帕卡 (PCAR) 2010 Q2 法說會逐字稿

Good morning and welcome to Paccar's second quarter 2010 earnings conference call. All lines will be in a listen only mode until the question and answer session. Today's call is being recorded, and if anyone has an objection, they should disconnect at this time. I would now like to introduce Mr. Robin Easton, Paccar's Treasurer. 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'd now like to introduce Mark Pigott.

Good morning. Paccar today reported improved revenues and net income for the second quarter of 2010. Paccar's second quarter sales and Financial Services revenue were $2.46 billion compared to $1.85 billion in the second quarter of 2009, a 33% improvement. Net income improved to $99 million compared to $26 million a year ago. I'm very proud of our 16,000 employees who have delivered outstanding performance to our shareholders and customers in an uneven and unsettled global economy. Paccar's financial results reflect the benefits of higher truck deliveries worldwide, and a continued improvement in after market parts sales and Financial Services results. However, the North American and European truck markets remain at historically low levels. In the US and Canada, our customers are starting to adjust to the higher priced vehicles that have resulted from the EPA 2010 emission change. The European truck registrations for the second quarter improved 17% compared to the first, but despite that favorable increase, the European truck market year-over-year is still down.

We expect the 15-ton market registrations in Europe to be between 160,000 and 170,000 units this year, comparable to the 168,000 units last year. US and Canadian retail truck sales are estimated to improve to a range of 110,000 to 130,000 units this year, compared to 108,000 last year. While the global economic outlook is still uneven, the truck market is stabilizing. Paccar truck build in the third quarter is expected to be slightly better than the second quarter. I would note that production at our DAF factories in Europe will have their regularly scheduled two week summer shutdown.

We discussed during the analyst call in April the three step process that the truck industry usually progresses as it recovers from a recession. First is improvement in parts and service, second is used truck values, and third is more truck orders. In the US and Canada, parts sales were up 10% to 15% and used truck pricing increased 10%. The good news is that industry new truck orders for the first six months compared to a year ago are up 30%. Many of the orders are for production during the next six to 12 months. In Europe, a similar situation with parts business and used truck pricing improving by 10% to 15%. In Europe, as I previously noted, new truck sales are 15% lower than last year due to a slow first quarter, but the second half of the year should be up 20% compared to 2009.

More good news is that DAF is the leader in the European market for on highway tractor sales and has now achieved a record overall market share of 16.3%, the second highest market share in Europe. Its been a wonderful success story over the last decade for DAF. DAF is steadily progressing towards its medium term goal of 20% market share in Europe. DAF heavy truck production is up 20% from first to second quarter this year, and we expect that their production will be up 25% for the remainder of the year. Kenworth and Peterbilt build rates will be up 10% to 15% from the second to the third quarter.

Our customers are benefiting from a 7% year on year improvement in freight volumes, higher freight rates, and stable diesel prices. They continue to increase the utilization of their fleets, which in turn is driving increased aftermarket parts and service business for our dealers. Paccar's aftermarket parts sales increased to $538 million for the second quarter, the highest level since the third quarter of 2008.

Turning to margins, margins for trucks was primarily driven by higher pricing due to improved demand. Paccar's strong balance sheet and positive cash flow have enabled the Company to continuously reinvest in the business, enhance operating efficiency, and develop innovative new products such as the Paccar MX diesel engine. I'm pleased to note that we're now installing the MX engine in approximately 15% of Kenworth and Peterbilt vehicles. Assembly of the Paccar MX engines began last month at or industry leading manufacturing facility in Columbus, Mississippi. Early feedback from our customers of the Paccar MX engine has been excellent.

On a broader scale, in the US and Canada, the substantial majority of Kenworth and Peterbilt trucks are being produced with the EPA 2010 engines. I know a number of you are interested in it. There appear to be about a 5% shift to 13-liter engines year on year.

Paccar Financial Services revenues were $239 million in the second quarter compared to $247 million a year ago, reflecting a lower level of assets. Paccar's financial second quarter pre-tax income was $34 million, more than double the $16 million earned in Q2 of 2009. This was achieved due to better finance margins and a reduction in the provision for credit losses. The credit loss provision for the second quarter 2010 was $20.2 million compared to $29.1 million in 2009. Paccar's conservative approach to business, complemented by its excellent credit ratings, enables Paccar Financial to offer competitive financing to Kenworth, Peterbilt, and DAF dealers and customers. The ongoing turmoil in the commercial real estate market is impacting regional banks in the US, which limits their ability to offer financing to truck customers. Good news for Paccar Financial. Paccar Financial has excellent access to commercial paper and the medium term note markets. Last month, Paccar Financial sold a three year $250 million fixed rate note at a rate of 2.1%. Also during the quarter, Paccar completed the renewal of a $2 billion credit facility.

