帕卡 (PCAR) 2011 Q1 法說會逐字稿

Good morning, and welcome to PACCAR's first-quarter 2011 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; Tom Plimpton, Vice Chairman; and Michael Barkley, Vice President and Controller. As with prior conference calls, 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 will 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 reported improved revenues and net income for the first quarter of 2011. PACCAR's first-quarter sales and Financial Services revenues were $3.3 billion compared to $2.2 billion in the first-quarter last year. Quarterly net income increased $193 million compared to $68 million a year ago, a 280% improvement. I'm very proud of our 19,000 employees who have delivered excellent performance to our shareholders and customers.

PACCAR's results reflect the benefit of higher truck deliveries, particularly in Europe and North America, and a continued improvement in aftermarket part sales and Financial Services profit worldwide. In the US and Canada, industry orders in the first quarter of 2011 increased slightly to 65,000 units compared to 61,000 during the fourth quarter last year. US and Canadian retail truck sales are estimated to improve in 2011 to a range of 200,000 to 220,000 units from 126,000 units last year. European truck registrations for the first two months of 2011 have averaged 18,000 units per month, which is comparable to the average monthly rate for the fourth quarter last year. We estimate that Europe's greater than 15-ton truck market will be between 220,000 to 240,000 units this year versus 183,000 units last year.

During the quarter PACCAR made progress in its search for a site for a new DAF factory in Brazil. Our goal is for DAF to achieve a 10% share of the Brazilian medium and heavy-duty truck market. The improving global economy is certainly benefiting the truck market. PACCAR delivered 13% more trucks in the first quarter than the fourth quarter last year. PACCAR had increased truck production in all truck plans in North American and Europe to meet higher levels of demand. The improved utilization of PACCAR's truck facilities is contributing to higher gross margins. PACCAR estimates delivering 15% to 20% more trucks in the second quarter compared to the first quarter, subject to suppliers able to meet demand for items, such as tires.

While the pricing environment is showing signs of improvement, there are some uncertainties in the industry, as you're aware, including the impact of rising raw material cost, the extent to which higher fuel prices will affect purchase decisions by our customers, and the impact on the Japanese supply base to meet increased demand levels, especially in electronic components.

PACCAR's strong balance sheet and excellent operating cash flow have allowed the Company to accelerate its investment in the business, enhance operating efficiency and develop innovative new products, such as the PACCAR MX diesel engine. We have now received over 14,000 orders for the MX engine in North America and the PACCAR MX engine is being installed in 25% of Kenworth and Peterbilt trucks. Feedback on the engine from our customers has been excellent.

PACCAR Financial Services revenues were $241 million in the first quarter compared to $246 million a year ago. PACCAR Financial's first-quarter pretax income improved to $50 million compared to $28 million earned in Q1 of 2010. This was due to better finance margins and a reduction in the provision for credit losses. The credit loss provisions for the first quarter of this year were $10.5 million compared to $18.4 million a year ago.

Thank you and I look forward to your questions.

(Operator Instructions). Your first question is from the line of Seth Weber of RBC Capital Markets.

Good morning, everybody.

Good morning, Seth.

In light of the strong margin results in the quarter, is there any update to your outlook for the year? I think in the last quarter call you gave a flattish guidance relative to the fourth quarter. Is there any update to that?

No, that's always a good question. I think the way we're looking at it is trucks are improving and becoming a larger proportion of our profit results, but as you may know, profits on trucks have a lower margin percent than parts. So when we look out for the rest of the year, even with increasing truck business, I think our margins will be in line with what we just had in the first quarter. That's the best update I can give for you.

Okay, thank you. And then just as a quick--?

Thank you.

-- as a quick follow up, can you give us any color whether you're seeing any strength from the smaller -- the order strength, has that transitioned to the smaller operators at this point or is it still largely coming from the larger fleets? Thank you.

