帕卡 (PCAR) 2009 Q4 法說會逐字稿

Good morning and welcome to Paccar's fourth quarter 2009 earnings conference call. (Operator Instructions).

I would now like to introduce Mr. Robin Easton, Paccar's Treasurer. Mr. Easton, please go ahead.

Good morning. We would like to welcome those listening by phone and those on the webcast. My name is Robin Easton, Treasurer of Paccar. And joining me this morning are Mark Pigott, Chairman and Chief Executive Officer, Ron Armstrong, Senior Vice President and Michael Barclay, 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. I'm very pleased to share the news that Paccar has earned a net profit for the 71st consecutive year. This remarkable achievement has been attained due to the hard work and dedication of our 15,000 outstanding employees who have delivered the highest quality products and services in our history, against a back drop of a very difficult recession. I'm very proud of their performance as it shines a light on the consistent proactive approach that has enabled Paccar to achieve the best shareholder performance in our industry worldwide. On that note I'd like to personally thank our long term shareholders, including the Pigott family for their support and encouragement during the challenging times of 2009. As has been done in other lean years, I and some of the Senior Executive team did not earn an annual bonus last year due to the effects of the recession.

Looking at 2010, the year ahead will continue to be challenging for many businesses. The economy is still in the middle of a recession. As long as unemployment is at levels close to 10%, and housing starts are at 50 year lows, freight growth will be muted, and truck sales will only gradually increase. The good news is that Paccar's fourth quarter results were our best profit quarter in 2009. Paccar earned $46.1 million in the fourth quarter 2009 compared to $113.1 in the prior year's fourth quarter. Fourth quarter 2009 results include a one-time expense of $11.4 million resulting from the retroactive effects of a new Mexican corporate income tax law enacted in December 2009. Fourth quarter net sales and financial service revenues were $2.2 billion, compared to $2.9 billion reported for the comparable period in 2008. Regular dividends of $0.54 per share were declared during 2009. And as many of you know, Paccar has paid a dividend every year since 1941. It's a long time. During the last decade, Paccar's regular dividends increased by 240%, and Paccar's average annual shareholder return is 19.1% for the last ten years compared to the S & P 500's return of a negative 1% annually.

Reviewing our business, there may be a small improvement in truck and after market sales, driven primarily by the industry's need to begin replacing an aging national truck fleet. Paccar is an excellent position to grow due to the strength of our dealers worldwide, a robust finance company, the most seasoned and experienced management team in the business, and the highest quality products in the industry. As I enter my 32nd year at Paccar, this promises to be one of the most exciting years as we begin the installation of the Paccar MX Engine into Kenworth and Peterbuilt trucks this summer. The Paccar engine successfully completed a grueling 50 million-mile test schedule, and is ready for the North American market. Of course, as many of you know, Paccar through our DAF truck group has been designing and building engines for 50 years, so the entry into North America is a logical step. We're pleased that our Paccar engines continue to earn industry quality awards.

Speaking of quality, Paccar reinforced its industry leading quality and resale value in 2009. Kenworth trucks were again ranked highest by the J.D. Power heavy duty customer satisfaction surveys, and the over-the-road, pick up and delivery and dealer service segments. Peterbuilt was also ranked highest in the conventional medium duty truck segment. Paccar was honored earlier this year by earning the J.D. Power Founders award for our 25 years of quality leadership. And DAF earned the UK's Motor Transport Award for Fleet Truck of the Year for the ninth time.

Looking at the markets, the 15 ton plus truck market in Europe is estimated to be between 150,000 and 180,000 units this year, compared to 168,000 last year. US and Canadian retail truck sales are estimated to improve to be in the range of 110,000 to 140,000 units this year, compared to 108,000 in 2009. Now, even though first quarter 2010 industry sales will be helped somewhat by the demand for trucks with 2009 engines, it's estimated that first quarter truck production will be 5% to 10% lower than the fourth quarter as customers adjust to the $8,000 to $10,000 price increase for 2010 EPA emission engines. Once again, the good news is that Paccar's strong performance places the Company in a leading position when industry demand improves to a more normal replacement range of 225,000 to 250,000 units in the US and Canada, and the same levels in Europe.

Looking elsewhere in our business, Paccar continues to invest in its factories. And we appreciate that many of the analysts on this call have toured our facilities, and have seen firsthand the superb quality that is represented in every facet of the operations. We thank you for taking the time to do that. Paccar's excellent balance sheet and strong operating cash flow of over $1.3 billion have enabled ongoing investments in projects such as new diesel engines, expanded vehicle ranges, and annual factory efficiency improvements of 5% to 7%. And finally, Paccar's finance companies have demonstrated remarkable resiliency due to their rigorous customer credit reviews, proactive management of challenging accounts, and good access to the capital markets. We look forward to 2010 and the opportunities to grow the Company. Thank you, look forward to your questions.

