帕卡 (PCAR) 2010 Q3 法說會逐字稿

Good morning and welcome to PACCAR's third 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. If anyone has an objection, they should disconnect at this time. I would you 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, Executive Vice President, and Michael Barclay, Vice President and 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 third quarter of 2010. PACCAR's third quarter sales and financial services revenues were $2.5 billion, which is 26% higher than the $2 billion in the third quarter last year. Net income improved to $120 million compared to $13 million a year ago. I am very proud of our 16,500 employees who have delivered outstanding performance to our shareholders and customers in an uneven and unsettled global economy.

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. US and Canadian retail truck sales are estimated to improve to a range of 120,000 to 130,000 units this year compared to 108,000 last year. European truck registrations for the third quarter improved 16% compared to the second quarter. As a result, we expect a 15-ton plus market, registrations in Europe to be between 160,000 and 170,000 units this year, comparable to the 168,000 units last year.

The global economic outlook is improving, which is benefiting the truck market. PACCAR delivered 5% more trucks in the third quarter than the second quarter this year, and looking ahead, we think that truck production for PACCAR could be up 20% in the fourth quarter compared to the third quarter. We discussed at our 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 increasing and third is more new truck orders.

For PACCAR in the US and Canada the good news is that part sales are up 15% to 20%, compared to last year, and used truck pricing has increased 10% to 15%. More good news is that the US and Canadian industry Class A truck orders for the first nine months are up 23% compared to a year ago, although they may be slowing now in the industry.

In Europe PACCAR parts business and used truck pricing have both improved by 10% to 15%, and DAF's new product production for the first nine months is 25% higher than last year. As we look at the European truck market, we're pleased that DAF is now the leader in the on-highway tractor segment and has achieved a record overall market share of 15.8%. DAF is steadily progressing towards its medium-term goal of 20% share in Europe.

Talking about our customers, they're benefiting from improved freight volumes, higher freight rates, and some 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 quarterly aftermarket parts sales increased to $554 million, the highest level since the third quarter of 2008.

PACCAR's strong balance sheet and positive cash flow of $1.1 billion this year have enabled the Company to continuously reinvest in the business, enhance our operating efficiency, and develop innovative new products such as the PACCAR MX diesel engine. Assembly of the PACCAR MX engine began in June at our new manufacturing facility in Columbus, Mississippi, and in September, the engine plant was officially dedicated in a ceremony that was attended by state and local officials, including Mississippi Governor Haley Barbour.

We are now installing the MX engine in over 20% of Kenworth and Peterbilt vehicles. This is the highest level of 13-liter engine installations in our Kenworth and Peterbilts, and reflects customer recognition of the PACCAR MX engine's excellent power to weight ratio, fuel economy and reliability. Feedback from our customers of the PACCAR MX engine is excellent, with over 2000 MX engines now installed in Peterbilt and Kenworth trucks.

Speaking of engines, the EPA issued its proposed greenhouse gas regulations yesterday, and as you know, PACCAR is an environmental leader worldwide. We are reviewing the proposed regulations, which is 673 pages long, and we're analyzing the details and look forward to working with the EPA and NITSA during the 60-day comment period to fully understand all the aspects of the proposed regulations. I would also like to point out, speaking of environment, that DAF will launch their hybrid LF truck this year, which will join the Kenworth and Peterbilt hybrid medium duty vehicles.

Switching topics, PACCAR Financial Services revenues were $238 million in the third quarter compared to $253 million a year ago, reflecting lower level of assets. PACCAR Financial's third quarter pretax income improved to $42 million, more than double the $18 million earned last year. This was achieved due to better finance margins and a reduction in the provision for credit losses. The credit loss provision for the third quarter 2010 was $13.7 million, compared to $26.6 million in 2009.

Looking at the global market, PACCAR's investment of $3.8 billion in the last decade has enabled the Company to enhance its operating efficiency, develop innovative new products, launch the PACCAR MX engine in North America and in Europe, strengthen its dealer network, and become an industry leader in information technology. 2010, while very tough economically, was an excellent year for new product introductions as Kenworth, Peterbilt and DAF launched more new vehicles and major options than at any time in our history. The success of the Kenworth T-700, the Peterbilt 587, and the complete line of vocational bodies for DAF, as shown that the recent truck show in Hanover, Germany, have our customers excited about the future.