Yes, that's a good question. We're finding some improvement at all levels of the customer base. Those customers with less than five units and then I would look at the group between 5 to 50, and then over 50 it's pretty much in line with what we've seen the last few years, even as it's improved. Of course, many of the smaller operators have aligned themselves with the large fleets to take advantage of better purchase pricing on their equipment, healthcare benefits, access to more jobs from different customers. So it's -- the old days of the owner operator have certainly drifted away but the smaller operators purchase approximately 25% of our products and it's pretty much in line with the last couple years.

Okay, great. Thanks very much, guys.

Thank you. Appreciate it.

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

Good morning, Robert.

Hey, good morning, thanks for taking the question. So you just mentioned something interesting that we wanted to ask about with the smaller owner-operators aligning themselves with fleets for purchasing power and so forth. Do you see that as any -- I know you've generally said your share in the fleets is just as good as with owner operators or very healthy anyway, but do you see it as a strategic threat in that the owner-operators might be getting to be pushed to take lower spec trucks or more utilitarian vehicles?

Well, it's a good question. I think generally probably not a concern because people are still looking to attract drivers, even with the slowdown in the housing and residential construction that we all know about. Still trying to recruit drivers is one of the main programs that certainly we're undertaking and many of the people in the industry are looking to set up training programs. So I think these companies, the freight haulers are all well-managed companies. They want to make a return and they know that by getting a good driver and giving them good equipment they're going to have a better return. I think as we've learned through the decades that we keep coming out with more fuel-efficient powertrain and we're very proud of our MX engine. But the one most important factor in fuel economy is the driver, and the more you train the driver and the higher -- better person you get driving the truck, the better fuel economy and the more money you're going to make as an operator. So I think people are going to say let's get good product, attract good drivers and we can actually make a better return.

Okay, that's helpful. And then if I could just ask a quick follow up on the component issues, which you mentioned.

Sure.

Is there any hint of -- are people doing excess charges to get production back online in Japan? Are the tire guys trying to price up -- obviously there's a commodity pass through but otherwise, just given the shortages, and do you see any margin risk from people trying to ramp a supply chain very fast? That's it. Thanks.

Sure. Well, the suppliers -- this affects the automotive industry worldwide and I think that's cars and trucks, and we have many excellent, excellent suppliers. So you have to take a look at it from a couple different viewpoints. First of all, the terrible tragedy in Japan certainly affected the automotive world and on the supply base, a number of suppliers, which I think tend to be a little bit more focused on the electronic components and these are the controllers that might go behind a dashboard, that's affecting the entire industry. But they're working very hard, either within their own company or with government agencies, to try to get back up to speed. That'll take some time, but so far it seems to be manageable, although you can certainly read in the industry press that a number of the car manufacturers in Japan have had shutdowns and are still struggling. But everybody's working with these suppliers to help them get back up to close to normal capacity.

Second, speaking of capacity, you've got record demand, particularly on trucks, around the world, whether it's China, South America, North America, Europe. When you combine them all, you've got a very high demand and that looks to be going higher over the next couple years. So suppliers, particularly in the tire segment of the business, are looking to add capacity. Certainly the cost of rubber has gone up about 200% since 2009. You also have carbon black shortages because of some production issues in Egypt. So it's a complex global concern, but everybody's working hard and it's something that we all do every day, this is just a little bit more exacerbated. But I think we'll get through it's just going to be a little bit more challenging this year.

Great. Thanks very much.

Thank you.

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

Good morning.

Good morning, how are you guys?

Excellent. How you doing?

Doing good, thanks.

Good.

Maybe you could talk a little bit about Q1 versus Q2. Could you talk about the ramp up of second shift, whether that's behind you or not, whether there were costs incurred in Q1 as you train people and bring people on and incur inefficiencies and when would you expect to be at equilibrium in terms of ramping up production volumes?

Well, we're continuing to ramp up production volumes and as I indicated, Ann, we're looking at 15% to 20% increase. We like, I'd say, most of our competitors are well into second shifts and that -- we expect the second shift to be as good as the first shift and they always are. So in terms of any additional costs, I think we've worked our way through anything like that, so I think it's now just adding on people and there seem to be good people available to come work at our facilities. And the orders are strong. We've got a backlog out to July, August, and that seems to support the ability to ramp-up production, so I think it looks reasonably good.

