帕卡 (PCAR) 2010 Q1 法說會逐字稿

Good morning, and welcome to PACCAR's first quarter 2010 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, Controller.

As with prior conference calls, if there are members of the media participating, we request that they participate in a listen-only mode. Certain information presented today will be forward looking, and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results.

I would now like to introduce Mark Pigott.

Good morning.

PACCAR today reported improved revenues and net income for the first quarter of 2010. PACCAR's first quarter sales and financial services revenue were at $2.2 billion, compared to $1.99 billion in the first quarter last year. Net income was $68 million, compared to $26 million a year ago. PACCAR's financial results reflect the benefits of higher truck deliveries in North America, and an improvement in aftermarket parts sales and financial services worldwide. PACCAR's results for the first quarter benefited from a small pre-buy in the US and Canadian markets, as customers took delivery of new vehicles with pre-EPA 2010 engines.

As I've mentioned in previous calls, I'm very proud of our 15,000 employees who have delivered outstanding performance to our shareholders and customers in a very challenging recession.

PACCAR's strong balance sheet and positive cash flow have enabled the Company to continuously reinvest in the business, enhance operating efficiency, and introduce new products, such as the PACCAR MX engine, which will be installed in Kenworth and Peterbilt trucks this summer. And on a personal note, I appreciate that many analysts on this call were able to view our many new products at the Mid-America truck show last month. I am pleased to share with you that we've received over 1500 orders for MX engines to be installed in Kenworth and Peterbilt trucks. We expect PACCAR's build rate in the second quarter to be comparable to the first quarter. DAF production may increase slightly, while Kenworth and Peterbilt production will be lower, as the North American truck industry adjust to the new, more expensive EPA 2010 engines.

PACCAR Financial Services revenue was $246 million in the first quarter, compared to $255 million a year ago. PACCAR Financial's first quarter pretax income was $28 million, compared to $15 million earned in Q1 2009 primarily due to better finance margins and a reduction in the provision for credit losses. The credit loss provision for the first quarter 2010 was $21.7 million, compared to to $25 million in 2009. Just as a reminder, there was an $11 million reduction in finance margin in the first quarter of 2009, due to an adjustment for mark-to-market effects on derivative contracts.

Other news in the market. Used truck values in North America have increased by approximately approximately $2500 per vehicle for one- to two-year old trucks, especially Kenworth and Peterbilts. PACCAR's conservative approach to business, complemented by its double-A minus credit rating, enables PACCAR Financial to offer competitive financing to Kenworth, Peterbilt and DAF dealers and customers around the world. As you are aware, some of our competitors have exited the finance business or formed financing partnerships, due to their weakening market positions. PACCAR Financial, on the other hand, has excellent access to the medium-term note markets. In March of this year, PACCAR Financial sold a three-year $300 million floating rate note, with an equivalent fixed rate of 2.17%.

More good news. PACCAR's quarterly aftermarket parts revenue of $505 million was the highest since the fourth quarter of 2008, as our dealers have more customers increasing their service business. Reviewing our dealers and customers, our 1900 Kenworth, Peterbilt, and DAF dealer locations are leading the commercial vehicle industry in customer service, and many of our customers are benefiting from reasonable diesel prices, low driver turnover, and year on year increases in freight tonnage, even though freight rates continue to be low.

Looking at the truck markets around the world, we expect the 15-ton plus market in Europe to be between 150,000 to 180,000 units this year, comparable to the 168,000 in 2009. Some of you may know that DAF is currently the number two truck manufacturer in Europe, with over 16% profitable market share. We'll see how that goes as the year progresses.

US and Canadian industry retail truck sales are estimated to improve to the range of 110,000 to 140,000 units this year, compared to 108,000 last year. As you know, the industry in US and Canada received about 20,000 orders in the first quarter, so it'll have to be a slightly stronger second half.

PACCAR's investment of $3.8 billion in the last decade has enabled the Company to enhance its operating efficiency, develop new products, strengthen its dealer network, become an industry leader in information technology, and deliver shareholder equity of over $5 billion. But even with all that, there continues to be many challenges facing the transportation industry worldwide, impacted by high unemployment, and low home construction and car production. The good news is that PACCAR's balanced approach in all phases of the business cycle position us to generate improving results as the global economy recovers.

Thank you, and we look forward to your questions.

(Operator instructions)

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

Hey, good morning, guys.

Good morning, Henry.

Wondering if you could chat a little bit about what you're seeing in the European trucking end-markets. The freight looks a little bit better. What do you think it 's going to take for that to translate to better retail demand?