We have indicated in the third quarter press release that PACCAR will be doubling its capital expenditures next year. I know a number of you are interested in that, and the funding will be focused on accelerating new vehicle development, customer service initiatives, meeting the Euro Six engine emission requirements, which come into play in 2013, and of course our global expansion. These investments will complement our industry-leading powertrain and manufacturing investments over the last decade.

In summary, the global economic environment is still very unsettled. However, PACCAR's balanced approach in all phases of the business cycle positions us to generate improved results for our shareholders as the global economy recovers. We look forward to welcoming many of you to the investor conference tomorrow, and thank you. Appreciate your questions.

(Operator Instructions). Your first question is from the line of J.B. Groh of D.A. Davidson.

Good morning.

Good morning, Mark.

Good morning.

A couple questions. One, the provision that was down, what are you guys seeing in terms of credits and those kinds of things that caused that to come down?

As we commented before, we have seen a progressive improvement in the portfolio, the truck utilization, freight rates are improving and so the customer cash flows are able to make and support their truck payments on a more timely basis.

Okay. So it is basically just driven by good customer margins and better balance sheets at the customers, that sort of thing?

Yes.

I am guessing you're probably not through all 673 pages, and I really hope it is double spaced, but I was wondering if you could maybe comment on R&D spend as a percentage of sales in 2011 and how that those new provisions will impact R&D?

We have indicated in the press release that we'll be increasing R&D, and certainly a portion of that will be focused on greenhouse gas and emission regulations.

So when I look back over time, it is kind of peaked out maybe 3%, 3.25% of sales, something like that. Is that probably the area we're going back to from the 2.5% that we're close to now?

Right. We really look at it on a dollar or euro basis rather than a percent. We know what our product plans are. We know the regulations we have to meet. We know the new factories we have to build, the new IT programs we're launching, and that's the way we look at it.

That gives me a little clarity. Thanks a lot. Looking forward to tomorrow and the next day.

Thanks a lot.

Your next question is from the line of Robert Wertheimer of Morgan Stanley.

Good morning, Robert.

Good morning, everybody. My first question is on credit availability broadly in the industry. It seems as though with used equipment pricing coming up, you get a little bit more of a safety cushion. I wonder if you're seeing constrained credit in North America in particular, and whether you see your financial arm as a tool to take market share?

Yes. I think the credit availability has improved during the course of this year as we progress through the year, and we certainly are looking to finance good credits and support the sale of PACCAR product around the world.

Is it tight for the stuff you're not financing, are you seeing people coming up short on the ability to buy because they can't find financing?

I don't think there is too much of that in the marketplace currently.

Okay. And then the second question will be on your outlook, is it constrained by supply chain or credit or more of a market forecast again for North America?

It is really a market forecast. I know a number of people have asked a similar question about supply chain, and I would just sort of reinforce that PACCAR has perhaps a slightly different approach to the supply chain than many competitors we invest in a lot of our suppliers in terms of capital equipment. We train them in Six Sigma. We work with them on their IT and business software programs. It is a real strong partnership, and the result is that the suppliers are very eager to work with PACCAR and also appreciate that we probably pay their bills faster than any other OEMs they work with.

Perfect. Thank you. Thank you.

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

Good morning, Jerry.

Hi. Good morning. Mark, can you talk about how much commonality your engines between North America and Europe will have once Euro Six is rolled out, what the economies of scale we should be thinking about there and is it right to assume you will use a diesel particulate filter as an add-onto to deliver on Euro Six? Thanks.

As we get to 2013, there will be some increased commonality, particularly on the top end of the engine, so that will certainly be a benefit just in the manufacturing and even the engineering side of it, that we're looking forward to that. I think on a broader scale as you get beyond 2013, 2015, that there is going to be a lot more commonality for emission regulations worldwide which will certainly help us and I am sure a number of our competitors.