Okay, thank you. And my follow-up question is about the pricing environment, both in the US and in Europe. Could you talk a little bit about the competitive environment in both regions and what you're seeing out there?

Sure. Well, I think we talked a few months ago when we had our first-quarter call and we've been pleasantly surprised by the stronger rebound, in both Europe and North America, as orders have come in for a couple of different reasons. One, I think in Europe obviously didn't have quite the impact in terms of the housing bubble that North American ran into. And then many of our good customers in North America, as the economy has slightly improved and got into a 1.5%, 2.5% GDP growth just finding their vehicles are at an age that it really would be more beneficial to replace them so that's translated into higher sales. And I think pricing has generally followed, As you have a stronger margin you're able to have a little bit better pricing scenario and our customers are able to get a little bit more on -- more freight and higher freight rates. Obviously, everybody has their eye on the increased price of fuel. But it seemed to be a little better pricing environment than just a few months ago.

Has that surprised you, or it's typical when you come out of a downturn?

Well, typically we find in a stronger market it's a little bit stronger pricing environment, so that's what we've seen through many, many cycles. I think the -- I would say that the rebound has been a little bit stronger than we anticipated, just even at the beginning of the year, so that's encouraging.

Okay, thank you. I'll get back in line and hand it over.

Okay.

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

Morning, Jerry.

Good morning, everyone. Mark, can you talk about when you expect your South American assembly capacity to come online. Looks like you've made progress on picking a site in the quarter, can you just tell us more?

Well, I think realistically -- and I was just down there, it's an exciting market. If you haven't been to Brazil, I don't want to be a tour guide, but I strongly recommend getting down there and seeing a very dynamic country. Well, the first thing is we have to select a site so we narrowed it down, but we do not have a site. So I think on a conservative basis, if we could start building a factory by the end of this year realistically it would hopefully be in production in early 2013. So that's just the blocking and tackling of building a factory.

And on that note, can you give us an update on how much of the hiring you've done in recent quarters has been in your Mississippi engine facility and when do you expect the production rate to really ramp up there?

Well, we have -- we continue to hire in Mississippi. Over the entire Company we've added 3,000 employees or so in the last four to five months so that's always great to have wonderful employees back joining the team again. And Mississippi is continuing to do well. It's 25% of -- Kenworth and Peterbilts have the MX engine and we're looking at bringing online some additional machining capacity this summer. So if you haven't had a chance to visit Mississippi we'd love to have you there.

Appreciate the invite. And on the hiring front, Mark, I'm wondering if you can talk about whether we should expect your pace of hiring to slow in coming quarters, or should we expect what we've seen over the past two quarters to continue through the balance of the year?

I think -- I'm not sure if it goes into your cost model, but I think hiring is probably slowing down because we're starting to ramp up to levels where we don't need to hire as many people as we did in the last six months, but continue to hire.

Lastly, you mentioned lead times. Can you talk about whether there's any difference between the US and European operations, or are they both out to July, August?

Yes, they're very comparable. Both of them are July, August time.

Thank you very much.

You bet. Thank you, appreciate it.

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

Morning, guys.

Good morning, J.B.

I just want to dive into this gross margin a little bit more because I'm assuming that your input costs have not gone down. Is there any way you could give a general gauge as to the sort of inflation that you're facing on the raw material front?

Well, it really varies, as you would expect, by commodity and you take a look -- and I think I mentioned rubber up 200%, but you look at carbon for steel and copper and stainless steel, palladium going into the engine, a lot of these are up 60%, 80% over the last two years. Now some of that is small dollars and some of it's large dollars, but there's a real demand driving some of that higher prices and we have to pay them, as our competitors do. We try to pass some of that through but as we talked about a few months ago, particularly on the exhaust side, it's very difficult to get all that passed through to customers, maybe a little bit better now than it was three months ago. So we continue to look at it every single day and if we're able to adjust our pricing we do, but sometimes it's just something you have to absorb in the cost of sales.