Operator, we'll take questions now.

(Operator Instructions),

Your first question comes from the line of Meredith Taylor with Barclays Capital.

Hi, good morning. Good morning, Meredith. I'm hoping we can talk a little bit about the trends that you saw in Europe. Clearly we saw nice sequential bounce there. Can you speak a little bit about how much of that was driven by underlying end market momentum versus the dealer network, having worked inventories down such that your revenues more closely match end market trends?

Excellent question. In terms of incoming orders, we've seen pretty much the same amounts in the last two quarters. So there isn't much of a story there. I think as we look at 2010 with the very positive progress that our dealers have made in selling their new truck inventory, if we retail the same amount as we did last year, we should see an improvement in truck orders coming into the factory.

Okay, so as I think about then your outlook for Europe specifically of 150 to 180, what would that assume on a year-over-year change for your retail sales in Europe?

Well, let's see.

Assuming flat.

A record of 14.8% and obviously, we hope to grow that --

Well, I was talking assuming flat share.

That's our share on retail sales, correct.

Right, but if I were to assume flat retail share, what would that mean in terms of your actual retail sales, retail sales chain assuming your end market outlook?

I think our retail sales would be comparable to last year, but we would just be building more trucks coming out of the factory versus selling them out of our dealer inventory. So that's a positive for DAF and for Paccar.

Okay, got it. And then maybe just one last related question, and I'll pass it along. Can you define kind of the macro assumptions that under lie the low end and the high end of your growth outlook for Europe?

I think the low end would be continued economic challenges. Many of the countries are having mixed results, some are still deeply in a recession, some are posting some positive GDP. But if there's a double dip, or whatever letter of the alphabet the economists are assigning nowadays, that will obviously have an impact on the lower end. On the upper end, if the economy continues to gather a little bit of momentum, and we would benefit from that. Very much, country by country, and the challenges that many of them face.

Great. Thanks very much.

Thank you.

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

Good morning, Jamie.

Hi, congratulations on a nice quarter.

Thank you, we appreciate it.

Just my first question, Mark your prepared remarks I think you talked about production being up first quarter relative to fourth quarter, I think 5% to 10% or so.

I said down.

Down, you said down, I'm sorry, that's what I meant, down. But was that for the industry when you're talking is that for the industry, or for Paccar just to be clear?

That's for us, for Paccar.

All right, sorry, I just wanted to make sure I heard it correctly.

It may also be the industry though.

Sorry, what? Well, a lot of times you do better than the industry. That's why I'm asking the question.

You bet.

The -- just the margins in the fourth quarter were impressive, across most levels. Was there anything unusual in the quarter? Can you talk about in the fourth quarter, did you see any benefit from lower input costs, and how we think about that into 2010?

Yes, it's a great question. There was the fourth quarter at Paccar like the industry benefited from a very slight pre-buy. if you will, and so you get higher demand. We were able to run our factories at five day work weeks versus something lower. And you get the operating leverage coming from that. We also had some benefit from lower commodity costs which I think you're calling input costs.

Yes.

But as I mentioned in the prepared remarks, the customers are now coming to grips that the new EPA engines will be $8,000 to $10,000 more for the industry. And our job will be to see if we can pass that along, and they will get a benefit of better fuel economy. So that's the challenge the whole industry has right now.

Okay, and then can you just talk about, you also mentioned R&D for 2010 was going to be up. Last quarter, when you talked about R&D, you sort of said when we see that ramp, it's sort of a sign that you see the economy improving. I mean the R&D, is it specific to a particular program? Is it related to the engine side, if you could just give more color on that?

That's a good question.

Or just a more bullish tone on the economy.

Well hopefully the economy is going to get a little bit better. I think we're being conservative as is our way, but Paccar continues to generate good cash flow. We're continuing to work on developing new products. The engine program which I mentioned is very exciting. That will continue to have some investment, and then just the introduction of more and exciting new products, trucks around the world, we're starting to invest more on that front also.

But to be clear, some of it is going towards the engine. Is the R&D investment related to the engine what you thought, or are you having to spend more?

No, it's very much in line. That project is really proceeding well.

Okay, thank you. I'll get back in queue. Nice quarter.

Thank you.

Your next question comes from the line of Andrew Casey with Wells Fargo.

Good morning, Andy.

Good morning Mark, how you doing?

Doing good, how you doing?

I'm doing fine, thanks. Just on the R&D question, should we expect it to re-approach 2008 levels, or is it just somewhere between 2009 and 2008, when you raise it in 2010?

I think we've given you a little bit of guidance on what we're looking to spend on R&D, and also capital. So it will be more than last year, and probably not as much as 2008. And a lot of exciting products, and got a great team working on them.