And, Mark, can you give us an update on your backlog trends in Europe over the course of a quarter? Where was backlog at quarter end versus start?

For our DAF trucks, we're looking to increase production. Backlogs have improved, so it is pretty steady growth.

And, Mark, as you take a look at your global R&D plan over the next couple of years, which region should we be thinking about as seeing the highest level of new product introductions sounds like South America one, North America two, but let me stop there and get your thoughts. Thanks.

Why don't you send me into the production plant and we'll try to execute to it. Obviously the two biggest markets for us at this time are Europe and North America, and you're going to have most of the new products being introduced there, but as we have indicated publicly, South America where we have been for 40, 50 years, we'll get more of our new products and that will be primarily the DAF product range, and then looking out even more than a few years, of course there is opportunities throughout Asia, so we're going to keep our customers happy with leading edge products, and that will be North America, Europe, increasingly South America, and then in Asia.

Thank you very much.

You bet. Good questions.

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

Good morning, Jamie.

Hi. Good morning. Two questions. Your outlook for 2011, the US and western Europe. Can you just talk about how you think the year plays out? Is it a gradual quarterly improvement or is it more back end loaded for both segments and then did we sell any trucks with the Cat engine in the third quarter and is there any assumed for Q4?

Okay. In Europe, I think it will be perhaps more even from terms of quarterly production and sales. They seem to be ramping up a little faster. The European governments have had a slightly different approach in trying to get their economies recovered. They have the employment programs, which are now fading out, but also they're taking some dramatic steps to reduce taxation at all levels throughout the countries, which are certainly benefiting many companies, and in North America and US and Canada because Mexico is actually quite strong now, US and Canada I think will be a ramping up, so we can say that as we go through the year each quarter will be successively stronger. In terms of Cat we have finalized and put our final Cats into our vehicles and moved on.

None expected in Q4?

I don't think there is really anything there any more.

Thanks. I will get back in queue.

Thank you.

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

Good morning Meredith.

Good morning. I am hoping you could talk a little bit more about your plans in Brazil, and I am sure we will hear a lot about this over the next two days, but can you talk about the timing of product launches and also how you see the long-term average industry sales in Brazil in particular going forward? I know you talked about the 110, 120 for 2010, but where do you see that over the longer term?

I think in Brazil of course they have a very strong GDP right now, the country has had eight relatively good stable years, all of our competitors are there, and make in some cases all of their profit out of South America compared to the rest of the world, so it is an exciting market. It is a market that we know we have had a ten-year partnership with Volkswagen Brazil that expired in the 90s, and we know Brazil and we're encouraged to see its strong growth, and over time if you look at a 5% to 6% GDP growth, the truck population and the truck production should expand and get up to maybe 200,000 units a year.

They have the Olympics coming up. They have the World Cup coming up, so there is going to be a lot of infrastructure investment and they're growing as a nation, and in terms of our particular plans, as I say, we have been in South America for decades, and not so much in Brazil, and I am sure our competitors are not overjoyed at the prospect of us being involved there, but we will, and we're evaluating different business scenarios. We're testing our vehicles, and the preliminary response from suppliers and customers and financial institutions are, the market is growing, we would love to have you here, you're a quality company with world class products, so let's work together.

Then just to follow up on the 13 versus 15-liter, you called out the installation -- the percentage of installations that are your 13 as opposed to 15-liter. Can you talk about orders, what you're seeing the mix there and then maybe a little bit around, for the customer that is are ordering the 13, how many of these customers is that are they ordering all 13-liter, how many or just a few 13 mixed into a larger order that's predominantly 15-liter?

Yes. Well, as I indicated, we have installed over 2000 now, and we continue to receive good orders in the 20% to 25% share of our total production which if you look out over the next few months, orders would be in the 5000 unit range, and people are enjoying the benefits. This is a proven engine that has won many awards, including being the top engine in China, and it is a great engine throughout all of Europe. It is a great engine anywhere in the world. I think the Kenworth and Peterbilt customers are just enjoying the benefits of it, and we continue to look for it to grow over time.

Okay. Thanks so much.

Thank you.

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

Good morning, Adam .

Adam, your line is open.