I guess I was pretty pleasantly surprised at the first-quarter gross margin number and I think other people have asked. Do you see that as being a peak number for the year? It's probably too early to tell, but if you are sticking to your guidance as flattish margins for the year--?

I think it was certainly better than we thought when we talked a few months ago for the first -- or for the fourth-quarter call, but I think it's going to be in that range. But as I've indicated, as trucks become a larger component of our total profit package, they have lower margin in the parts business so hopefully we can keep pushing in the parts business to grow, but parts were very strong in the first quarter. So I think it'll be sort of flattish compared to the first quarter I think is a fair -- plus or minus.

Okay, that sounds good.

On the first quarter.

And then could you maybe give us the currency impacts on the revenue and the EBITDA?

You bet.

Yes, the currency impact on revenues was $16.7 million increase compared to last year, and the impact on pretax profit was $5.7 million compared to last-year's quarter.

Okay, thanks for your time.

Thank you. Good questions.

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

Good morning, Henry.

Hey, good morning, everyone. Wondering if you--?

What's going on?

Things are good. How are you doing?

Well, pretty steady as she goes.

Congratulations on a good quarter.

Good, appreciate your write up. What's on your mind today?

Could you talk a little about the PACCAR Financial contribution as we go through the rest of the year?

You bet we can and we're making some good progress there. Let's give some more specifics to it.

As you noticed our -- this is Tom Plimpton -- our provision for credit losses was $10.5 million this quarter and we think going forward with the improvement in the operating environment for operators that we finance we should see that continue to improve slightly. We expect to see the portfolio to grow somewhat over the year and as we talked about in the first-quarter release, improved margins and, obviously, the lower losses. So pretty much continuing to be steady in the range of the first quarter, I would suspect.

That's helpful. And is it possible--?

Hello, Henry?

Hey, can you hear me? Can you hear me?

Yes, I can hear you now.

Oh, okay. Sorry. Is it possible to talk a little bit about the difference in growth rate that you're expecting for the vocational truck market within class 8 versus the over-the-road class 8 truck market?

Yes, we typically don't break that out but the vocational side is certainly dampened, if we're looking at the construction market. The ag side is good, there's certainly a demand for food around the world. But concrete, mixing, dump trucks, utility vehicles, they're down and they're going to be down for a while. There's great companies out there working hard to try to improve it but they're fighting the headwinds of a difficult macro environment, economic environment. So on-highway is going well. There's good GDP growth of 2% to 3%, consumers are spending again. That looks like it's going to be good for our on-highway truckload carriers.

Okay, thank you very much.

Thank you. Good questions.

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

Good morning, Steve.

Hey, good morning, gentlemen. Thanks for taking my question. Most of them have been answered, but I wonder if you have any visibility -- sometimes when the markets get overheated, Mark, as you well know we tend to get a little double ordering in the market. I wonder if it's time to start thinking about that yet and how much visibility you might have?

Steve, I think you've been around as long as I have if you can remember those days. We're not anywhere close to that. That's -- I know exactly what you're saying and certainly something that all manufacturers are always on the lookout for. But we've got dealers with -- who really are in good shape now coming out of the recession, but their in-stock inventory is probably at five-year lows, so the products that are being ordered from the factory they are moving right through the dealers, right to the customer for use. And that's really a key factor, criteria that we look at to see if there is such a thing as double ordering. But, no, I would expect this year it'll just be a reasonably strong market and one that certainly is going to be more enjoyable than the last few years. But I think -- and this is an important point -- still not at what we would expect is replacement demand because there are certainly some headwinds in the general economy. But a good market.

Fair enough. And I wonder -- I guess there's a bit of a thesis out that we've had a very strong few months of orders because the fleets have all been stepping up to do their replenishment but that the order numbers may fade as we go through the rest of the year here because maybe the owner-operator segment isn't really ready to stand up and order yet. Do you have a view as to what the order trajectory for the industry might look like as the year progresses.