Okay, and then when you look at the acceptance of the new technology and the pricing, are you seeing what you would have thought, in orders looking at this time period maybe six months ago? Or is it a little bit stalled out because the economy has taken a little bit longer to get going?

Well, I think the economy, I think it's actually probably tracking about where we thought it was going to be, which I think 2010 will still be very challenging for many, many industries. So we thought that was going to happen, and it certainly is playing out that way. In terms of just the pricing and our customers, many of our customers are doing well. Many of them are publicly traded, and you can see their results and that's fantastic. They are doing an excellent job of running their companies. $8,000 to $10,000 is a significant amount of money, but there are benefits in terms of cleaner power, and better fuel economy. So that will take some time just to work through the market. But within the next quarter or two, that's the only engine that's going to be available from anybody. And if you're in the transportation industry, that's what you're going to be looking at.

Okay, thank you very much.

You bet. Thanks.

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

Good morning Joel.

Hi how is it going?

Pretty good. Good to hear from you.

Good to hear from you too. Are you going to help your customers transition into the new pricing levels, starting in the first quarter of 2010?

Well, by offering them the best highest quality J.D. Power Award Winning Trucks, you bet.

Okay, and even on the models with 2009 engines, it would be a good customer service to be able to help ease them into the new pricing?

Well, most of the industry within the next month or two probably won't have many 2009 engines left. And so I think we're starting to see people place orders for 2010, and move on from there. Every few years as you know, Joel, the industry goes through this and the customers have a very good appreciation that technology typically is beneficial, and is nothing new.

Okay, and you also mentioned that you're not going to be putting your own engines into the trucks until the middle of 2010.

Yes, this summer.

Is that a comment on the order board for the 2010 product?

No, that's just a plan that's been in place for a number of years and we have put out a press release earlier this week announcing the introduction of the MX engine. That seems to be very well received. We've got a lot of positive comments from the dealers and customers throughout North America. And that's all on track for the Summer. Hope you get you down to the factory. I think you'd enjoy it.

I'd love it. And then just lastly, a little bit of color because you guys know as much or more than anybody else. Can you talk a little bit about what's happened to the number of parked trucks out there? And sort of your guess at what the real average age of the fleet that's in North America?

Yes, that's a great question. I think average age is probably six to seven years, but I've seen eight years on some studies. It's certainly at the high end for the last couple decades. I think that's a fair assessment, which means as business improves, the economy generates some strength, you'll see better parts and service business, particularly at the dealerships. And eventually you're going to have many of the fleets wanting to replace those vehicles, and get lower operating cost product running. And I think the industry is in good shape. There's been a little bit of a shake out over the last couple of years. But compared to the number of fleets that went out of business in 2001 and 2002, it's about half that level. So transportation particularly in North America, but also Europe is in good shape.

And number of parked trucks out there has it come down significantly?

Yes, it has. Absolutely. I don't have a firm number for you, but as we do our channel checks, and work with our dealers, and the used truck groups, it's come down significantly.

Okay, thank you very much.

You bet. Good to hear from you.

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

Morning, guys.

Morning, how are you doing today?

Doing well. I have a question on the good margin performance in Q4. Is there a way to break that down between pricing and operations? My guess is not a lot of pricing power up there, so it's basically -- is it basically blocking and tackling on your part?

Absolutely. It's operating leverage, you get more product going through the factory, a little bit lower commodity. But our guys in the factories and logistics are doing a fantastic job. And of course we keep improving the efficiency 5% to 7% a year, and that has a benefit over time.

Could you give -- and I may have missed this, but the currency impacts in the quarter?

The currency impact in the quarter were actually fairly negligible.

Okay, and then maybe you could comment on how the credit quality in the portfolios changed over the last 90 days, what are your thoughts there?

Sure. The past due percentage for our over 30 day past due was 4.4% at September 30. And that's down to 3.8% at year-end. So we continue to see a steady progression of improvement in the performance of our overall portfolio.

Okay, thanks for your time.

You bet, thank you.

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

Good morning Henry.

Hey, morning, guys. Question I guess to get back to Meredith's question, if retail sales were stable in Europe, is there anyway to quantify how much your production would be up?

Yes, there is. It would be up -- probably -- 10%, 15%.

Thank you, that's helpful.

You bet. And we're hoping that comes true.

I hope so too. In the parts business, could you talk about the trends you're seeing today, and what we might be able to expect in 2010?

Parts is obviously a function of a couple things, general economy, do fleets feel a need to have regular maintenance, or can they cannibalize trucks that are parked., the age of the overall fleet, the amount of freight being transported. But also just the general economic health of the dealers. And when you look at all of that, there's actually a lot of positive trends going on. You've got an older fleet, customers that are still running are doing fairly well. They see the advantage of repairing and replacing their vehicles. And the dealers, our dealers in particular are on very strong position.