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, and become an industry leader in information technology. As we all can see from our iPads and newspapers and television every day, there continue to be many challenges facing the world economies. The global economic environment is still unsettled. However, Paccar's balanced approach in all phases of the business cycle positions us to generate improving results for our shareholders as the global economy recovers. Thank you. Look forward to your questions.

We would be happy to take questions now.

(Operator Instructions). Your first question comes from the line of JB Groh of D.A. Davidson.

Hi, JB.

Good morning guys. Can you hear me okay?

I can, good morning.

I popped on a little late. Maybe you addressed this, but of course the thing that pops out immediately is the real strong gross margin performance in the quarter. And could you maybe help us understand, attribute that -- was it just I'm sure part of it's driven by better volumes, but is there input cost benefits in there or anything else that you can point to that drove that good margin?

We commented in the opening statement, gross margin was really driven primarily by some increased volume and better pricing, particularly as there's been increased demand throughout the marketplace.

So are you able to get margin on the higher priced trucks with the new engines? I know that the cost has been passed through, but is there any margin that -- whatever it is $8,000 to $10,000 increase?

Yes, it's an $8,000 to $10,000 increase. We're starting to see slightly improved margins as the overall market's getting a little bit stronger. It's still a challenge for many of our customers to recognize that $8,000 to $10,000 price increase, but as the freight business improves, as their freight rates are increasing, as there's a little bit more business for our customers, they're starting to see the benefits of it.

And I notice the top headline today in one of the trade rags about fleets raising driver pay, and I know in the past you guys have talked about your premium brands being a driver retention tool, which I guess when turnover was pretty low that wasn't probably as attractive a prospect. But now it looks like things are kind of turning the other way. Can you maybe address that?

Yes, a number of our customers are increasing their pay somewhat, although there's still a fair number of potential candidates out there, particularly as the housing construction market is at 50 year lows. But all these fleets want the best drivers that are available in the marketplace, and using a Kenworth, Peterbilt, or DAF product as an inducement to join their fleet is always a great idea and we encourage it.

I guess it sounds like it's going to be a little tougher to get drivers with some of the new restrictions, so maybe that plays right into your hands, we'll see.

Good point.

Thanks.

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

Good morning, Joel.

Hi, how are you?

I'm pretty good. How are you doing? Making it through the summer?

Yes, I'm not used to actually getting to ask questions anymore.

Well, welcome back.

Yes, exactly. Have you sold through all of your CAT engines?

They will be pretty much gone this quarter.

Okay, and then can you give us any sort of an idea how many trucks you shipped in the second quarter in the US and Europe versus the first quarter?

We typically aren't breaking that out too much, but we shipped about -- comparable number between second and first quarter for the US. The first quarter, as you may recall, still had some carryover of 2009 engines. The second quarter was really the customers adjusting to the 2010 pricing.

And then your comment on the 13-liter mix, is that saying that now 13-liter is about 40% of the total mix?

Not for us, it's not. I mean obviously in Europe, it was the entire mix. But in North America, it's still probably more in the 20% range, but improving.

Okay, and last one, can you comment a little bit on the inventory levels of your dealers?

They are about five or six year lows. So our dealers are in great shape, making strong profits as the parts and service business returns. Used truck pricing is improving, and they're in very very good shape financially.

All right, thank you very much.

Good. Good to have you back.

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

Good morning, Jamie.

Hi, good afternoon. It's Chase Becker in for Jamie.

Hi, Chase.

Just a bigger picture question on the announcement of DAF in South America. I know obviously this is probably not a huge near term impact, but was wondering if you could speak to the longer term strategy and the investments that you feel you need to make to be a meaningful player in that market?

Well, that's a great question. I'm glad you brought it up. As you've seen from the reports, DAF has really become one of the major leaders in the European market, western and central Europe, and now over 16% market share -- a great product, great dealers, and really a terrific Company. So as we are more comfortable with the strength of what's going on in Europe, we're taking a look at South America. And we've sold in South America with our -- particularly our Kenworth brand for many decades, but in the [America Sur] region, which is most of the product being sold in South America, we've only sold in very limited numbers. So recently in the last few years as we evaluate growth opportunities, that seems to be a very strong candidate. Most likely we'll take a manufacturing facility in order to meet local content regulations and also to qualify for some of the national finance programs that are available to customers in Brazil and Argentina. And as you've heard from many of our competitors, they seem to be gaining most of their profitability from the strong South American market. We compete against these same competitors around the world and do very well, so I think over time, we should have a very strong, profitable and growing presence in South America.