Well, we had for the first quarter 65,000 and we're saying the year it could be 200,000, so that means the trajectory would be flattish to -- it could even be a little bit lower, if you're going to get to 200,000. But once again, a good year.

Okay, fair.

Compared to 126,000 last year, if you get to 200,000 I think the industry would be pretty happy. Of course, it'd be happier if it was at 220,000 or higher.

What do you think MX engine penetration will be at the year end?

Well, it'll be -- I know it'll be resulting in a lot of very happy customers and currently we have 25%, and our excellent partner, Cummins, has 75%, so I think 25% to 30% for MX is probably reasonable. We'd like it to be higher, but that's a great way to start for the first year. I think it's established the record for the highest percent of 13 leaders in the industry in a ramp up in a launch phase, so we're very pleased and very proud of our team.

Thanks for you help.

Thank you.

Your next question is from the line of Timothy Thein of Citi.

Good morning.

Thank you, good morning. Mark, just going back on the -- or the plan in Brazil, I'm curious if you could walk through the analysis in terms of the capital budgeting decision on building a greenfield plant down there, and what sort of a realistic time horizon are you using in terms of your analysis in terms of getting to that 10% market share?

Well, 10% by 2020 and the other information are great questions but it's the ones that we continue to talk with our Board about so I don't think we can really go online and talk about that. But certainly have plenty of experience building new factories. We just got a new one in Mississippi. It'll take time but the good thing about Brazil -- and there are many of them -- is first of all it's a strong truck market. Second, it's the highest margins for truck markets in the world and some of that is because of the structure of their customer base. It's primarily smaller fleet owner-operators, there's only a few large fleets. So I'd say it's comparable to what we saw in North America in, let's call it the '70s and '80s.

Third, there's a lot of demand for agriculture and there's very little rail infrastructure so trucks have the vast majority of the business. And finally, all of our competitors are there and we know them well. We see them every day around the world and the good news is with our DAF truck and the PACCAR powertrain has done very, very well and we certainly expect that same sort of positive results as we get a factory up and running and start growing in that marketplace.

Okay, great. And just going -- drilling into the gross profit performance for the first quarter, I was hoping to get two specific numbers within the truck segment, if you guys have these handy. The first was just the contribution from the delivery volumes and then secondly is that average truck price versus the material and other direct costs that you've conveniently laid out in some of your recent disclosures, do you have those two numbers?

I don't think we have them right on hand but we could talk to you offline and try to get a little bit more specifics on what you're looking for.

We can give you our truck margin and parts margin percentages.

Well, I was hoping to actually get just some of the key drivers. I guess ultimately what I'm striving to understand is -- or get some color from you is what that contribution from volumes could look like. I think it was, call it 16% or 17% in 2010 and whether you'd expect that to be higher or lower in 2011 as some of these volumes ramp up?

Yes, let's take that offline and--.

-- make sure we know what metrics you're referring to.

Yes, lot of ways to do it. Good thing is overall margins have gone up, but let's talk about that a little more specifically.

Okay, fair enough.

Thank you. Appreciate it.

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

Good morning, Jamie.

Good morning. A couple questions. One, Mark, can you just speak to what your mix is today of the aerodynamic truck versus traditional and how you see that progressing and is there any margin differential between the two? And then the follow-up question is on your engine facility in Columbus, which I did see was quite impressive. While we were there in late February they were talking about building about 25 engines a day. I'm just wondering where you think we should be by year end with you adding machining in the second half of the year?

Well, we're building 25, but we're getting another 25 in from DAF, so that's really 50 a day is the way we look at it, so that's what we're shipping out. And so we're looking to grow that. We don't have a specific number that we could share at this time, but that's our intent. And I'm glad you brought the aerodynamics up because we were pleased to hear over the weekend that the Kenworth T700, a wonderful aerodynamic vehicle, was the American Truck Dealer truck of the year, so that is a wonderful kudo for the Kenworth team.