Their inventory on new trucks has come down significantly in Europe. In North America, their inventory is at probably five to six year lows, so they've got the operating cash, and the wherewithal to focus on the parts and service. So I think we're looking at some improvement on parts business. Obviously, if something negative happened to the general economy, that would have an impact. But if there's some improvement in the general economy, we would see a little bit improvement on the parts business.

Thanks a lot. Congratulations on your 71.

Thank you very much. We're proud of it. We've got a great group of employees here.

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

Good morning Adam.

Hi, good morning. Mark, I was wondering if you could talk about your operating costs as we look out into 2010. R&D is going to be going up, and DAF benefited from some of these short time hour support from the government, various governments in Europe this past year. And I bet your team is probably shooting for some bonuses this year. So how should we think about cost growth in 2010, and modest market growth?

Well let's take one of the larger elements you brought up, and that's the part time employment programs, particularly in the Netherlands and Belgium. That is an important government program, and DAF and many industrial companies like many companies period, benefited from those, I call it far sighted approach by the government. Those programs currently are set to expire in the summer of this year. But there's a lot of discussion by many industries to recommend that the part time programs are extended.

I think that's still being discussed at governmental levels. But I think it would be good for those countries in general, for all industries, if they were extended. So that's an important consideration. But in terms of just the overall business, I think DAF is in good shape. It continues to grow. It's got great recognition as being the quality leader. And here in North America, I think we're in very good shape, attaining record market levels in the medium duty product. And close to industry leadership in terms of the market on the heavy duty. And I think everybody is poised to really generate some good results, if the economy can cooperate with us.

Mark, could you put the short time -- the part time hour benefit into dollars for us -- perspective -- to better understand what the benefit has been this year so that we can understand if those programs are allowed to expire, what the cost creep back would be?

Well I don't have it right here. But the way the program typically is set up is that if an employee is furloughed or has a part time working, the government would pay a 70% of an agreed wage, and then the Company would pay a 30% of an agreed wage. The -- what the -- there's some discussion within the European industry is that, by the time these programs may expire in the summer, perhaps the orders, and the demand for truck starts to increase. So it sort of seamlessly moves back to a situation, where you don't need to have part time unemployment and the underlying demand will necessitate keeping all of the employees working full time. So that's kind of the thinking right now.

Okay, got you. And then secondly, unrelated. Could you talk about the leasing business, what you're seeing there in terms of demand and rates?

Yes, the leasing business, early 2009, was challenged with lower freight levels, and that depressed some of the rental utilization. But in the latter part of the year, second half of the year, particularly fourth quarter, we saw improved rental utilization. And we enter 2010 with a bit stronger position.

Great, thank you.

Thank you. Good questions.

Your next question comes from the line of Stephen Volkmann with Jefferies.

Good morning, Steve.

Good morning, gentlemen. Thanks for taking the question.

You bet.

Most of mine have been answered but I was just thinking about your finance company. And looking at my model, which actually goes back to 1986. And I've noticed that almost always your first quarter is pretty similar to your fourth quarter in terms of finance company income. And I'm just wondering if there would be any reason that that shouldn't be the case this year.

Well, as we talked the portfolio has shown steady progression improvement during the course of 2009. Freight is still challenged, but we see that the portfolio performing relatively consistent with how it did in the fourth.

And then, Mark, you said you would expect part sales to be the first to ramp up as we start to come out of this thing, assuming we are at some point. And I just wanted to -- I didn't quite get it. Is that happening already?

Not to a significant extent, no.

Okay--

We're still in the middle of a recession. As we touch many industries around the world, I think that gets transported by truck, we're involved with. And as you see a lot of industries report their results, maybe they've had slightly better financials, but the underlying demand is still pretty low. And the consumer as I indicated in the press release, they're saving their money, and kind of worrying, am I going to have a job, and what the general economy is going to do. So the part side is still, some improvement because they've got great programs, and we keep adding new stores, but it's still early days.

Okay, fair enough. And then I'm wondering if you just have any insights, there's been some discussion in some industry sources that Eastern Europe may be coming out of the depth of it's funk there, and maybe a little more availability of credit and so forth. So do you have anything to add to that discussion?

Well I think you're probably hearing it somewhat accurately. I think in terms of our business, DAF. I don't know if you realize it, but we just took market leadership in Hungary, and we're one of the leaders in Poland and the Czech Republic. So Eastern Europe is important, Central Europe is important for us. They've got some, call it currency issues, obviously, have some trade, uses and just general economic issues. And it's going to take time to work through that. I think we're looking for Western Europe, and maybe even more specifically, Northern Europe to lead the recovery.

Okay, great. Thanks very much.

You bet. Good questions.