Good morning. Sorry about that.

That's fine, Adam. Good morning.

Mark, I was wondering if we could start with a clarification first on the Brazil statement earlier. Is any of the increase in capital spending forecasted for next year targeted to put production in place in Brazil?

There is a portion of it, but to put a new facility in, it is a couple year project, as you're aware.

Then you were talking about the new fuel efficiency standards that are going to be coming out and I guess Kenworth was talking about that's likely the end of the long and tall trucks, and I am just wondering conceptually, how much of an impact is that going to have on the business as we transition to these more aerodynamic fuel efficient trucks from PACCAR's perspective, how meaningful to the business is that today, how meaningful to the margin profile of the company in North America?

PACCAR is the leader in aerodynamic trucks. We pioneered it over 20 years ago, the Kenworth T-600, the famous ant eater. I guess I am old enough to actually remember, I was at the launch of that thing, and it was quite a wonderful event. So the T-700 that was just launched, the 587, of course the DAF XF105 and others, these are all aerodynamic leaders, and we're a premium vehicle and get the highest residual for our products because we deliver the best fuel economy, so this is perfect for us. We have great engineers who are leaders in terms of developing innovative solutions to meet the new regulation, but the long and tall is something that I knew early in my career and there is always a few that are out there, but for well over a decade, we have been the environmental and aerodynamic leader in terms of our vehicle, so it is playing into our cards perfectly.

Good. That's good to hear. And then just lastly, a clarification. We're seeing that North America and Europe builds were going to be up 20% from the third quarter levels. Could you break that down into the difference between the North America and Europe?

At this time, I think there is probably a slightly greater emphasis in Europe, but overall we're looking at 20% worldwide because you have Australia, you have Mexico, you have export markets and overall we're looking at about 20% global increase.

Got it. Great. Thanks.

Thank you.

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

Good morning, Henry.

Good morning. How are you doing?

Good. How are you doing today?

Good.

Will you see me tomorrow?

You will see me tomorrow and Thursday as well.

Excellent.

You drew the short straw there.

Looking forward to seeing you.

Likewise. Anyway, could you talk a little bit about how your customer mix may be shifting? Are you seeing more fleets coming back into the market relative to your historical mix and how does that impact the margins?

Well, the vast majority of our customers sort of have over 10 to 15 trucks, so the fleets are always a very big part of our customer component, and there certainly has been a consolidation over the last decade because of a couple of different recessions, but I think our mix is pretty stable in terms of just most of the people that buy our products are medium to large companies and the owner operators, the ones that are still exist are usually align themselves with different companies for economic benefit, so very stable.

And the pricing side, how disciplined is your competition being? Are there any pockets where pricing is shakier than you prefer?

I think the wonderful thing about being in this business, I am in my fourth decade now, is that there is one constant, and that is there is always a lot of interesting times with our competitors, and their pricing, and that's all I can say.

That's helpful. Thank you very much.

Thank you.

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

Good morning, Andy.

Good morning, Mark. Good morning, everybody. Looking forward to seeing you tomorrow.

You bet. We are, too.

Just a follow-up, a lot of questions have been asked about this, but the fleet preference shift to 13 from 15-liter that you talk about in the industry, is that something that's more affected by the type of fleets that are buying today or is it really conquest versus the 15-liter?

The 15-liter is an excellent engine, so I think that's important that we recognize that, and it certainly has been a mainstay for many years, and will continue to have a very important presence in the North American market, so I think that's -- let's just put that out there. The 13-liter worldwide is the preferred large engine for a number of reasons, one being a little bit lighter weight, typically better fuel economy, and that's kind of the standard, so I don't think it is anything unusual or even a surprise that the US Canadian and let's call it Mexican markets are just becoming a little bit more aligned with the rest of the world in terms of engine preference.

And so I would say if you could cascade that down, all different types of customers are interested in the 13-liter from the small operator to the largest fleets. They're saying, we have similar operating characteristics to companies that operate in South America or Australia or Europe or even into Asia as the infrastructure gets built there, so 15-liter is a very important contributor and engine in North America. I see that will continue to be, but you can't really be surprised that the US and Canadian truck markets are becoming more aligned with the global preference for 13-liter.