And aerodynamics continues to increase and it's certainly the majority of our vehicles now, over 50%. And in terms of the margin and I've been tracking that very carefully -- because you can go back to the old days of the long and tall with lots of chrome, which had the highest margins of that time -- the margins for aerodynamic continue to improve. And really one of the main drivers is because you've got a lot more volume going through the factory so you can get it -- continue to get it more efficiently produced. So the margin on the aerodynamics is improving steadily, so that's very encouraging.

So the takeaway is it's not where the traditional is, but over time we should get there with volumes is the way to think about it?

I think it will continue to improve, and certainly as new products are developed with more efficient manufacturing controls, that we're looking for those to be a -- to carry a bigger and bigger part of the load.

And then just last follow up. I know you've talked about production increasing Q2 from Q1 15% to 20%, did you break out US versus Europe or did I miss that?

No, I didn't break it out, but I think for Q2 versus Q1, the majority of the increase will be in North America. There will be increases in Europe. DAF is now at about 16% share and the product's going very, very well. So there will be increases around the world but I'd say 60% of that increase will be in North America.

Great, that's very helpful. I appreciate it. Congratulations.

Hey, thank you very much and come back to the tech center and drive those trucks again.

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

Good morning, Patrick.

Good morning, everyone. Congratulations on the quarter.

Thank you very much. We appreciate it.

Just two quick questions, one's just kind of a housekeeping. Can you break down the truck and parts margin and revenue in the quarter?

Yes, we can.

Yes, the truck margin was 7.8% compared to 6.7% in Q4, and the parts margin was 35.3% compared to 34.4% in Q4.

Thank you very much. And Mark, you guys cited in your release about parts supply and that being possibly a constraint on industry demand. I know it's early to think about next year, but when you think--?

Never too early.

When you think about overall industry capacity, when do you think -- are we real -- is it going to really be that we're going to butt -- there's some pretty aggressive forecasts for the industry overall next year. When do you think we start butting up against part supply issues so the industry is going to really hit that headwind of capacity constraints?

Well, I think because of the recession, probably the OEMs are in slightly better shape than some of the suppliers because there was an ongoing profitability stream that the OEMs could tap into on the spare parts and through their distribution channels that may not have been available to the suppliers. So the suppliers, as you know, they shut down and really reduced their capacity significantly and that was probably the smart thing to do. As I mentioned earlier today, the rebound has been a little stronger than I think any of us expected, particularly in Europe and North America, so that's the good news. The more challenging news is that the suppliers are rightfully asking how long and how strong and what does that mean in terms of me as a supplier. Do I need to go out and get a new factory, do I need to look at two and three shifts, can I get the people, all the normal things that you run into as you operate a business.

So right now, outside of just a very strong global demand, I don't think we'll be butting into endemic shortages within the industry but we're at 200,000 here and 220,000 in Europe. If you get up to those heydays of 2006 of 280,000 and 300,000, there may be some real issues because I've been around for a long time and a number of the suppliers are saying, sure, I can supply you at 300,000 or 320,000 or 340,000, but then what happens a year or two later when it goes back down and I'm stuck with all this capacity. Right now I don't think it's an issue but I certainly -- it's an active topic amongst many of our suppliers of how strong and how far and I think it's going to be a year or two before we really have to wrestle with that. But apparently people are thinking about it, which I think is smart. I think the industry's been through some challenging times and I think people have learned from it, which I think makes for a better business environment as time goes on.

That's helpful context. Thank you very much.

Thank you.

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

Good morning, Ben, how are you doing today?

Excellent, thank you for taking my question.

You bet.

I was just wondering about the timing of your 15-liter MX launch, when should we expect to see it?

When you give us the go ahead, Ben, we're all set. Don't know anything about it. We have a 13-liter that we're very proud of and the 15-liter is supplied by our wonderful partner, Cummins, and that's what we've got.

Right now there's no plans, not in development?

No, unless you're working on something in your garage. We're happy with the 13 and, of course, our 9.2-liter. So that's what we've got and it's keeping our team very busy and pleasantly so.

Okay, second question. What is your priority now for use of cash beyond investment? And as a follow up to that, do you think there's anything missing in your portfolio of truck and engine products?