Your next question comes from the line of Mike Roarke with McAdams Wright Ragen.

Good morning, Mike.

Hi good morning everybody. I had a question just a few here. First, on the MX engine, can you specify at this point how many orders you've received for the new engine in North America?

No. We haven't launched it officially. So we've got 50 million miles of experience on it, and it goes into production this summer. so it's still building anticipation.

Okay. So have you received any orders though?

Yes, we've got many people who are excited about getting it when we go into production, definitely. It's an exciting engine, and obviously has a wonderful track record in all of our DAF trucks around the world.

Okay, and then at the outset, how are the logistics of the engine going to work in terms of production? Are you going to be turning on the Mississippi plant, or is there going to be some importing taking place?

Yes, that's a good question. For most of 2010, the program will be that will do the majority of the machining and assembly in Eindhoven, in Holland. And ship it to Mississippi for the final specification fit out and then it will be sent to our Kenworth and Peterbuilt factories.

Okay, also on the Kenworth plant side, are there any plans right now to kind of turn the Renton facility back on for Class 8 production?

You know that would be fantastic. The team there has done a wonderful job. Have you visited Renton?

Oh, yes.

It's doing great and obviously as orders pick up, and the industry returns, we look forward to Renton making many more Kenworth trucks.

And then just one last one if I could. I heard you say the 30 day past due percentage for the entire finance portfolio is 3.8%. But would you be able to break that down by geography, US, and Canada and Europe?

US and Canada is 2.5% and Europe was 4.4%.

And then also Mexico and Australia if you could?

Mexico is -- I don't have the specific number, but it's closer to 10%, and Australia is 2%.

Great. Thank you very much for taking my questions.

You bet. Thanks.

Your next question comes from the line of Andrew Obin with Banc of America, Merrill Lynch.

Good morning Andrew.

Yes, good morning. Just a question. Could you give us some more color on used equipment truck market by region, US versus Europe, and if we are seeing trends in this market bottoming yet?

I think we have seen the bottom. In fact in the fourth quarter slight improvement in some models and some markets, so we're encouraged by what we saw in the fourth quarter and as we head into 2010.

Any color on what's happening in Western Europe on used equipment pricing?

Yes, I'd say that comment really was both the US and Canadian market as well as Europe. We did see some firming of prices. And in fact some slight improvement on the DAF recognition really of the quality product that they have.

Terrific. Thank you very much.

Thank you.

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

Good morning, Christine.

Good morning. My question is around the financial portfolio. Our firms trucking industry bankruptcy data suggests that things could get a little bit worse, before it gets better, in terms of repossessions, which is ultimately should be better for the trucking industry down the road, as you lose some weaker players. Do you think that your portfolio could see a little bit of a hit, as we roll through 2010 from some of that repossessions and bankruptcies from some of the weaker players?

Well let me address that and then Ron will have some specifics, because I think that's a very perceptive question. As we look at the number of bankruptcies for fleets, which we typically look at as companies have five and more trucks, for this recession which has been a tough one as we all know. We've got about 6,000 companies go into bankruptcy or leave the industry. When you look at the recession in 2001 and 2002 there was 12,000 companies that went into bankruptcy. So what that tells you on a macro level is that a lot of the weak players have obviously exited. And here we are in a recession that's probably 10 times as word as the one in 2001 to 2002.

But you only have half as many companies going into bankruptcy, which lets you know that the people who are here are better financed, better capitalized, probably have better customers paying their bills on time. So that's the good news for our industry, that the people operating are doing better, they're managing their companies in a very excellent fashion, which is good for us and obviously has an impact on repossessions. Ron has got some additional color on repossessions.

Yes, I think we seen from the peak in US and Canada was in the second and third quarter of 2008 when fuel prices escalated. Fuel prices are steady. Driver availability is good, and turnover is low. So there's some very positive things, but still a challenging environment. and we work with our customers very closely to make sure that they continue in business, and we continue to get paid.

We're still in a recession. It's getting a little bit better but we're still in one.

Do you think arguably if we were to lose some of the smaller players in the industry and you get some of the pricing power concentrated among the larger fleets, do you think that the pricing could be a little bit different this cycle as we edge out? Do you think it could be more difficult given that some of the pricing power is going to be so concentrated with the large fleet type trucking companies?

Well, you've seen that over the last 20 years. As I say, I'm in my 32nd year, so I've seen the ebb and flow of the industry over many many cycles. And today, what you consider the smaller operator is more than likely aligned with a larger company. And of course the benefits of that, are a little bit more consistency and the number of halls they get, they might have a healthcare program, they might have other benefits. They maybe able to get better pricing on their vehicles themselves. So the old days of owner operators, although it's romantic, I think it's pretty much gone away over the last decade. But it doesn't mean there aren't companies with smaller fleets, or just a few number of vehicles. But more times than not, they're in line with a larger company. So I don't see it changing. I think we've already absorbed that change over the last decade.