Thanks for that. Then on the alignment if you will, US and Canada, I am wondering if there is a contradiction between the chatter that has been going on about increasing weight limits for freight across highways and the 600-plus page energy efficiency?

That's a complicated topic. It is probably going to take a little bit more time than we have this morning, but whatever the regulations are, obviously PACCAR and fellow competitors have input into it and once we have our input, and the rules are made then we work with those rules and design the highest quality most efficient products for our customers. We have been doing it that way for 105 years.

Okay. And then one last one on the kind of building off your response to that question, some other companies through this year, not necessarily you folks have kind of been upset about the uncertainty on a macro government policy everything type level. Are you seeing that ease as we go forward?

I can't really comment for our competitors. We know what we do. We work with the regulations in place, and as I indicated, our goal is to design and provide the highest quality products in the industry and of market and that's what we do every day.

Thank you very much.

Good questions. Thank you.

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

Good morning, Ann.

Good afternoon at our end.

Good afternoon, Ann.

I think there has been a lot of talk about yesterday's announcement from EPA and DOT, but can you talk a little bit more immediate policy change and that's CSA safety regulations per truck drivers? We heard a lot from fleets around the fact that this ruling could result in a much smaller pool of drivers and that driver retention is going to be become a much bigger issue earlier in the recovery cycle this time around. Can you talk about whether that might position PACCAR better or worse or does this give you any kind of advantage going into 2011 and beyond?

It is a good question. I think one of the interesting out takes of this particular recession, which is very challenging one for everybody, is typically in a recession, you have a lot of drivers sort of reentering the transport industry ,because the housing industry is down, certainly the housing industry is at a many decade low right now, but we haven't seen the corresponding increase in the pool of drivers, because I think people are saying, driving a truck is a challenging profession, it's rewarding, but I want to stay closer to home, so that's been an interesting out take of this recession. In terms of a smaller pool of drivers, I think there is a benefit for PACCAR because many fleets want to attract drivers, and the premium reputation and the premium quality, and the ease of operation of our products makes it very attractive for fleets to purchase our vehicles and attract drivers, so I say there is an advantage.

Would you anticipate then providing options like automatic transmissions or anything like that to improve ease of drivability?

We have many automatic transmissions. It is a popular option that we install in our vehicles.

Okay. We can talk more about that tomorrow perhaps. My follow-up question is just on Brazil. I guess I am having a little bit of a hard time understanding why a greenfield will be the best option for investors, given how entrenched we were just down in Brazil and toured Scania, AMN and Volvo facilities and one take away they get from them is that they have been there a long time. Why greenfield? Why wouldn't you make an acquisition and then what are you going to do about distribution if you're beginning from zero?

Are any of them for sale?

There is also Eveco.

Certainly we have seen the pros and cons of doing it both ways. Obviously the DAF success story is one of the great business stories of the last ten years, and that was an acquisition. We continue to evaluate all opportunities. A greenfield site as you indicate is completely in your control and completely on your timeline, and we know exactly what the cost of that is, so there are many advantages to that.

Distribution is an equally important aspect of entering a new market, and the good news is that with our independent dealer network which is the most profitable dealer network in the world, there are a lot of businesses saying, wow, can I get an opportunity to represent DAF and PACCAR in this market? And that will allow me to make a lot of money? I am interested. I would just say, Ann, watch this space.

Okay. We will pick up that story tomorrow, I guess. Take care, guys.

Excellent. Good. Other thoughts? Thank you.

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

Good morning, Patrick.

Good morning, everyone. Just a couple of quick questions the quarter and another bigger picture question, on the quarter, I think I might have missed it. The change in production by region, Europe and North America in the third quarter,.

No, I don't think that's been outlined. We just said it was about 5% increase in production from second to third quarter.

And do you have any preliminary view in how the breakdown of parts and truck profitability broke out in the third quarter?