Well, that is a great question. Of course, we talked a little bit during this call about some opportunities in Brazil, which will absorb some cash. We want to make sure our wonderful shareholders who have been extremely loyal and very supportive for -- well, forever, are suitably compensated so we take a look at what we can do for them. And then we're looking at China, we're looking at India and taking steps -- conservative steps in those markets. Then there are opportunities in central Europe and Russia that we're looking at. And then, of course, you've got a lot of excitement, as with any Company, on developing new models, which absorb cash. And then finally, as we've talked through the years, we continued to work with different third parties on any acquisition opportunities and that's certainly something we continue to look at. So that's what we look at. Ben, thank you very much.

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

Hello, Andy.

Good morning, everybody. Thanks for taking my call.

You bet. Good to hear from you.

Likewise, Mark. Just a quick question. A lot have been answered already, but as you look at the trend, you talked about the 13-liter ramp up being better than periods past. If you look at the fuel price level plus the what I would imagine would be a continued trend towards increased power density of the engine, are you surprised that it's not happening at a faster rate, or is it just going to take truckers getting used to a 13-liter that can do much if not most of what they need from a larger engine?

Well, that's a very perceptive question. Of course, we're very pleased with the strong acceptance and support we had for our engine in North America and around the world most of the engines we put into our vehicles have the PACCAR name on it, as you're aware. Having just returned from the UK where they just hit a record in terms of fuel price and you have to convert metric, imperial gallons and pounds and dollars, but the equivalent of $10 a gallon -- which is a record for the UK, by the way -- and we're at, let's call it $3.50 to $4.00 a gallon here, the rest of the world certainly looks at North America as a wonderful oasis of low fuel pricing. Will that continue forever? Well, I'm not sure anything continues forever so let's expect that the fuel will go up, so $4.00 and then I think the high was a number of years ago at $4.60 or $4.70, will it go through that level? Most likely it will.

So what does that mean for engines and power density as you brought up? The rest of the world has 13-liters as the highest and largest engines that they use. I would say over time that -- there's already a shift happening in North America that 13-liters will be a larger and larger component of the engines being purchased, along with 11-liters and 9-liters and things like that. So that's just the way of the world. There's no particular reason why North America should be the only market in the world with such a unique powertrain being demanded by our customers, but it'll take time.

Thank you very much.

Thank you.

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

It's actually Keith Schicker on the line for David.

I thought it was Keith. Good to have you here, Keith.

Excellent. I had a couple quick questions. First, If we look within the credit company could you maybe talk quantitatively or qualitatively about PACCAR's finance penetration. Has that started to go down. Have you seen additional sources of funding come back into the market for your customers? How does credit look for some the smaller fleets and owner-operators? Could you just provide some color in that regard?

You bet we can.

In that area there is -- as the truck market continues to improve there's increased competition, the banks start coming back in. Our share for the first quarter is 29%, which is up from last year, which is a good sign. The credit quality, we've got a very rigorous credit quality metric system that we use and so those results are good and being reflected in reduced losses. So pretty much steady as she goes in that area.

And is there any differences in credit availability for smaller fleets or even owner-operators versus larger companies?

Well, some of the agencies, some of the finance groups are expecting a little larger down payment, trying to mitigate some of the losses that they experienced over the last few years where credit was probably too flexible and then it was too tight and now they're trying to get to a middle ground. But we're now basically at record levels in terms of our penetration on the PACCAR Financial. We've got a great team and the dealers, as we come out of this recession, are great partners, but they realize even more so what a wonderful tool PACCAR Financial and Pac Lease is when they're talking with their customers on deciding which is the best financing package for that particular customer. So it's encouraging. And I think the banks are back in it. Some of the larger independents are tiptoeing back in it, but they had such huge losses that I think their appetite has been diminished.