Okay, thank you for your time.

You bet, thank you.

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

Good morning Jerry.

Good morning. You had a nice sequential pick up in sales in Europe, in what's typically a seasonally weaker quarter. Can you just talk about how much of that was better end customer orders versus just a bit of a pick up in dealer activity?

Well, for Europe? For Europe, you say?

Yes.

I think that was pretty consistent . We continued to reduce the amount of inventory at our dealers. So some of the dealers began to order some for stock, which is healthy. And I think that's really primarily the main change. We had a number of summer shut downs to balance incoming orders with demand. And so if you're producing five days a week versus four versus three, you're going to see more trucks coming out. So I think between some reduction in inventory that's benefited the dealers, and moving from the summer shut downs which obviously had a big impact on the third quarter, we seen some improvement but not

And in which countries have you seen the most significant improvement or the most positive signs from dealers?

Well I think in general, you could probably say Northern Europe, the UK. Southern Europe, Spain, Italy, obviously got impacted on a macro economic level the most, particularly Spain, with the construction. And that has had a tough impact, and you could see the unemployment in Spain is bouncing between 15% and 20%. The same with Italy, so that's had a bit of a depressing effect on all industries, on their total GDP. But Northern Europe and the UK seem to be responding the best.

And in the US, you've typically been the first OEM to rollout new emissions products. Can you talk about whether you're producing the new emissions products and full production now? Or is that going to be later in the quarter?

It's later in the quarter and once again we will be the first. We pride ourselves on being the environmental leader. And our customers appreciate that, and we've had a lot of good feedback from our customers about the new engines and those will be rolling out later this quarter.

And is that going to be closer to February or is it going to be later than that?

It will be March.

Thank you very much.

You bet. Thank you.

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

Good morning Patrick.

Good morning everyone. Just most of my questions have been answered, so I just had a quick couple of follow-up questions.

Sure.

First provisioning came down sequentially. Can you give us some color on what charge-offs were in the quarter versus provisioning?

Yes, the charge-offs came down consistent with the amount of provision reduction.

Was the allowance up or down sequentially?

The allowance is down a bit reflecting lower portfolio balances, but we maintain a very conservative reserve relationship to our asset balance, so we're well positioned as we go into 2010.

And just a follow-up to that versus the previous question, so you're comfortable with that allowance going into what could possibly be a tick up in the bankruptcies in Q1?

Well, we're comfortable with the allowance for sure.

And just my last question is on, you were asked the question about the headwind of the return to the full work week in Europe. But can you give us some numbers around what the headwind will be as far as bonuses next year versus this year?

Are you calling from JPMorgan or somebody? (Laughter) Well, as you know, a lot of us are getting no bonuses. And that's the way it should be so, we're very happy and comfortable with that. Bonuses within Paccar don't really have much impact on financial results for our shareholders.

So would you think the SG&A run rate you're at at the fourth quarter is fair to be using for next year?

Yes, yes, absolutely.

Okay. Thank you very much.

You bet. Thank you.

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

Good morning, Ann.

Good morning. I'm not sure what the crack on JPMorgan was there, but that's okay.

On the bonuses.

I wanted to take a step back and talk about the new engines, the DAF engines. You seem to emphasize over and over, that these engines have 50 million miles on them. Can you talk a little bit about the engine development process and how important is it to have 50 million miles? How long does that take? How many engines does it take to generate that much experience, and then thus the confidence that customers can have in the new engines?

Well typically, as we look back over the last 20 years at the new engine introductions by our competitors and suppliers, it's usually in the 10 million to 15 million mile test cycle, which is fine. And obviously, particularly for our suppliers has worked out well. I can't really comment on our competitors. I think the point that we wanted to insure, is that these are the highest quality engines in the world. Obviously we've got a great track record with DAF, and they're running in DAF every day as you know around the world. And being the first time we've introduced our own engine into Kenworth and Peterbuilt products, as is Paccar style, we wanted to go the extra mile, literally. And so 10 to 15 was what the norm was for the industry.

We said, well why don't we look at 300% better, which would be 50 million. And so those have been running in hundreds of vehicles for the last number of years, and in all types of terrain and temperatures and applications. And we're the quality leader, certainly quality has been a topical note in the newspapers, regarding the automotive industry, certainly in the last month or so. And we're the quality leader every year, and that applies to the powertrain in the engines so that's why we set those targets at 50 million miles.

Okay and can you just remind us if those engines are indeed certified to (inaudible)?

The certification with the EPA is ongoing right now, and we're confident that it will be achieved the time we go into production.