No. We did share with you that we had a strong parts sales of $554 million and of course you have total sales, so parts is increasing at a steady rate, primarily being driven by a very old truck population in North America and of course also a record number of Kenworth, Peterbilt and DAF trucks worldwide, over 1.5 million, so that looks good as the economies improve and freight companies now are pulling their trucks off the back lot and utilization is going up and they're finding they're needing to invest in their vehicles to get them ready to work again.

Okay. And from a bigger picture perspective, are you capacity constrained right now in the MX engine, so it is 20% of your fleet but 20% of your volume right now, but you're just ramping up the US plant? Is capacity constraint an issue or is 20% kind of where the natural demand is falling out for you?

It is just where the demand is, and we're very happy with it, fantastic. We have got plenty of capacity and the ability to increase the capacity, so the fact that's a good point. I am glad you raised it, as we look back over the last decade within PACCAR because of a lot of investment in our factories, Six Sigma and efficiency gains, we are actually having more capacity worldwide than we had five years ago even though we have closed a facility and reduced the production in other facilities, so we're in excellent shape.

When you approach the customers at the MX engine and what is the fuel economy benefit if you're looking at a comparable truck, and I know it is a little difficult because there is always different spec but an average MX engine versus your standard traditional 15-liter engine, what's the fuel economy benefit for the customer?

It varies, but I would say that the vast majority of our customers are enjoying a healthy improvement in the fuel economy. It is all I can really say at this time.

Okay. Back in the queue.

Thank you.

Your next question is from Tim Denoyer of Wolfe Trahan.

Good morning.

Good morning. Quick question for you on just the health of the North American trucking industry. Clearly with the reduction in loss provisions, it seems to be getting better and with used truck prices getting better but I would say there is still a significant portion of the industry in the negative equity position and it is probably potentially one of the factors constraining your sales outlook. Can you talk about how that has been progressing and potentially the implications for loss receivables going forward?

I think we have seen progressive improvement in our portfolio over the last four or five quarters. We see the health of our customers continuing to improve, and there is still challenges out there but we any that improving trend will continue.

We're seeing many of our customers profitability, the one that is are publicly traded and report their earnings are now getting back to sort of 2005 levels, so good profitability, freight rates are going up, I think the health of the industry is certainly better than it has been for several years. It has had a couple of difficult recessionary shocks this decade, and obviously they have also had to work through some substantial cost and price increases because of the emission regulations, but the companies that are out operating, unless they're intimately linked with housing construction, those are going to be struggling, but they seem to be in good shape.

Yes. So would you say it is the price increases on the EPA 2010 trucks that may be a bigger factor in keeping demand levels below replacements or do you think it is more the health of the smaller end of the industry?

Actually, I think it is a broader question, and that is the overall economic vitality of the US economy, and that is a very broad topic, but as we have burdened our country with increased legislation and taxation, that has made our recovery in the US very weak and there is not a strong outlook through any sector that I can see about a US based company really having a lot of growth. Now, if you are selling into China or Asia or other markets, yes, you're seeing some real strong benefits, but if you're a trucking company operating in the US, it is still plenty of challenges. It is recessionary in many cities, and as you travel around the country as we do, there are many states that are in very difficult shape, so if you happen to be in the trucking industry obviously but manufacturing and financial services, it is all just ongoing challenge. Going to be tough for the next couple of years.

Yes. Okay. And then one more on the long-term product lineup in North America. It does seem like you're switching focus a little bit more to more medium-duty trucks. I suppose we can talk more about this tomorrow, but can you give me a sense of longer term how you expect that mix to change?

I don't think there is actually that much of a change. The market is -- the traditional medium duty let's call that class 6-7 is really pretty stable, but at levels that are about half of what it was five years ago. We don't see that substantially increasing, so you're finding that people are going towards the medium heavy if you will or the greater than 15-ton, and then they might be shifting more to the 6-ton and below, and I think there is plenty of growth in all of those markets.

Okay. Thank you.

Questions?

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

Good morning, David.

Actually it is Keith Schicker on the line for David.

Hi, Keith, how are you today?

Good. David is on his way out to visit you guys.

Excellent. We look forward to seeing him.