Well, Europe, you know, is having lots of different types of challenges, whether it's some issues in Greece, or just a simple thing like the volcano out of Iceland. So there's lots of ongoing economic challenges, particularly in southern Europe. And there might be some increase in freight rates at this time. But, you know, we look at car production to be down throughout Europe this year, which has an impact on the amount of freight being hauled around Europe. So I think it's just going to continue to sort of be a market very similar to last year, in terms of truck orders.

Thank you.

And you mentioned on the aftermarket side, things looked a little better. Could you talk about your expectations for aftermarket demand as we go through the year, and is this somewhat of a precursor to improved new demand?

Yes. I think, Henry, that's a good point.

You know, when we look at the typical cycle, and we've all been through many, many cycles in our careers, usually see about a three-step process. So, one, you start to see some improvement in the parts and service, as customers go back to the dealerships to, you know, repair their existing vehicles. As freight increases, you see some increased demand and values on used trucks, and we're starting to see that, which is positive. And then finally, as used truck values increase to a point where customers are saying, you know, there may be some advantages to buying a new truck, and there's enough freight to justify that, you see the new truck orders start to kick in. And so it's really, you know, a pretty normal three-step process. We've seen it for decades. And right now, we're seeing our customers having a little better freight, which means they're now taking their vehicles in to get the maintenance done, which is improving parts sales. I mentioned in my comments that used truck values have gone up about $2500 per vehicle over the last year or two, about $2500 per vehicle over the last year or two, particularly for late model vehicles. There's still a ways to go on that. And then, you know, sometime in the medium-term future, we hope to see new truck orders improve. But the general economy is still -- got a lot of challenges out there.

That's helpful. Thanks a lot.

Thank you. Good question.

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

Hi, good morning.

Good morning, Meredith.

I'm hoping to start out, you can give us a little bit more color on the sequential production rates in the second quarter. You talked rather broadly about Europe up slightly with the US down, but can you give us a little more granularity there?

Well, I think what we laid out in the comments in the press release is that, you know, we look for it to be comparable to the first quarter. US and Canada for our Peterbilt and Kenworth groups, it's slower as we essentially have gone through all the '09 engines and customers are adapting and starting to understand that there is a $8,000 to $10,000 price impact on buying a new vehicle. Well, that's -- you know, that's slowed things down and I think it will continue to be slow for the second quarter. In Europe, our dealers are in good shape. They have low new truck inventory compared to a year or so ago. So they're now looking to purchase some stock units. And we're seeing some improvement in market share with DAF, so that's translating to a little more production at our DAF company.

Okay, great.

And then, you know, in Europe last quarter you talked about production being up 10%-15% in a flat, full-year market. Can you talk a little bit about what you saw in the first quarter, and then how you expect this to evolve over the balance of the year?

Yes. For DAF, as I said, because our dealers' new truck inventory has been brought down to a -- pretty much a couple-year-low level, so they're in very good shape, we expect some improvement in year-on-year production at DAF. And first quarter was sort of comparable to a year ago, but we're starting to gather some momentum now, so I think it'll be maybe 10% up for the year.

Okay, great.

And then just one last question. In Europe, can you talk a little bit about what your expectations are for the extension of temporary unemployment programs there?

That's a great question.

I think it's -- well, it's by -- country by country. I think the Netherlands program, which obviously has a major impact on our facility in Eindhoven, will expire at the end of June and, as you probably know, there is going to be a new government in place in the Netherlands. So I think with some of the economic challenges and the new government, it's unlikely that the part-time unemployment will be extended. In Belgium it's -- has a longer duration to run. And other countries, we really don't have any manufacturing and they're taking a slightly different approach. So, I think it's been an excellent program. I compliment the governments and agencies involved with it. It came at a critical time for the industry, and I think it's served its purpose.

Can you quantify then, assuming it does not get extended in the Netherlands, can you quantify what the impact will be for you?

I think that the impact will be very, very minimal. As we increase production, it'll be pretty seamless.

Okay. Thank you.

Good, thank you.

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

Good morning, Jamie.

Hi, good morning.

A couple of questions. One, on the gross margin front we saw another nice sort of sequential improvement, any color you can give on that front?

And then my next question relates to, you know, you talked about Q2 in the US production being down, because we won't have any more transition engines. Again, is that -- I guess -- can you just comment more specifically? I thought you guys did have some more Caterpillar engines and that you were running out of Cummins engines, so if you could just comment on sort of that trend. Because I thought we had enough Cat engines anyway to get us through the end of quarter, so that just sort of confuses me relative to what you are saying.

Let's look at gross margin first.

Yes.