Okay, and just on the production side, and this is my final question. You noted that you expect Europe production in North America, or in the US to be down 5% to 10% sequentially from Q4. Can you just walk us through the three other quarters then? Should we expect another decline in Q2, just because you changed over the product lines and the assembly lines? And then quite a steep ramp maybe above retail in Q3, as you kind of fill the channel with trucks with new engines?

That's a great question, Ann. Of course, we don't really change over production lines. It's not like the car industry. We've kind of gotten beyond that, so that doesn't have an impact. The second quarter for the entire industry will be an interesting one, because that will be the quarter that you'll be really focused on selling pretty much exclusively 2010 emission engines. And with an $8,000 to $10,000 price point increase, the industry has to get used to that. I'm sure they will. They have every other time, every three years we have a new emission standard. So the second quarter for the industry will be I think challenging and interesting. And then as the general economy improves, which we hope it will, the third quarter people are used to the price of the engines, we should get back to business as normal.

And would you anticipate any channel filling just to get these new products out to your dealers, and get some on the lot so customers can get comfortable with it?

Well I think what many customers have seen the product running. We don't do channel filling. Our products are built to order. And so I think that's the normal way that we approach. Some of our competitors may do some channel filling but that's not what we do.

So you wouldn't anticipate any building above whatever retail it is as you go through the year?

That's not our approach. We always meet demand.

Okay, and just as a final follow-up, you talked about the benefits you received from Belgium and the Netherlands. What percent of your European employees benefit from that?

Well, I'd say probably at least half. Good questions, thank you, Ann.

Okay, thank you, guys.

Your next question comes from the line of Ben Ellias with Stern Agee.

Good morning.

Good morning. Thank you for taking my question. I just wanted to circle back on the margins, especially the cost cutting. I was just interested if there was any other additional structural adjustments in the fourth quarter. When I look at your costs as a percentage of sales, it was down about 400 basis points compared to the other first three, sorry, compared to the third quarter. And when I look historically it seems like you have another three to 400 basis points to go. And now does that just simply come back for higher volume?

Yes, kind of a two part answer, one, Paccar prides itself on being the low cost manufacturer in every marketplace in which we compete. And I think we were achieving that because of great employees are taking a lot of good steps and benefited by programs such as Six Sigma throughout our Company. So we are the low cost producer. Nothing unusual in the fourth quarter. And I think to the second point as volume does increase, we do get some very excellent operating leverage. And we look forward to that, hopefully taking place later this year.

So what we saw in the fourth quarter is that sustainable through the low point the first half of 2010? How should we look at that going forward, when do we begin to see more of a return to what you've done historically?

Well, I think in terms of the first and second quarter, as production in the first quarter will be 5% to 10% lower, that will probably have some impact on the margin, because you've got lower operating leverage. And the second quarter will be as I say the most interesting as the industry transitions to 2010 engines. But you get back to a normalized marketplace, we certainly look forward to returning to those excellent margins.

Okay, and thanks. Second question I just wanted to once again follow-up. I know these questions have been asked before, but truck pricing in Europe, are you seeing, you are seeing evidence of better used truck pricing now. Are you seeing a good pull through from some of the emerging economies, Eastern European economies, because from what I recall a couple years ago, they really pulled out a lot of the three, four, and five year trucks out of Western Europe. Are we beginning to see evidence that that's starting up again, and what are we seeing over there?

Well I think in Eastern Europe, central Europe, you're seeing slight improvement. But they still have a lot of macroeconomic challenges. So they've replaced as you indicated a lot of their older trucks, but that was several years ago. So no, in a sense, Central Europe in particular is very similar to Western Europe, so I don't see any major pull through impact.

Okay, thank you very much.

Good questions, thank you.

Your next question comes from the line of Basili Alukos with Morningstar.

Good morning.

Hi, guys, good morning. I was wondering if you could talk a little bit about your relationship with some of the bigger fleets.

Great, great relationship.

I guess my, maybe misconception is that Paccar was more geared towards the owner operators, as you mentioned looking at the last two recessions, there's been about 18,000 bankruptcies in kind of the smaller owner operator space, but yet the market share of Paccar has maintained relatively--

Maintained and grown.

And actually grown, so I wonder if you could just comment on that.

Well I'm not sure what your background is with the industry but we're the longest serving Company in our industry. And we've got people that buy our products, and we have about 25% to 26% share in the US and Canada, and 40%, 50% share of Mexico, and 15% in Europe and on and on. People love our products. They have low operating cost, great resale, high quality. And so that's all ranges of customers from the very, very, biggest fleets to the smallest of companies, And that's certainly the way that it's been for well forever. But certainly over the last decade as the industry continues to consolidate.