That's helpful. Do you care to touch on the potential timing of a manufacturing facility?

Well, they usually take a couple years to get up and running and in place, but we will see what happens.

Okay, and then one last question, just on the material cost side, sounds like not seeing much headwinds right now, but wondering what your expectations are for the back half of the year? One of your suppliers was talking about this morning.

Well, we track all of the major commodities around the world, and obviously there was a run up and now things have slowed, and we have very good relations with all of our suppliers dealing with commodity pricing. We have long term agreements with them that hopefully will minimize the impact of the pricing swings. So at this time, minimal impact, but you can never tell as the world may go on a different tangent.

Great. I appreciate the color.

You bet. Good question.

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

Good morning, Henry.

Good morning guys. How are you doing?

Steady as she goes.

Could you chat about how Europe trended through the quarter? If you saw improvements as the quarter went on?

Sure. Europe started out slow for the whole industry in the first quarter, and the second quarter definitely gained some momentum, and as I said is up 17% second quarter to first. And orders continue to be good -- obviously some countries are stronger than others. Some of the Southern countries, Spain and Italy, are still challenge. But a little more confidence among our customers. Our dealers once again are in very good shape in Europe as they are in North America, so they're continuing to invest and add new service facilities which helped grow our business, and I think as I shared with you, our DAF production is up about 25%. Some of that is obviously gaining market share as people really enjoy the DAF product, and I think the European market is steadily improving. But even with that, we're looking for the number of registrations this year to be comparable, maybe a little bit more than last year. But 2011 could be better again.

That's helpful, and on the share gains with DAF, congratulations on that.

Thank you very much, we appreciate it. The team has worked very hard.

Is there anything you can highlight for either a segment of the market or a geography where you're gaining some of the share?

Well, we are now number one in Europe in the on highway tractor segment, so that's the vehicles that you see up and down the motorways. That's been a very excellent result and a very long process of developing the right product for our customers, and growth opportunity for us is continuing to grow in the off highway or construction segment. And that tends to be a little bit more regionalized. Certainly the biggest market would be Germany and I think we still have a few competitors in Germany that seem to have a strong presence there. But overall, Northern Europe, DAF is doing well in every country. If we're not number one, we're most likely number two, and so we see continued growth opportunities as we add more service facilities. We continue to invest in new products. We've got Euro 6 coming up in 2013. It's going to be another exciting inflection point for our industry. So it's just good, steady progress. Excellent team.

That's helpful. Thanks a lot.

Thank you. Good questions.

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

Good morning, Steve.

Good morning, gentlemen. Thanks for taking my question.

You bet.

A couple things. You provided some helpful detail here, Mark.

Thank you.

Going back to --

We're always learning.

-- overall, but I'm also going to ask with respect to your production volumes as we go forward, I think you mentioned Kenworth and Peterbilt would be up 10% to 15% in the third quarter. You reminded us about the DAF shutdown. Should I read that to be DAF as maybe flattish in the third quarter?

I think that's an excellent assessment.

Excellent. So is there any reason not to think that the fourth quarter sequentially should continue to improve over the third quarter with respect to production for the overall Company?

I think that's another excellent assessment.

Great. So --

You're right on point today.

Sometimes you get it right. Is there any reason on the margin side, and I would agree good job on the margin this quarter -- any costs that we should be aware of that kind of start to ramp up in the second half as volume comes up, are there any costs that need to be brought back that would lead us to be a little more cautious on margins in the second half?

No. It's a good question. I mean obviously we touched on this a little bit with some of the commodity pricing, which is still very variable around the world depending on major macro influences, but I would just say on the margin -- and we have to take a look at a 20 year horizon. When you look at that, the US and Canadian and European truck markets are still down in those 20 year lows. So the volumes overall for the entire industry are improving, but they're still at a very low level. And I think in order to get solid margin enhancement, we need to get back to not the heyday of 2006 but certainly 2004 or 2005, maybe even 2007. So that's going to have a big influence on the margin growth.

Okay, great. That's helpful, and then on your MX engine, 15% of your Kenworth and Peterbilt vehicles would be MX now. What's the overall target for that over whatever time period you choose, and what's the outlook for actually kind of full production rather than just assembly here in the US?