Okay. And then just to circle back, another question about the pricing and maybe commodity costs, kind of the equation that we look at there. Are we at a position right now where as you talk about pricing and the end market rising are those units that are just going into the backlog right now, or are you seeing higher pricing on products that are getting recognized into revenue into the current period? And then if you look at commodity costs, we've seen them spike up. Is that something where you're paying -- or your cost of goods sold right now is based on commodity prices from a couple months ago, how does that equation work and how does that spread work going forward between pricing and commodity costs?

Right. We're looking at, if we can, depending on the market's appetite, having pricing adjustments on a regular basis -- that could be every month, that could be every two months -- to reflect the rapidly increased commodity pricing. Sometimes that's really a moot point, it's very minimal. Sometimes you'll have a number of larger increases come in from several different commodity groups and we need to take pricing action in the marketplace. So that's -- I would say that's almost on a monthly basis now.

Okay. Thank you.

Thank you.

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

Good morning.

Tim, how are you?

Pretty good. Yourself?

Good, thanks, appreciate it. Where are you calling from?

New York.

Oh, good place.

Mark, a lot of truck carriers are talking about potentially a little bit of an overbuy in the second half of this year to take advantage of the bonus depreciation tax law. What do you think that might have an impact in terms of orders going forward and to what extent are you hearing that from your customers and do you think there could be a drop in orders as a result of if it actually is cut to 50% depreciation next year?

Obviously the -- a lot of our customers, very bright and financially astute, are taking a look at the benefits of that bonus depreciation and there certainly are some. So I think your question is saying do we see, in a sense, maybe a pull forward or a prebuy and how that'll affect next year. Is that what you're saying?

Yes.

Okay. Well, depends. If the general economy -- and you're talking about really North America, not Europe now. If the general economy strengthens, which there's certainly pros and cons on that, but if it does continue to strengthen that may be enough to offset or mitigate any prebuy that might result as a result of the bonus depreciation. So I think it's a little early to tell right now. Certainly if the economy slows down and is at that 1% GDP level, there may be, in a sense, a bit of a prebuy. Right now it's early days.

Yes, sure. Are you hearing that a lot from your customers in terms of the potential for that and is a lot of that built into your expectations at this point?

No, what we hear from our customers is the evaluation on what benefits they'll get from the bonus depreciation, so they're evaluating just on the financial spreadsheets right now.

Okay, thanks.

Thank you.

Your next question is from the line of Basili Alukos of Morningstar.

Good morning.

Hey, good morning, guys, how's it going?

Good, thanks.

Quick question, it's kind of related to some of the comments you made about Brazil and then further about rising oil prices. As you look at the United States, obviously intermodal and rails are such a big part, something that's not in Brazil.

Right.

Like you mentioned. I'm just wondering, as oil prices rise or at what point do you see some of your customers switch more towards thinking more aggressively about pursuing intermodal more so than using trucking to transport across the country, and I understand that trend has been happening already, but is that discussion at all increasing in today's oil price environment?

Trucking as a percent of the total freight hauled actually has increased over the last several years, by a small percent but it's increased. There are certainly benefits to intermodal and a number of our customers actually use both, but intermodal tends to be not quite as timely I think is the best way to address it. And so you need to be shipping items that are perhaps not as time sensitive, not focused so much on just in time for manufacturing. So it's something that the truck industry continues to look at, certainly working with groups like the American Trucking Association, the ATA, we evaluate it. I think we can actually take some heart from what you see around the world. As you look at Europe, which has significantly higher fuel prices on a per gallon basis, the truck market is a little bit larger than North America. And so I think if I read into your thoughts, do you think intermodal will take away from trucking, no, if the total GDP's growing I think there's room for both. And as I say, take a look at Europe and truck market's very strong and very profitable, so I'm encouraged by that.

Great. I guess if high-speed rail comes into play then maybe there'll be more room for trucking to take over?

Well, high-speed rail tends to be more for people and -- but I certainly have enjoyed high-speed rail at many of the countries I've traveled around but I don't see too many people loading shipments on because those tend to be a little bit shorter run. But it's an exciting world, that's why we love it.

Fair enough. Okay, that's all, thanks a lot, guys.

Thank you very much.

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

I'd 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.