Yes, gross margins as a percentage of sales for parts in Q1 of '10 was 33.7%, which compares to 32.7% in Q4 of '09, and truck margins were 3% compared to 2.4% in Q4.

But on the truck side are you seeing -- was there any material cost benefit there? I'm just trying to get more color within trucks specifically, too.

For Q1?

Yes.

I think the margins were up slightly on trucks in North America, yes. Of course you're now seeing the increase in commodity prices around the world, which will have an affect on, well, any manufacturer that makes anything, as you see copper and others really start to increase after some lows of last year. So it's, you know, ongoing challenges, but our team is doing a great job of managing through the cost elements.

On the engines and transition and Q1-Q2. You know, for most of the industry the vast majority of the engines and trucks built in Q1 in the US and Canada were, you know, pre-2010 engines. That's the same with us. PACCAR, as we've done in every other engine transition, we adopt the new technology. We're the leader on that. And so we will have a minority of engines in Q2 being the -- let's call it pre-2010 engines, meaning we're going to be putting in more of their Cummins 2010 engines, and maybe even a few PACCAR engines.

Okay.

So -- but -- so there will be no -- so you don't have any left over Caterpillar '09 engines?

There will be a handful, but it's a minority.

Okay.

And then just last question. You know, on the SG&A front it's, you know, been increasing a little over the past three quarters, and this is the first quarter we saw a year-over-year increase. I guess just, Ron, how you are thinking about SG&A, you know, in dollars for the year, if you could give any color.

Okay.

Yes, this is Michael.

SG&A, the run rate of what we have is pretty indicative of what we expect for the rest of the year. Against Q1 of '09, about $4 million of that increase is due to currency. So really pretty flat.

Okay, great, I'll get back in queu.

Good questions, thank you.

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

Good morning, Andy.

Good morning, Mark. Good morning, everyone.

A question on the financial services, given that you're seeing, I think you said, used equipment prices starting to go up, should we see the provisions start to go down more dramatically than they really did in the quarter, if we compare it to the fourth quarter?

You know, I think we've seen, you know, gradual improvement over the last year in terms of past-dues and credit losses, and I think that improve -- that gradual improvement is what we see as we go forward. There's still a difficult operating environment, and I think we'll see that gradual improvement as we move forward.

Okay, thanks.

And then a little bit back on your comment, Mark, on commodity costs being a little bit of a hurdle that you have to get over on the margin side. Given that you are already seeing kind of the US and Canadian industry push back on some of the emissions pricing, is it easonable to assume that you should be able to get pricing to offset that, or is that something you've -- you really have to do on a productivity basis?

I think productivity will have an important element of that. You know, as I say, we're the -- pretty much the first in the industry to have the majority of our vehicles now being equipped with 2010 engines, and, you know, frankly customers are appreciative of some of the benefits of the new engines, but there is a real-world price hurdle that they have to get used to. They will. They're a very flexible and proactive customer base. They've seen this every three to four years for about 20 years, so they understand how it works. But, you know, for the interim, let's say for this year, it will probably have some impact on some of the margins, and then you throw in the commodity price increases and, you know, that's just -- that's just business. That's what we do every day.

Okay. And -- thank you for that.

And then a little bit longer term, I mean given that freight demand and used equipment pricing and all that in US and Canada seems to be improving, you know, and there's this hesitance out there, are you -- without giving quantified 2011outlook -- are you looking for kind of a normal cyclical recovery, or one that is exaggerated up-front? And if so, how are you looking to support the supply chain's ability to really ramp up quickly?

Okay. That is a fantastic question.

Well, first of all, on the freight, it's up about 10% from its low, but it's still down about 10% year-on-year. You know, we have to get the general economy going, and I'm not talking about the financial sector, just the basic blocking and tackling of people making things in this country to get freight really going again. There is some improvement, and I think over the course of the year we hope to see more of that. Obviously the housing industry is a big factor in terms of freight movement,and that's still at a 50-year low, on home construction. So that's going to take a couple of years to come back.

So I'm not sure what the normal cycle recovery is out of the worst recession in 50 years, but you know, there's some positive signs. As I say, used trucks are looking good. Our suppliers are really in good shape. We have an excellent collaborative partnership. We train our suppliers in Six Sigma. We are one of the few companies in the industry that actually will purchase major capital pieces of equipment and install them in our suppliers, to help them improve quality, and improve capacity, and reduce their cost. We retain ownership on this piece of equipment. So our suppliers, overall, are in very good shape and our teams have done a fantastic job around the world. And the good thing is that when suppliers have ideas, and have many great ideas, PACCAR is the first place they call, because it truly is a partnership. We want our suppliers to make money. And I'm not sure other -- other manufacturers are of that same mind. So it'll recover, and PACCAR is in good shape to take advantage of it when it does.