Well, as the market improves we're looking for further growth. Obviously the template that we've designed the MX engine on is based on the success of the engine and the DAF product. And as you know, we're standard and essentially exclusive with our own product as many of the other competitors are, but it's going to take some time to ramp up. We certainly will be expecting to get well over half our products. We'll have our engine as we continue to grow our business, but that's going to take some time. The other element that was not really addressed is that we're seeing some real success in selling our Powertrain around the world to independent manufacturers, and that will -- still small numbers, but starting to gather some traction.

Okay, great. I'll pass the baton. Thanks very much.

Thank you very much. Good questions.

Your next question comes from the line of Tim Thein of Citigroup.

Thank you, good morning. Two questions. First, on the Paccar Financial Services, I'm wondering if you can comment -- one of your competitors had noted some higher or increased competition from some of the bank and leasing companies in certain western European markets. And I'm curious if you could comment in terms of the financing landscape in your key western, especially northwestern European markets, as well as what the penetration rate in the quarter for the Financial Services business in Europe was?

I think the competition levels are comparable to what we've seen historically. The banks are always going to be there and offering competitive rates, and we try to show we're the best in terms of providing the service to support the customers long term. In terms of penetration, we were at 25% for the first half, consistent with where we've been historically.

Okay, and then in terms of the production scheduled for the back half of this year, how many -- or in terms of the dealer inventory levels, where are they versus where they were a year ago? I'm just getting at -- if you have a flattish retail market, why you wouldn't see production rise more than what you're suggesting in your commentary.

Well, taking a look at Europe, which as you know a little bit behind, a little bit ahead depending on how you look at the markets and the economic cycle, our dealer inventory for DAF products is probably half of what it was a year ago. So they're in great shape, and we are seeing an increase in production, and as I mentioned DAF production is up about 25% year on year, so that's significant. And we expect that will run out of that same rate during the rest of the year, recognizing we do have a normally scheduled two week summer shutdown that will affect DAF production. And in North America, once again, the dealer new truck inventory is five to six year low, so they're in great shape, and Kenworth and Peterbilt production will improve. It had a good first quarter. Things slowed down in the second quarter, and we look for some improvement in the second half.

Okay, thanks a lot.

Yes, appreciate it.

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

Good morning, Adam.

Hi, good morning. First just a clarification, Mark. I think you mentioned that 15% of your trucks were now taking an MX engine, and then you'd also mentioned 20% later. Is the difference the C13 engine from Caterpillar?

Yes. That's correct.

And then secondly, could you talk about what the impact was from currency to sales and earnings this quarter?

You bet.

The impact on earnings for the quarter was fairly modest. It was about $4 million and most of that came from movements in the Australian dollar. And the impact in the first half was about $14 million and a lot of that was in the first quarter, and that had to do again with Australian and Canadian Dollar movements.

Okay, got it. And then just real quickly, could you talk about the demand trends that you're seeing in Eastern Europe?

You bet. Breaking out let's call it Central Eastern Europe versus Western Europe, it's kind of interesting because year on year, that's the first six months, Central Eastern Europe is up about 20%. Western Europe -- these are registrations I'm talking about, 15-ton and higher -- Western Europe is down about 20% for the first six months. So you blend those together and they are down about 17%. So Eastern Europe, even though there's plenty of challenges and you see those in the paper, those economies are still chugging along and people are interested doing business there. They typically have low corporate tax rates. They have attractive business programs to invite new businesses to settle into their countries. So we're seeing some growth, but Central Europe total market is about 12% to 14% of the Western European market, so it's still a lot smaller.

Got it. Great. Thank you.

Thank you.

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

Good morning, Meredith.

Hi, good morning. I'm hoping that you can address your end market outlook both for North America and for Europe. I noted that you took the high end of both of the ranges down. Can you define -- or can you talk a little bit about in both regions the scenarios that would have defined the high end of the range, and what you haven't seen take shape that caused you to take the high end of the range down?

Well, as we -- I've been doing this for a long time, and as we progress through the year, obviously we got a little bit smarter in what the total market is doing. Looking at Europe first, we have a range of 160,000 to 170,000, and that's strictly a range. Things can happen that will have an effect on that. But looking at the order input for the entire industry and obviously what we're getting at DAF and any of the changes in market share between the competitors, it seemed to be probably close to the 170,000 -- which is, as I mentioned earlier, comparable to last year, which is 168,000. 2011 could be better market if some of the momentum continues. In North America, we have a range of 110,000 to 130,000 units, which is up from 108,000, and in fact if you went to 130,000, it's up about roughly 20%. So we're seeing that in terms of the incoming order rate. Hopefully that's the first step in a trend to get back to the replacement demand, which we calculate is about 225,000 to 250,000 units for the US and Canadian market.