I was wondering if you could comment on the capital spending outlook beyond 2011 as the markets recover or hopefully recover? Looks like your guidance phone 2011 already puts you right about where you were at the last cycle peak in terms of capital expenditures. I am wondering how I should think about how much money you're going to be investing during the course of the next cycle as we get up to higher volumes?

I think your analysis is accurate. It does get us towards the peak of the last cycle, and it is probably a fair comment. I think that's all we can really add to it right now.

And then if I look at the Europe market or the European market, is DAF -- are you stronger in the north or the south? Are you benefiting from stronger recovery in the northern European economies? Is that having any impact on the market share gains? Just elaborate a little bit on the regional exposure in Europe?

That's a very excellent question. Actually, DAF is strong in almost every market in Europe. The market share leader in Belgium, Netherlands, UK, we're number two in Italy and we're number two in France, we're number three in Germany, we're the market share leader in Hungary, Czech Republic, Poland, we have a growing presence in Spain and Portugal, and moving into Russia, so obviously Germany is the economic driver in the European Union, and DAF being number one overall in Europe in tractors has really benefited from the increase in freight, so our focus is to continue to grow in all markets and also have a particular emphasis on the vocational markets, so DAF has done an outstanding job.

Great. That's all I had. Thank you.

Good question. Thank you.

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

Good morning, Ben.

Good morning. Thank you for taking my question.

We look forward to it.

I have a couple of questions actually. The first, do you think we're sort of under estimating demand levels in Europe where we had a transmission supplier talking about Europe being strong but a lot of that being exported out of Europe, are we not satisfying demand in Europe right now? Is a lot of that going out so are we under counting?

It is a good question. Our customers, our dealers, are very happy in Europe. Our dealers' inventory levels are close to five year lows. The dealers are doing well. They have been through a difficult time, but they have done a fantastic job working in partnership with DAF. Certainly there is an increase in product going to other markets, but the European customers are getting all the products that they're requesting, so we're in good shape.

Okay. The second, you had a competitor yesterday talk about supply bottlenecks and shortages, especially with specialty steel and microchips, truck trams, and things like that and they comment as production rates rise this is going to be an issue going forward. How do you address that?

I am not sure what the competitors are doing. I do know our approach is very much a collaborative partnership with our suppliers. First, we pride ourselves on paying our bills in a very timely basis, many of our competitors seem to drag it out, maybe they have cash flow issues. I am not sure.

Second, we invest in our suppliers and where we'll actually purchase capital equipment which allows them to increase their capacity, increase their quality, reduce their costs, and improve their profitability. Third, we have an active Six Sigma program where we will go in and train our suppliers and everybody from the shop floor to management of how to run their business and, fourth, we invite them into our engineering groups at an early stage to get their input on new designs and how they can best partner with us, so that's how we approach it, and it works very, very well.

Okay, and lastly, you did talk about the state of the economy, and I think we're drowning in debt. You seem to have a lot of cash, plenty of it, any thoughts on allocating some of that cash? I know R&D and CapEx are going up. Any thoughts on the portfolio?

We continue to evaluate different opportunities but we did increase our quarterly dividend, which was appreciated by our shareholders and as you have rightfully noted, we will be increasing our investments on a global basis, and interesting enough, through this recession, the cash question has not come up because it has certainly been a benefit for PACCAR, and it is a cyclical industry, and we want to provide a great return to our shareholders. We want to be able to invest in world class products and grow on a global basis, so that's our use.

Thank you very much.

Thank you. Good questions.

Your next question is from the line of Seth Weber of RBC Capital Markets.

Good morning, Seth.

Good morning, guys. Just a follow-up to the kind of the broader economic landscape discussion you're talking about before. Have you noticed any change in order patterns where customers are kind of waiting until the bitter end or until they can't really just hold out any longer before they order closer in versus a couple years ago?

It is a good question. I think you could actually apply that question to the broader consumer that we all run into on a daily basis. There has been many pronouncements and headlines about the recession is over, but I think whoever came out with that has forgot to tell the basic consumer, because you know what, in many town across this great country, it certainly doesn't feel like the recession is over, so obviously that has an impact on our customers and the trucking in general that people are saying, is it over? You say it is, but I see my neighbor's house just went into foreclosure, nobody is building any new homes, car production is at a 30 year low, consumer spending is not really strong, I would say, so people are saying, tell me when I can see three, four strong economic growth quarters in a row, and then I will feel better about it. That applies to you, me, and all of our customers.