Thank you very much.

You bet.

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

Good morning, Joel.

How are you?

Good. Did you get an MX hat and a calendar?

No, no. But I got stone walled by all your dealers, so you guys did a good job.

They were probably checking credit.

Yes, yes.

Can you talk a little bit about the California port issue? You know, there were a lot of people all over the place talking about, you know, there's 100,000 trucks that have to be -- that are going to come out of there, and some people talking about 150,000. Could you just give us a sense of the impact of that, and the size maybe on the industry?

Sure.

I think particularly our Kenworth team, have done a very good job on being one of the leaders in terms of supplying alternate fuel vehicles down in the ports of L.A., Long Beach. And I think that right now it's a little bit confused by what the federal authorities say is possible, versus what the state authorities say, versus what the local authorities say. And then unfortunately you've got the trucker caught in the middle.

You know, the good news is we've got a product that people like, that is -- has been endorsed by the major ports,but there's still some sort of interdepartmental agency discussions that need to be settled out. We're not involved with that. That's really at a political level.

And so the size -- you know, the size is a little bit variable, and it'll be interesting to see what happens when the Panama Canal is enlarged and more freight is brought to the east coast, and what effect that's going to have on the ports of the west coast. And so there's a few interesting variables going on. We're in good shape when they do figure it out, and we've got the product that customers seem to want.

All right.

And then just last, can you talk a little bit about some of the guideposts that we should be watching out for, to gauge the amount of margin efficiency or operating efficiency that you've built into the Company during this downturn, you know, on less volume in this coming cycle, can you achieve the same or better operating margins? You know, just trying to get a sense.

Yes. You know, the operating margin, you know, we always pride ourselves in delivering good margin and, as you know, we even made money last year when most of the industry did not. But, you know, the volumes are a third of what they were when things were really strong, and that does have an impact on your operating efficiency. Even with that, we continue to be more efficient in our factories and quality continues to improve, and we win these J.D. Power awards, which we're very proud of. But until you can, you know, get your volume up to probably 60%, 70%, 80% of what we were when things were really strong, you know, overall it's going to have an impact on your margin.

So you'e not going to know until the volume comes back to more normalized levels?

Yes, exactly. It's that simple. I mean, we're getting good margins on the volume we have now, but you have to go back a decade to find comparable volume. So we've made a lot of improvement on the operating efficiency within the factory. It's fantastic.

Okay. Thank you very much.

You bet. Good question.

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

Good morning, Adam.

Hi, good morning.

I was wondering if you could talk a little bit about the parts business, the trend of demand between the US and Europe. Is Europe also seeing improved parts activity yet?

Okay. The answer is yes. Europe is seeing improvement in their parts business, which is very good. As I say, the DAF dealers throughout Europe are in good shape, and they're starting to see customers coming into the shops for, you know, normal maintenance. And the same is true of the Kenworth and Peterbilt dealers throughout North America. And so the parts business is, you know, starting to improve, starting to improve.

Good, okay.

And then just a couple of clarifications. Could you help us with the impact to sales and earnings from currency? And then, I might have missed it, but what the past dues were in the quarter?

Okay. Let's do currency.

Yes. Against prior year, the impact on currency was about $110 million to increase revenue and about $10 million to increase pretax income.

And on the past due side. Past dues at March 31 are comparable to the December 31 levels, with a slight improvement in the US and Canada offset by slightly higher percentages in our other markets, so overall 4% at March 31, versus 3.8% at December 31.

Great. Thank you.

Good, thank you.

Your next question comes from the line of Steve Volkmann with Jefferies and Company.

Good morning, Steve.

Good morning.

Just a couple of quick follow-ups for you.

Sure.

I was a little surprised to see the finance down sequentially, even though the credit quality seemed a little bit better. Are we just sort of working down the portfolio here, or how should we think about that?

Good question.

Yes, I think the biggest thing is the reduction in the asset base and the effect that had on finance margin, and there are a couple of fewer days in the first quarter versus the fourth quarter. So it's primarily on the finance margin line.

Okay, great. That's helpful.

And the market share of the potential deals that you're financing internally? Has that changed much?

Matter of fact, the first quarter was right in line with our full year last year. The first quarter typically is a little bit lower, but we were able to achieve 26%, the same as our full year last year.

Super, that's helpful.

And I'm also wondering, you know, as you start to put orders for your 2010 compliant engines on the books here, have you seen any kind of a shift with respect to engine size? You know, some people in the industry are sort of pushing away from 15-liter into the lower sizes, is that happening with you or is it kind of status quo?