Okay, well, it sounds like as you talk about Europe then that the base case is closer to 170,000 than 160,000. Is the 160,000 still on the table in the event that you see some measurable slowing in Europe or what really defines the low end?

Yes. Six months ago, I'm talking about the Euro dollar exchange rate, there was a lot of people thinking well it's going to go to $1.50 to $1.60, and three months ago they were talking one-to-one and now they're saying $1.30. A lot of things can still unravel in Europe that -- seems many economists can't even foresee. So we just give a range.

And then a as quick follow-up, can you walk us through the delinquency rates on a region by region basis in the quarter?

So overall past dues for the Financial Services segment were flat, with slightly higher in the US and Canada and Europe and offset by a reduction in our Mexican and Australian portfolios. We do continue to see gradual improvement in the portfolio and customers are continuing to work through the rehabilitation process, if you will.

Okay, thanks so much.

Thank you.

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

Good morning, Andy.

Good morning, Mark, everybody. First, on the South American growth opportunity, would you be entering with a full line or more in the tractor area? And then also are you expecting to support that production with engines or components from the Mississippi plant?

Yes, we would be looking at a full line, primarily it's the DAF product. Most of South America prefers the cabover version, and we're very pleased that we have the global leader in cabovers with the DAF LF, CF, and XF. In terms of the Powertrain, that's a very important part of growing in South America. We have some very good suppliers there that can furnish us with componentry, and some of the product may come from Mississippi or may come from (inaudible) just depending on what makes the best economical sense. Very exciting opportunity for us over time.

Great, and then dialing it back to the near term, around the production projections, Q3 versus Q2, the 10% to 15% increase for Peterbilt Kenworth, is that related mainly to the availability of the MX engine?

No. It's just markets perhaps getting a little bit stronger. People want the MX, we are happy to provide it.

Okay, and then in Europe, this may have already been announced, but I may have missed it. The market's improving, but still weak with some macro concerns overlaying. Is the government labor cost assistance still being eliminated or is that still up?

That's a great question. I just want to say that that program for the industry was very well thought out and very well instituted and really achieved its target of maintaining a reasonable level of employment of giving some assurance and hope to many workers and many industries and also basically allowing companies to do some forward planning. That was a really excellent program. The program, the part time unemployment has now expired in the Netherlands, but it continues in Belgium and in other countries. The good news is the markets are starting to improve and we're able to start hiring back some of our employees. So I think the programs were excellent for their time and now they will just be gradually phased out.

Okay, thanks, and then lastly, pricing in the NAFTA US and Canadian market. Clearly, you've benefited in the second quarter from better pricing. What are you seeing generally from competitors? Is it as they go after some of these larger orders? Is it getting more competitive as you go forward or is it pretty much static?

I think there's many consistent themes in our industry, as I'm entering my 33rd year. One is Paccar will produce the highest quality products in the industry. Second, most of our competitors will sell one thing, cheap pricing, and I think that's all I can really comment.

Okay, thank you very much.

Thank you.

(Operator Instructions). Your next question comes from the line of Ann Duignan of JPMorgan.

Good morning, Ann.

Hi guys, good afternoon I guess by now.

Probably a nice hot one on the East Coast.

It sure is, and I'm ready to ask my super duper questions, so --

We're looking forward to it.

Hope you're ready and waiting.

Okay, here we go.

Well, I suppose I'd be remiss given all of the discussion you've just had about how great your products are and the great share you've gained in Europe, I was hoping that you would comment on Navistar's recent release that their product is 1% to 2.5% more fuel efficient than your wonderful T660 with the [ISX] 15-liter. Would you comment on just fuel efficiency overall, what you're finding out there, and just what your reaction was to that press release?

Haven't seen the press release. All I know is what our customers tell us. They love our product.

And what are they saying on the fuel efficiency?

Yes. We're the leader, continue to be the leader, and there's always somebody that will say something, but let's let the market decide.

Okay, so you haven't done any testing yourselves in terms of -- ?

We've done plenty of testing. You know that, Ann. You've been here. We're the leaders in testing. 50 million miles for our engine. We test extensively. We have a very sophisticated testing, but at the end of the day, let's just let the customers decide. And as I go to these used truck auctions, and that would be probably fun for you to do some time because you can really see the real world there and the Kenworth, Peterbilts, and DAF are getting 20% to 25% more for a comparable aged spec vehicle. That's what's defining our product worth.

So your products are holding up better in the used market. Is that what you're saying?

They have. They always will, and that's a very important part of how we develop our product.

Okay, and just conceptually also, can you talk a little bit about why you chose Brazil as your next region of expansion and not Asia, just conceptually or strategically?