Because I ask because there's been a shift in the concentration of truck purchasers from -- with like kind of the top call it 30 truckers out there. And I was just wondering how going forward if that were to play out--

Yes, I think that's actually a benefit for Paccar because you're going from certainly there's always an emotional attachment, and this is a beautiful piece of art that's moving along the highway, it has our names on it, it has the customers names on it but as you do more and more financial analysts, analysis, it just shows hands down, that whether it's a Kenworth, Peterbuilt or DAF, that's the product to have. And it's the low operating cost through its life cycle is our product, and that's been proven time and time again. So we're finding a wonderful response.

Great and then a follow-up if I might kind of on a bigger picture. Recently Caterpillar kind of in their earnings release talked about housing starts in the million for this year. And you seen kind of increases in truck sales, and assuming that an increase in sales will lead to more production. And I'm wondering how an increase in potential call for housing starts, as well as auto production, could lead to even more growth during for 2010. considering that truckers tend to ship a good portion of housing related and car related products versus other forms of transportation.

Yes, excellent question. I hope that housing starts reaches a million. I'm not sure I've seen that particular study, but that would be good. A 10 year average is probably about 1.2 or 1.3 million. You can see different forecasts from 600,000 to 800,000, but that has a big impact on transport and freight. Because everything does get moved by truck that goes into a house. So if that improves, we're going to be benefiting from it.

Great. That's all my questions.

Good questions.

Your next question is a follow-up question from the line of Andrew Obin with Banc of America Merrill Lynch.

Good to hear from you.

Just a follow-up question. One of your competitors has been sort of stating that people with SCR engines might have difficulty running them in extreme conditions, i.e., too cold or too hot. Could you just provide us what have you guys observed as you've put the miles on your engines, what have you experienced was running them under these extreme conditions? Thank you.

Well, the whole world has adopted SCR, so there really isn't any credible competitor that is making those claims that we know of. SCR is the industry standard. So that's it. And they run from the Arctic to the Mojave desert and they do great. So everyone in the industry has adopted it. All of the support programs are either in place or being put in place. It's actually a non-event now.

Thank you very much.

Thank you.

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

Good morning, David.

Hi, good morning. I was just wondering if we take the mid point of your sales forecast for North America, the 125,000. And for simplicity maintain your share of 25%, you're looking to sell roughly 31,000 trucks in North America in 2010. What percent of those trucks do you think will have 2009 engines and then obviously what percent 2010?

Well I would say probably 75% would have 2010.

So, I'm trying to square that up assuming you're going to work through your 2009 engines a large percent in the first quarter, and the new engines won't be available until the summer.

That's our new engine.

Exactly, so the Cummins 15 liters, is mostly what's going to makeup your second quarter, or say early summer sales.

That's correct. Well, the whole range of Cummins, we're their largest customer, they're an excellent, excellent partner.

Okay, I appreciate that. Thank you very much.

Thank you.

Your next question comes from the line of Garrett Stevens with Giovine Capital.

Good morning, Garrett.

Good morning, thanks for taking my question. So just to a follow-up on the Mississippi plan once again. Presumably you're going to produce the engines in Europe to begin with, because there's too much excess capacity currently. What sort of demand level would you need to justify starting up the plants in Mississippi?

Well, let me clarify. The Mississippi plant is starting up, and will be assembling the final specs of the engine. And we are currently installing the machining capital equipment, and that will be ready to go in 2011.

Okay, so what sort of demand level would you need to justify doing the machining at that facility then?

Well, we look to meet the demand for our 13-liter engines from that factory, so it's going to start up next year.

Okay, and then on the finance side, if I could very quickly, it seems like you've been taking share. Does that continue in the fourth quarter, and do you think you can sustain that once the credit market is normalized?

Yes, Paccar Financial and Paccar Leasing we've had excellent access to the credit markets. And we've been there to support our dealers and customers throughout the challenges. And I think the dealers and customers appreciate the level of customer services that we can provide, and we look to continue to build on that as we go forward in 2010.

I think just picking up on that good comment from Ron, you've seen several large third party financing companies withdraw from the market, or severely curtail their approach to the market. And then you've got the ongoing overhang of the commercial real estate that's having a real dramatic impact, particularly on local and regional, maybe even super regional banks that typically might have been working with the transportation industry. So that's being impacted. And as a result, Paccar Financial is there, through great times, through lean times. And we keep adding to our team, introducing easier to use retail tools, and the teams just done a fantastic job, and the same in Europe.

So will we start raising financing at the sub level in 2010 again?

Excuse me? I am not sure I understand the question.

Will you start raising financing at the subsidiary level in 2010, again, instead of doing it at the parent?

Yes, we've borrowed both during 2009 out of our finance subsidiary, as well as out of Paccar Inc. And we'll continue to do that during the course of 2010, it will be a balance as well as commercial paper borrowings.

Okay, thank you.

Thank you.

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

I'd just like to thank everyone 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.