Okay. Are you able to use this dislocation to try and grow and growth sharing your finance business, is it capturing a greater percentage of sales with PACCAR finance?

We have particularly in recent months we have seen our share penetration grow somewhat, and we are very active with our dealers and our customers and supporting them and buying Kenworth, Peterbilt and DAF products around the world, so really focused on growing the good customers.

Okay. If I could ask a quick follow-up. On the CapEx ramp, is any meaningful part of that a reflection on any increased investment with the supply chain or is that just kind of as normal?

I think the supply chain is as normal, yes, good question.

Thanks very much, guys.

Thank you.

Your next question is from the line of [Lawrence Devin of JM Advisors] LLC.

Good morning, Lawrence.

Yes. Hi, Mark.

Hi.

Just a quick question on a big picture nature for you. I was wondering what your thoughts might be on the future for natural gas powered vehicles in the heavy truck industry and the likelihood of that becoming significant factor in any comment you have as to timing and implications for PACCAR?

Well, LNG, CNG if that's what you're talking about, we have been pioneers on that. We have product running, certain ports are advocates of it. We have great product. We have strong partnerships with different major industry suppliers. In terms of a significant share probably not in the short-term, diesel really is the most efficient and effective power source for commercial vehicles and if you go to Europe for cars also, so but we offer LNG, CNG, and for those applications that we are there and we have the world's best solution but I think diesel will continue to be the major driver for quite the foreseeable future.

Very interesting. Thank you.

Thank you.

Your next question is from the line of [Daniel Johannessen of MBIM].

Good morning, Daniel.

How are you doing? Thanks a lot for taking the question.

Excellent.

I have a question on the European revenue. If you look at the way you show it, it seems to be up 19% year-on-year, and I guess you have 10% or so of currency head wind in there so on a like for like basis it would be up 30% or so, and if I assume that is equal to deliveries, I would have actually thought it would be up a bit more than it is, if you compare it to some of your competitors from northern Europe that have shown quite much stronger growth rate, so are we seeing or are we looking for catch up in the fourth quarter?

From your accent you sound like you might be spending some time with your friends in northern Europe.

Yes.

Well, I can't comment on what they're doing or not doing. I know that DAF is doing an excellent job and seems to be the number two position overall share in Europe, and we're getting good orders in. Our dealers are in great shape. We are looking for DAF to increase its production rates in the fourth quarter as we indicated, and continue to grow.

But f your competitors are delivering up to 80% more vehicles and you are running at some 30% up, is this -- if this is a market share issue, is it a regional issue?

There is no issue. We're second largest supplier in Europe, and we're very happy. Our customers are loving it. We're getting many new customers every week that are pleased to work with DAF and give their business to us for fantastic product, so not sure there is any issue but we're excited. We're pleased where we are, and we're moving ahead.

Maybe I missed this earlier on the call but have you sort of like -- if a way to gather your market assumptions or so it seems like your revenue is going to be up 30% or so next year according to the estimates have you given out, all else equal, have you given some assumption on what sort of incrementals we should look for or how to think about that into next year? Nope. We're still evaluating on how that will shake out.

Thank you very much.

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

Good morning, again, Ann.

Just on the back of the last caller's question, when we were over at IAA, we did meet with some of your DAF management, and they did say that they were having some supply constraints particularly on things like I think so they mentioned actually brakes. Is that something that just was a ramp up issue, or could it be an issue for the industry as we go into 2011 that suppliers just can't keep up with demand? I know we talked about your investment in suppliers. That may be more of a US item.

We do it worldwide. We're in good shape. I am glad you had a chance to visit the stand, and hopefully you were impressed by the wonderful selection of vehicles.

They did say they have supply constraints.

Every day there is something going on when you run large multinational companies, we're in good shape, Ann.

I appreciate that. We'll get back on the line.

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

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

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