Well, actually, we're in both areas. We've been in China for 100 years, so we certainly know that market. It's a huge market, as you're aware. It's got some different kinds of challenges in terms of the ownership capability for western companies. There's still been no certified western truck manufacturer that's ever made any money in China in a partnership, so that's a challenge. But we are pleased that for four years in a row, the Paccar engine has been named the Diesel Bus Engine of the Year in China. We're selling a lot of our product in China. Brazil, America Sur, South America is a market once again that we've been in for over 50 years, and we're the market share leader in a number of the countries. Colombia comes to mind, and it's a market that is in a slightly different place in terms of its evolution of owner operators, medium and large size fleets. There still seems to be the opportunity to gain significant gross margins on vehicle sales. As you've seen over your years of covering the industry, any of our competitors that are in South America, particularly Brazil which is the largest market in South America, seem to gain a inordinate amount of their net income from those markets when it's going well. We're the leader in every market we're in and we think the product will be very well accepted and we're looking forward to growing in South America.

Okay, I'll get back to my iPad here and followup offline.

That's a good one. Thank you, Ann.

Okay, take care.

Your next question is a follow-up from the line of Joel Tiss of Buckingham Research.

Joel? Two questions.

This is Alex in for Joel, actually. I was just hoping you could talk about how many parked trucks there are in the US right now?

I don't think anybody knows exactly how many parked trucks. I think the best comment would be there's a lot less than there was a year ago and many of our customers have no truck parked.

Okay, thank you very much.

Thank you.

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

Good morning, Patrick.

Good morning, guys. Most of my questions have been answered. Just a couple quick follow-ups.

Okay, great.

On the 13-liter shift, the 5% shift, was that you or the industry?

I'd say it's both.

And is it a matter of who's buying trucks or is it really customers shifting down from 15s to 13s?

I don't think there's any shifting down. The 13-liter is the preferred engine throughout the world, and I think there's just a growing realization of the benefits of a 13-liter in terms of fuel economy, lightweight, ease of maintenance, and certainly it will deliver comparable torque and horsepower. So I think just people coming to grips that the US and Canadian market really cannot be an island in the global truck world that -- recognizing this is what the vast majority of people use for power in their vehicles worldwide.

Got it. And when you look at your share in the second quarter, were you supply constrained? I know you guys were doing the change over quicker than most in the industry. Was there a supply issue your share was a little weaker in the second quarter versus the first?

No, I think what the main impact was that we made the shift to 2010 engines as we always make the shift to new technology faster than any of our competitors, and thus there was a price differential as we were passing along the 2010 pricing versus the old 2009 pricing.

Do you expect the share to come back some?

Oh, I'm sure it will over time. It always does.

Got it, and just more of a detail question. Can you give us an idea of what finances you both did quarter-over-quarter in the finance business?

Could you repeat that? I didn't quite hear that.

The balance of the financial receivables on the balance sheet, what they did quarter-over-quarter?

I think we were down $400 million to $500 million in the quarter. Part of that was currency and part of that is just lower level of truck sales that we continue to see in the markets.

You're talking about receivables?

Right.

Yes, the asset base is a little bit smaller. The good news is that probably getting close to the bottom, and as our customers see improved business and start purchasing more, that we'll see finance company assets growing and our total asset or finance company will grow.

Got it. Okay, thanks very much.

Good. Good questions.

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

Good morning.

Good morning, Mark. Can you give a little more color on the margin impact, the increase in parts and service you had, or was that material enough?

No, the margins for parts and service was pretty comparable to what we've seen before. Parts business is improving as we mentioned as more customers are fixing up their trucks and they are seeing some freight growth and taking trucks off the parked status, but margins for parts is comparable to what we've seen.

Okay, and then can you give a little more color on South America and the strong result that you posted geographically outside of the US and Europe, in terms of -- was that being driven by mostly South America or were there other markets involved?

Our two primary markets would be Mexico, where we are celebrating our 51st year and we're also celebrating probably over 50% market share, so that's going well. Australia is also a very strong market. We're the market leader there, and Australia did a very good job of navigating the difficult economic times over the last few years and seems to be in a pretty steady recovery area.

Okay, thank you very much.

Thank you.

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

Good morning, Jerry.

Good morning. Mark? When we've seen successful new product cycles for your business in the past, we saw the momentum on share gains continue really for a couple of years. Do you see potential for your share gain in the back half of the year to improve further from here based on your order share, or do you have any visibility there?