I think there's more discussion about that than perhaps is actually happening, but it's certainly a topic that people are looking at with, you know, fuel prices, even though they're attractive, they've gone up, you know, over the last year, 18 months. And the 13-liter engines are performing very well, they deliver excellent torque and horsepower . So, you know, that's what the rest of the world uses, and I think over time North America will probably become a little bit more aligned with the rest of the

Great. That's all I had. Thanks very much.

Good questions.

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

Good morning, Mike.

Hi, good morning.

Just two short ones here. What's the value of used equipment currently being held for sale on your balance sheet, please?

Don't have that number.

Used equipment?

-- readily available.

We'll have to get back to you. We can get back to you on that.

Used trucks held for sale? No?

I don't have that -- I can get you the numbers.

Okay.

We'll get you.

Also just another quick question. What was the level of charge-off in the finance portfolio in the first quarter, please?

So the actual charge-offs were $26 million.

Okay. Versus the $21.8 provision?

Yes.

That's correct, yes.

Okay. So in terms of --

We don't have a lot of used trucks.

Pardon?

But if you want a deal we can probably talk to you.

Okay.

So in -- just bigger picture thinking, allowing the charge-off to move at a rate that's greater than the provision, how should we be thinking about that going forward?

Actually, the provision -- or the reserve that we have on the balance sheet compared to our asset base has actually pick the up a little bit, progressively each quarter just to retain our conservative position as we usually do and so we're consistently at -- at the end of the first quarter. Actually, the provision -- or the reserve that we have on the balance sheet as compared to our asset base has actually picked up a little bit, progressively each quarter, just to maintain our conservative reserve position as we always do. And so we were essentially at 2.5% of our asset base at the end of the first quarter.

Okay, great. Thank you for taking the question.

You bet. Thank you.

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

Good morning, Kristine.

Good morning.

My question is a little bit more color on the new engine production. I know you said this summer, but I was wondering if could you give us a little bit more detail about the process of bringing up production and where you are now, in terms of ramp-up? And then you mentioned the 1500 orders, I was kind of wondering just over the longer term where the mix of your volume is going to come, more of the 13-liter versus 15-liter, kind of what's your goal mix there?

Well, certainly for the foreseeable future we'll be selling more 15-liters, with our excellent partner Cummins. We only have a nine liter and a 13-liter in-house, so that's -- that's what we'll sell. And in terms of the ramp-up it's -- you know, the summer is the, you know, the time frame that we're aiming for. And I think over time we'll see a good balance between the 13-liter PACCAR engine and the 15-liter Cummins engine. Serve the whole market, customers will get the benefit.

In terms of summer, would that be late summer or mid- or early summer?

I'd say in the middle of the summer.

Okay.

And then I wanted to ask a question about the pricing, maybe a little bit differently. We've been hearing the same things on pricing, especially on the 2010 engines coming under a little bit of pressure. I wanted to get your sense on what are you seeing competitors doing at this time. I realize it's pretty low volume, so it's pretty hard to make long range forecasts based on this, but what are you seeing from competitors and do you think that the industry will be able to hold the line on the pricing, or do you think that as volume improves we'll start to see, you know, the industry pushing back on trucking companies with that pricing?

Well, I think it's a very normal process. Most of our competitors are still trying to sell pre-2010 engines. As I say, we're the leader on selling the 2010 engine. Over time, you know, most of the pricing will be passed through as our customers pass through the additional cost to, you know, their customers. That's a pretty normal way the market works. But, you know, that'll take some time. It'll certainly take all of this year to work through,particulary since we're introducing higher price but more efficient product in a -- in an ongoing recession. You know, if it was boom times it'd be a slightly different economic scenario. But, you know, we're coming out of a very challenging recession, and customers and their customers are more wary and more conscious of costs and what they can or cannot pass through.

A short-term question. You mentioned that your competitors have more 2009 engines available. Do you think you'll see market share shift here in the short term, if they're running those out and you may see a lower production in North America?

Oh, yes, I think that's pretty normal. You know, a number of our competitors are interested in market share. Usually at the detriment of their shareholders, I find. But that's a -- pretty normal.

Okay.

And after time it all balances out.

Great. Thank you for your time. I appreciate it.

You bet. Good questions.

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

Good morning, Jerry.

Good morning.

Mark, you have as lean of an inventory supply chain as anyone. I'm wondering if you can talk about how you see the freight situation in Europe playing out for truckers. How much higher have spot truck rates moved, and over what time period do you think that situation is resolved, if airspace opens up over the next couple of days?

