down. We are maintaining our market share at about 14%, 14.5% in Europe. I think the team is doing a good job and obviously balancing that with margins. So it's tough. Say they are about a year behind the US and Canadian in terms of the plotting them on the recessionary cycle, if you will.

And what kind of order pickup would the industry need to see to get to your guidance for the year relative to the first quarter orders?

Well, the first quarter -- you're talking about Europe or North America?

Europe, just Europe.

There would have to be some pickup or increase in market share, which you have two different elements working there and as we have stated many times as we progress through and each quarter moves on, we continue to evaluate what the size of that market is. But I think most of the competitors probably are around the low end of our range, if I want to put it that way, and so I think we are in the ballpark.

Okay. And Mark, in the annual report you highlighted lack of competitor pricing discipline. I am wondering if you are seeing more disciplined action in the market now that hopefully inventory levels are bit lower but I'm wondering if you could provide an update there?

I compliment you on reading the annual report. We always have some good-looking pictures in there. Every company has their own approach to the marketplace. Certainly, the one that we have taken for 104 years is to be the quality leader and conservative business practice that has serve us well. Others take an approach that cheaper is better and they certainly don't generate the return to shareholders, to their employees. So it's a difficult recessionary world out there and I think every company is trying to do whatever they think works best for them.

And on the financial services business, Ron, I'm wondering if you can share the delinquency rate at the end of the quarter.

As we said Europe and Mexico has trended upward. Up from where we were at year end and the US and Canada is roughly equal to where we were at the end of last year.

At the end of last year for a consolidated basis you are at 3.3% so if we assume that's roughly 3.5% at the end of the quarter, that's not going to be too far off?

Yes, it's upward from there.

Okay. Thank you very much.

Thank you. Good questions.

Your next question is from the line of Patrick Nolan with Deutsche Bank.

Good morning, Patrick.

Good morning. Most of my questions have been answer but I have two quick questions.

Sure.

First on the financial services business there's a lot of moving parts if you look at this business versus the previous downturn. Can you give us an idea of where you actually see your receivables balance actually bottoming in this downturn? It would just help us. We can all make our assumptions for provisioning as a percentage of receivables but just where do you see that balance actually bottoming out through this? And then my other question is just on -- you did a very good job of really dialing back CapEx in the quarter. Where do you see that actually coming out on a full-year basis now?

Okay. On CapEx?

I'll take that question. Our previous estimate was $150 million to $200 million. So it's likely to be at the lower end of that range of the full year.

Got it. Thank you.

And on the financial services question, I mean, it's obviously a function of the level of truck sales that occur in any given market we expect, as long as truck sales are at this level. We will continue to see some reduction in the portfolio balances but we expect -- we are there to support the sale of trucks and if truck sales improve, we will see return to higher new business volumes in our finance operation.

So you wouldn't anticipate the receivables falling much below like $6 billion, $6.5 billion, right?

I don't see that in the short-term for sure.

Good question.

Thank you.

Your next question is a follow up from Andy Casey from Wachovia.

Good morning.

Hello, again. If I could go back to the commentary on the similar production in Q2 versus Q1. If the markets really don't show any demand improvement, do you expect Q3 to be similar to Q2? Is there any consideration of some summer shutdowns?

Well, even -- I mean, in normal times we probably could give you a little bit of color on Q3 but obviously with the lower market, the -- we are really dealing in a little shorter timeframe, probably weeks instead of months so it's a little hard to assess what is going to happen in Q3. It's something we have not talked about for any of the questions is there is the overarching economic stimulus packages that are being unveiled around the world by different countries and some of them are taking different approaches. And I'm not sure what effect that's going to have. Hopefully it will be positive whether it's infrastructure or construction projects or just general pickup in the economy. And it's a little hard to tell, I think, probably it will have more impact next year than it will this year. But it could have some impact in the second half of this year. So we will continue to monitor that.

Okay. And then just -- on tax rate. It was, by my calculation, slightly above 28% in Q1. Is that about what you expect now for the year?

Yes. The first quarter rate is a pretty good indicator at this point, given our mix of earnings in the Company.

Okay. Thank you very much.

Thank you.

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

Good morning again, Ann.