Well, we do have great products and I appreciate your support of that. Of course Kenworth, the T700 is really doing well. Peterbilt has got some exciting new products themselves. We continue to be recognized by many of the industry groups such as the American Truck Dealers and the Peterbilt 384. So right now, when you look at the US and Canadian market, whether it's 110,000 or 120,000 units, it's still at about a 20 year low, so it's still at the bottom now. It's improving, so that's the good news. Our share will improve over time, but there's a number of competitors that are still actively selling engines that were built last year. There's certainly a price differential on that. So this year is certainly a year of flux as customers are working their way between what engine do they buy, how is the economy generally recovering. But then you've got the countervailing concerns about housing build, 50 year low; car production, 20 year low. I mean these were major drivers for freight movement in our country and also have a big effect on what our customers see. So it's -- 2010 is certainly a better year than 2009, but it's still a very challenging year.

And Mark, can you address the same question for the European business? So the question is, considering the share gains you delivered in the first quarter and based on what you're seeing out of your order share, do you think your retail share will be higher in the back half of 2010 than the first half? Looks like customers are clearly voting with their wallets. Question is, is there a further momentum on this product cycle for you in Europe? Thank you.

Yes, great question. In Europe, I think the share will be comparable to what we have now. There's certainly a range that it will fluctuate in between. We continue to add service points and the customers love the DAF product. Our share in Europe is lower than it is in US and Canada, so there's still some opportunity, but there's also different dynamics. There's a little different economic headwinds you run into in Europe. Every country has a slightly different challenge and different opportunity. And also a number of our competitors in Europe are not present in North America, and some of those competitors have their own unique challenges. So it's a little bit, it's a different market.

And Mark, you mentioned improvement in pricing, which is great to hear. Is that centered more in the US and Europe or is that pretty broad based?

I think the improvement in pricing we're seeing in most of our markets, it's just early days coming out of a very tough recession and still in a challenging year. So I think I'm proud of the team for getting improved margins, but it's going to take a number of more successful quarters and a much stronger economy in Europe and in North America to continue to get margin enhancement.

Thank you very much.

Thank you.

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

Good morning, David.

Mark, I don't think I heard you talk about this, but in the North American market over the last couple of quarters, there's been a disparity of different segments of the market and how they are recovering. Have those started to recover a little bit more in line or there's still some lagging areas?

There's definitely lagging areas. Anything to do with construction, commercial or residential, or let's call it manufacturing are down. Whether it's a five year, 10 year, 20 year, or 50 year low, they're down. And some of the retail Main Street may be seeing some improvements, although a number of the big chains are pretty flat year on year. So there's definitely some unevenness, as we said in our press release.

But what about within the truck segments, for severe service on highway versus truckload?

Yes, there's some and we'd take most of the day to go through it all. But certain of our customers focus on different segments. Some are doing very well and you've seen many of the financial reports from the publicly traded truckload carriers. Some of them are seeing good improvement, others are maybe struggling a little bit more because of the segment that they are focused on hasn't recovered to much of an extent. And some of the customers have let's call it a mix of customers base, and so their results may be a little bit more on the flat end. But all in all the good news is freight has improved. It's still about 10 points lower than it was at its peak two years ago. Diesel fuel is relatively stable. Freight rates, some of our customers are starting to see a little bit of improvement in freight rates. But a lot of the customers are still holding on to their older equipment because they just want to see does this recovery really have any legs or will next month bring some other challenge.

Okay, and one last item here, as you look ahead to volume and recovery, can you walk us through what your strategy plans are for ramping production back up?

It's a very straightforward strategy, one we've had for 105 years and that is -- if you want our product, we will build it for you in a very reasonable amount of time. We have a lot of flexibility in our factory. We have the most efficient and productive truck manufacturing factories in the world, and so as volume increases and we get more orders, we will increase our production.

Okay, great. Thank you.

Thank you.

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

Good morning, Mike.

Good morning. Just a few quick ones. What percentage of loans are 30 days past due in the finance portfolio, please?

Yes, that was 4%.

Okay, so about flat. And then what is the amount of used equipment on the balance sheet right now?

We've made significant strides in reducing our level of used equipment and we're down to between 1,500 and 2,000 units.

And then do you have a dollar value assigned to that, please?

I don't have it offhand. It's probably $75 million or so.

We can send that out to you.

Okay, and then I think I heard on the manufacturing breakout that $538 million was attributable to after market parts?

That's correct.

What was the gross margin on that $538 million, kind of like you do in the 10-Q if you could?

I'll get it to you in just a second.

For the quarter, the after market parts margin was 33.8%, which compares to 32.5% in the prior year's quarter.

So we have some improvement there.