Well, you know, I don't have -- sort of the -- what the freight spot has done just over the last four days because of the Icelandic volcano. But, you know, the vast majority of freight does get moved by truck, as you know. So there might have been a momentary one-week upward movement, but I think that'll settle back down. So we're starting to see freight rates slightly improve, but I'd say slightly in Europe, and, you know, there's still a lot of economic challenges there.

And you've got a number of countries that have elections going on. The UK, the Netherlands come to mind, and then you have Spain, Portugal and Italy that are probably having a little more serious economic challenges. And central Europe is sort of being impacted in a negative way. So there's lots of things going on there that's going to take some time to settle out. The good news is that people love the DAF trucks and they're buying those, but certainly not at the levels we saw two, three years ago.

And, Mark, in terms of the parts of Europe or countries that you're more optimistic on this year, can you talk about which countries are at the top of that list?

Well, I think primarily northern and western Europe, France, the Germanys, Netherlands, Belgium, you know, would be some of our strongest markets.

And Mark, the order trends that you're seeing in the European market, obviously it's a great sign that you're taking up production rates, can you just talk about where orders tracked in the first quarter, perhaps relative to sales?

Well, the orders have improved. We're taking some share away from probably one of our German competitors, who seems to be in a little bit of disarray. But, you know, having been in this business for many decades, what will probably happen is once our competitors figure out their internal business systems, they'll aggressively come out with low prices to regain or regain some of the share that they lost and, you know, we'll go back to the steady progress that DAF's has made over the last, almost 15 years of, you know, a few tenths or half a tenth or half a point of share increase every year. So I think, you know, that's kind of what we're seeing right now in Europe.

And, Mark, lastly just a clarifying question. Your earlier comment that commodity costs and inflation you would have to offset through internal initiatives, does that apply to both US and European market , or is there a chance that your European competitors might push prices with the [inaudible]

Well, the commodities are worldwide so we're -- you know, everybody who manufactures anywhere in the world will be impacted by the base commodity increases. Europe doesn't have the 2010 engine increase. But I think the competitors will probably keep their pricing at relatively low levels to maintain whatever share they've got and, you know, they've had several years of losses and I think they are probably comfortable to have several more years of losses as long as they can keep some share going. So, it's pretty normal in many ways.

Thank you very much.

Good questions.

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

Good morning, Patrick.

Good morning, everyone. Good morning, Mark. A couple of questions, most have been answered.

When I look at your R&D and your CapEx spending in the quarter, I would have thought that they would have been a little bit more front-end loaded, given the ramp-up for launching the '10 engines in mid-year.

Well, a lot of the expense and capital and R&D for the engines has been in the previous couple of years, or the previous three, four, five years. What is now shifting, because, you know, we're in very good shape in terms of 2010 engines, is the ongoing development of just new vehicle products. So you're -- we're actually sort of in a bit of a transition right now. And I think you saw some of that at the Mid-America show. So the engine -- the engine expenditures has really been dialed down because we're -- we've done the work.

And how are you thinking about -- you're now -- it looks like production is increasing in Europe, pretty steady to increasing in North America, you're still generating cash, you know, $2 billion on the balance sheet. How will you think about what you are going to do with your cash and relative to -- I mean, you reduced the dividend last year, I know that's a board decision, but what are the priorities for cash going forward?

Well, I think just, first point, on the production, as we've indicated in North America, Kenworth and Peterbilt production will most likely be down this year. So that's an important factor to take into account. Yes, we've got a very strong balance sheet, which is really one of the major factors that's contributed to us being able to make any money last year. And being able to borrow money for our finance companies, and the treasury team has done an outstanding job on that. The dividend is something that we continue to review with the board. And we made that difficult decision a year ago. And as the business improves, we certainly would like to take a serious look at improving the dividend. We're looking at opportunities in South America. We're looking at opportunities in Asia. And we also have got a pretty active new product development program that will use some of that cash. So plenty of opportunities to invest.

And just the last question. So we should not expect any benefit of utilization rates in Europe from the North America engine in the second quarter, because that's more midsummer to the end of the summer, so that's really going to be Q3 and beyond, right?

For engines?

Yes, as far as the improved utilization rates in --

Yes, they are being -- DAF has an excellent engine factory, but they're at relatively low production compared to the capacity of our engine factory. So it'll be minor enhancement to utilization and efficiency.

Okay. Thank you very much.

Good. Good questions.

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

Good morning, Ann.

Hi. Good morning, guys.

Mark, I'm just a little bit confused on the outlook for Q2 North American production. You said that you are in effect almost out of 2009 engines. However, your 2010 MX engines have not been certified yet. So could you help clarify what will you be building? Will you be building uncertified?