Hi, guys. Could you just clarify, was pricing a net head wind or a net tail wind in the quarter?

You ask the best questions. I'm not sure I understand some of them. Help me out on that one.

I thought if I asked you was pricing a net was positive or a net negative you might not answer it.

You ask great questions. I think, to be fair, obviously in a recession, generally pricing is coming down for everybody. I mean, it's a buyer's market. I'm sure it's true in your own industry. So we are certainly in a buyer's market and the good thing is we have got very smart, motivated customers. And we love them. And they are taking advantage of the economic cycle we are in right now. So pricing has probably come down reflecting very few orders and a tough environmental and economic cycle. However that fits into your incredible question, I hope that answers it.

It doesn't answer it, close to it. I interpret it as a net negative.

That probably is a fair assessment.

Okay. And then a second follow-up, I look for more philosophical -- what we have seen in Europe the last couple of months, as you said, you have seen cycles before. I don't think we have ever seen Europe fall so quickly in any downturn and the notion I'm kind of wrestling with is -- the good news. The bad news is it means this year is a disaster but then perhaps we stabilize at -- towards the end of the year and next year is a more stable environment in Europe. Maybe not another step function down. How are you guys thinking about that as you talk internally and you look out a little longer-term?

Of course every year has got opportunity so we always look at it in a positive framework and, yes, there are challenges but that's what makes us stronger. This year will be down and they say, it's certainly at a 10, perhaps 15 year low. That's the cards we have been dealt, so that is the one we are going to work with. If the European recession cycle follows what we have seen in North America, next year could see some improvement. I can't tell you exactly when that's going to happen but we take the appropriate steps in terms of reducing our expenses and the projects we are funding and our approach to the business. Always keeping in mind it's all about great people. And that's going to make you do well in a good market or a bad market. So it's going to be a challenging year this year for every industry and Europe has certainly gone down faster than everybody thought it would or could. But I'm encouraged. I find some people are really stepping up and being real leaders. That's what makes the Company exciting.

Okay. I appreciate that. I'll take my other questions offline. Take care.

Thank you. Good questions. Great questions.

Your next question come from the line of Steve Volkmann with Jefferies.

Good morning, Steve.

Steve, your line is open. Please go ahead. We will move onto the next question from the line of Peter Bates with T. Rowe Price.

Good morning, Peter.

Good morning, guys. Thanks for your time.

You bet.

A couple of quick data questions. What were finance receivables at Paccar Financial? At March 31?

Finance receivables -- I think of the $9 billion, roughly $8 billion.

Roughly the change on the cash flow statement. There wasn't anything.

Yes, there's a little bit of currency impact in addition to the change of the cash flow.

We fell ilike $300 million or so? Because it was 8 (multiple speakers)

Why don't we get back to you on that one. That would probably be a better one to take offline. We could give you a little more specific information.

What was finance debt at Paccar Financial? (multiple speakers)

Let's do that one offline.

Okay. And what were parts and service sales in the quarter?

We don't break that out. Can't take that one offline.

Were they up year-over-year?

We don't break it out. I think we indicated steady.

Steady. And do you guys have a medium duty volume forecast for North America and Europe. I guess with medium duty I would be focused on the equivalent [6 to 7]?

Yes, we do. You bet.

Yes, it's 50,000 units for the year.

50,000 units for the year. Is that North America?

50,000 for North America. Correct.

What about Europe?

Europe also is about 50,000.

All right. Appreciate it, guys. Thanks.

Thank you.

All right.

Your next question is from the line of David Campbell with Owl Creek.

Good morning, David.

Good morning. Owl Creek. I wanted to ask -- because I don't know if anyone asked it directly, could you please provide us with the specific delinquencies as a percent of finance assets at the end of Q1?

Well, we, as we said, the trend on delinquencies is up relative to the fourth quarter. And that will be -- we will have that disclosure in our 10Q when we publish that.

Is there any reason not to give it to us now? We are obviously very curious.

Well, I -- again, we -- the percentage is going to be 4.9% -- I think 4.9% as of March 31 versus 3.3%, with that increase being in Europe and Mexico.

All right. Thank you.

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

Thank you very much. Operator. There are no further questions. Thank you!

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