And then 33.7% for the six months and 33.8% for the six-month last year, so it's comparable.

Okay, and then what was the gross margin in Q2 for the trucks, please?

The truck gross margin was 5% in Q2.

Great.

Good questions.

Okay, thank you very much.

Thank you. Appreciate it.

Okay, bye.

Your next question comes from the line of Ben Elias of Sterne Agee.

Thank you, good morning. I was wondering if you could spend a couple of minutes talking about the capacity utilization in Europe. I think people I guess have moved from the argument that the fleet is kind of young and are thinking about the lack of capacity or the impending lack of capacity. What are you hearing from your dealers?

I'm not sure which capacity utilization are you talking about?

The fleets, the fleets. The number of trucks on the road and freight capacity.

I think there's good fleet capacity.

Okay.

Our dealers -- that's not an issue for our dealers, and our customers seem to be in good shape. And if they need more capacity, they are purchasing trucks and the good news is DAF production is up about 25% year on year.

Okay, so you haven't heard anything from your customers that they're close to, that they need additional trucks in a shorter period of time?

Well, they're purchasing more trucks than they did a year ago, and of course a year ago is in the middle of a very tough recession, so I think we're in good shape.

Okay, thank you.

Thank you.

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

Good morning, Kristine.

Good morning. Just a few questions. I want to frame up a question that was asked earlier. We've seen some rather lofty increases in the forecast for next year. But understanding that the supply chain and your manufacturing can react only so fast, thinking about it quarter to quarter, what if -- if we see demand really surge, what's the availability? Could the supply chain react with a 50% increase, 100% increase? This is some of the forecast we've seen year on year.

You haven't seen those forecasts from us.

It's out there.

I don't think so. I'm not sure who's forecasting that, but that would be quite an increase. I'm not sure a number of our competitors could meet that. Someone is talking about 100% improvement in the market size?

There are some forecasts that are pretty lofty out there for next year.

Maybe those are just people who are actually not building trucks for a living, so they are just forecasting. I can't really comment on that. We've got a great supply chain. Obviously it's been through a tough couple years with the recession. Once again, the good news, and this doesn't get a lot of press, is that Paccar is really the only OEM that continues to invest in our suppliers, particularly on capacity and quality enhancement, where we will put in multi-million dollar machinery to improve our suppliers. So our suppliers are in good shape and they relish the opportunity to produce more.

I bet. Then changing directions a little bit, out of the EPA CARVE workshop last week, it sounds like the EPA is going to make changes to the SCR guidance after a comment period here in August. Do you expect any impact to adhering to these changes? Will there be any R&D investments or anything we should look out for?

Well, we continue to work with EPA and all of the relevant environmental groups around the world. I think whatever changes are promulgated, we have an opportunity to have some input to them and we will be a leader on meeting them and as you know, everybody in the world, all major competitors have aligned themselves on one environmental strategy and practice, so I think we're in good shape.

Okay, thank you very much.

Thank you.

Your next question is a follow-up from the line of Tim Denoyer of Wolfe Trahan.

Good morning again.

Good morning again. Just one quick follow-up on used truck prices. You noted a pretty strong improvement in the first quarter, and we've heard anecdotally that things continue to pick up in the second quarter, but I was wondering if you're seeing that as well?

Yes, we are. Used trucks are having good improvement, and we look forward to that improvement continuing through the year and into next year, particularly as the market ramps up and people need trucks to haul their increased freight. So the good news is that all of our trucks -- Kenworth, Peterbilt, and DAF -- are still having a 20% to 25% residual value greater than any of their competitors.

Okay. Are there any specific segments of the market? I mean, I would guess obviously the younger trucks where there's less supply are having the biggest price increases, but are you seeing differences in mix as you go older?

Yes, I think that is true. The late model used vehicles have seen better appreciation because there is good miles left in those trucks and good demand for those. I think we're seeing some on the day cabs seem to be strong.

Okay. Great. Thanks a lot.

Thank you.

Your next question comes from the line of Stuart Hosansky of Vanguard.

Good morning, Stuart.

Good morning, how are you? And thank you for taking my questions.

Good, thank you.

A question I have for you is in your release, you've mentioned that your CapEx for the year you're expecting I think around $175 million or so. And I think the first six months of the year you were a little bit below $50 million. So is it fair to say that the second half of the year, you're going to be at about $125 million to $150 million?

That is correct. We've got a lot of exciting projects we're working on and we are ramping up on them.

So could you provide any more color on that?

Not at this time, but it's a great question.

Okay, thank you.

Thank you.

There are no other questions in the 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.