No. But I always love your questions. No, we're Cummins' largest customer. We have a great, strong partnership. We'll be selling a lot of Cummins engines.

So, not just 15-liter.

No, Cummins has a whole range of engines.

I know. But that's helpful to clarify that.

Yes.

So you will not be assembling PACCAR trucks, Kenworth and Peterbilt trucks with MX engines until they are certified. I was just kind of wondering if you could be building them into inventory.

Obviously. The EPA certification is a very normal two-step process. The first step is complete, passed great and we're in process on the second step, and we look for certification in May.

In May? Okay, that's helpful.

And then the 1500 orders for 2010 engines, can you talk just a little bit about what your expectations might have been, you know? Is this in line with what your expectations might have been? Is it below? Is it above?

I think it's in line. These are 1500 MX engine orders.

Yes.

And I think it's -- it's in line and we look for, you know, a -- a few more thousand as we go through over the next several months, and obviously it's an engine that's had very good results in all the rigorous testing we've done. I think you have picked up that, you know, 50 million miles of testing. And, you know, so we're excited about getting them out into the field and having our customers enjoy the benefits.

So you are reiterating that miles tested is an important criteria?

I think everybody in the automotive industry would corroborate that.

And then just finally, just a detail. The slowdown in North America then as you transition out of '09 engines and into 2010 engines in Q2, versus maybe a slight pickup in Europe, net-net if you look at the net impact, would you expect revenues sequentially to be down or flat in Q2?

I'd say flat to maybe slightly up.

Flat to slightly up overall?

Yes.

Okay. That's helpful.

Good questions. Thank you.

Thank you.

Your next question comes from the line of David Leiker with Robert W. Baird.

Good morning, David.

Good morning. It's actually Keith Schicker calling in for David.

Good morning, Keith.

I wanted to touch on used truck prices. Prices are rising in the US. Could you comment on the used truck pricing in Europe? And then also, we saw as used truck prices were depressed that potentially some lenders were a little reluctant to repossess trucks. Could you comment on how that looks right now, and what sort of impact that could have on capacity going forward?

Yes, I think as we look at Europe, I think we're seeing the same trends in Europe as we're seeing in the US, that late-model used equipment is up, you know, 5% or so year-over-year. So similar, very similar trends. In terms of repossessions, I can only comment, you know, we've seen gradual improvement in the performance of our portfolio. We evaluate and want to work with our customers to achieve full payout. But if that situation's not possible, then we try and find the quickest solution to -- for the best economic result for --

I don't think it has really any effect on production or what we're doing. I mean, it's just a small part of the business.

Okay. And then we outlined a pretty -- pretty good three-step process here ahead of recovery, it sounds like in America -- or North America or the US, we're kind of rearly in step two. Can you just give your perspective on when you think things shift over into step three, and then maybe some perspective on where you think Europe is along that time line?

Well, I think in terms of the -- you know, the pretty normal three-step process we have here. It's probably going to be later this year. And, you know, it's hard to pinpoint. Obviously there's lots of economic inputs that have to be factored in, and things are changing every week in many different industries, as you know.

In Europe, I'd say they're probably a little bit behind where North America is right now. But then I would also just add that they don't have the impact of transitioning from one engine model to another. And so that's -- that could be a positive in the European markets. So they're probably slightly behind. But they're both moving forward on the three-step process.

Okay.

Do you still get a sense that there's a greater overcapacity situation in Europe to work through, relative to the US?

Well, there hasn't been too many factories decommissioned. As you know, we permanently shut our Nashville factory in the US, but in Europe everybody still has factories in place. Certainly employees have been let go, but structurally the industry is probably pretty much the same as it was a couple of years ago.

Okay.

And then if you looked at -- from a truck or freight hauling capacity, do you get a sense that there is more of a surplus in Europe than the US, is it closer to equilibrium there?

Yes, I would agree. I think that US -- North America is probably in a little bit better shape. Youknow, Canada is in good shape economically. Mexico is starting to recover although, you know, different things going on. But Europe plunged much more dramatically into recession, and that was a real shock to the system that they're now coming out of.

Okay. Thank you very much.

Good questions.

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

Hi. Is it Bass?

Basili.

Vasili.

Yes. That's okay. I have family members that get it wrong. [laughter]

I want to get it right, though.

I appreciate it.

Going back to an earlier question maybe asked a little differently, you mentioned the 1500 MX engine orders. Can you talk about the time frame of those engines or basically, what I'm trying to get at, is what percentage of your total truck purchases that represents? Just the kind of --

Yes, those are over 12 months in terms of the customers, the way they laid them out on a monthly basis and, of course, that's starting this summer. And so this summer to next summer is the way that I'd realistically look at it. You know, but at this time, you know, it's -- it's closing in on, you know, 5% of our orders, and hopefully that will increase.

Okay. And -- and is it -- I guess, correct me if I'm wrong, I've heard something that -- maybe the Company said this -- about 50% is kind of the goal ultimately to have --

Yes. Over time, sure.

Okay.

Absolutely. And I think, you know, to look at the industry as a barometer, youcan see what the competitors have. They all have their own in-house engines and a number of them still purchase third-party engines and you can see what their percentages are.

Right. I was just trying to get a sense of where it is now versus the longer --

But this is early days. It's a very exciting journey, but it's early days.

Understandable.

And kind of second question. You talked about kind of your three-tier turn around, or I guess, how the trucking industry works. How closely do you follow the truck tonnage index? I've heard mixed reviews from different carriers themselves, kind of as to the validity of --

That's a great question, and it's certainly one input, is the way that I'd put it.

Okay. But it's not something that you kind of obsess over?

We try not to obsess over anything, other than outstanding product quality and shareholder return.

Great.

Then kind of one last question. Follow up back on the 13-liter engine. From what I understand,13-liter engines are more fuel efficient. I know one of the reasons that they've really taken hold in Europe is just dealing with the geography. It's a lot smaller. In the US there's kind of more open road, the 15-liter is more desirable because of the power. At what point -- do you have a sense at what, you know, price per gallon of diesel, I know we recently broached $3, but at what price do you think the market shifts their preferences to a more fuel efficient engine?

Well, if you look at the pricing per gallon, and you obviously have to translate that from liters and kilometers to miles, but in Europe, you know, you can have anywhere from, you know, literally $5 to $10 per gallon depending on where you're traveling. That will have an impact. And, you know, we have a wonderfully attractive, low price for a gallon of diesel in North America. How long that will last is obviously open to much discussion. But over time it will most likely go up and there will be more interest in 13-liter engines.

Great. Those are all my questions. Great job, guys.

Good. Great questions.

Your next question is from the line of Tim Denoyer with Wolfe Trahan.

Good morning, Tim.

Good morning.

Quick question. Not to belabor the order level point, but in terms of the number of orders that you had of '09 engines, can you specify a little bit more in terms of March versus how many you have left over going into April?

Well, it's a minority now in terms of our production and, you know, it's winnowing down every week.

Okay.

Similar to the $2500 per truck increase in used truck prices that you mentioned, can you just cite the source of that data point?

Well, we have a very active used truck centers around the country that our teams operate. And, of course, we're also involved with independent auctions. We have, you know, many hundreds of excellent dealers who tell us what's going on, on a daily and weekly basis, in terms of the valuation of our product and our competitors'. We also are involved, you know, every day on talking with our customers about trade-in packages. So, you know, you take all those inputs, and we have for years and years, and it's quickly apparent, you know, is the value of a T800, you know, going up or going down? And how is it spec-for-spec, year-on-year? So it's pretty straightforward.

Great. But it's weighted towards Peterbilt and Kenworth or --

No, no, it's weighted that way because they have the best resale value, you know, up to 25% compared to the competitors. But, no, we certainly track what the competitor's vehicles are doing.

Okay.

And then just one broader question. You mentioned a few industries, and I know that you have great exposure to lots of different end markets, you mentioned that European auto sales, or production, is fairly weak, and I'm guessing that in the US it's fairly strong, but the housing market is not great, are there any other --

Our production is not fairly strong, it's slightly better coming off a 20-year low in North America.

Okay.

But my question is more, are there any other industries where you're seeing particularstrength or weakness, US or Europe, just kind of wherever?

Commercial real estate, commercial construction is challenging right now.

Okay.

Retail sales, people going to shopping malls, you know, has improved over the last year. You know? The home repair market has seen some improvement, but not back to the glory days. And so, you know, you track -- anything that gets moved by truck and, as you know, over 70% of all freight is moved by truck in North America. And so it touches every industry.

Yes. Absolutely.

And then just one very long-term. Do you have any expectations on the -- the next emissions regulations on the timing or -- I know you're participating in the super truck program, and just what types of technologies might be being looked at for that?

Well, we're looking at a whole host of technologies and that's-- there's a lot of exciting opportunities out there. And, you know what? It would be fun if you and your team would like to come out and visit our technical center, we could talk in more detail about that.

We would love to.

That's all the questions I had. Thank you very much.

Good, thank you.

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

I'd like to thank everyone for their excellent questions and thank you, operator.

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