帕卡 (PCAR) 2011 Q3 法說會逐字稿

Good morning and welcome to PACCAR's third 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; Ron Armstrong, President; and Michael Barkley, Vice President, Controller. As with prior conference calls, if there are members of the media participating, we request that they participate in a listen only mode.

Certain information presented today will be forward-looking and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results.

I would now like to introduce Mark Pigott.

Good morning. PACCAR reported record quarterly revenues and strong net income for the third quarter of 2011. PACCAR's third quarter sales in Financial Services revenue were $4.26 billion compared to $2.54 billion in the third quarter of 2010, a 68% increase. Quarterly net income increased to $282 million, more than double the $120 million earned a year ago. And our best quarterly profit since the third quarter of 2008. The lower tax rate in the third quarter reflects the benefits of recently enacted research and innovation tax incentives in the Netherlands. I'm very proud of our 23,000 employees who have delivered industry leading products and services to our customers worldwide.

Increased truck deliveries, higher after-market sales, and a growing financial services business worldwide contributed to PACCAR's increased profits. Our customers in North America are benefiting from increased freight tonnage and higher freight rates, which is generating good profitability for their companies and enabling them to replace their aging fleets. Through the first 9 months of this year, Peterbilt and Kenworth have achieved a record Class 8 market share of 27.7%. The performance of our suppliers improved significantly in the third quarter as they invested in production capacity to meet increased market demand.

Turning to Europe, economic uncertainties in recent months in the Eurozone have resulted in lower industry truck orders. You may have read, I'm sure you have, that a number of our competitors have taken actions to reduce their build rates. DAF is taking similar action and will reduce build rates 5% to 10% in December. The good news is that Europe's 2011 industry registrations are up 30% compared to last year. And DAF has achieved a year-to-date 15.2% share of the above 15-ton market. All of PACCAR's factory production worldwide slots are full for the year.

PACCAR delivered over 35,000 trucks during the third quarter, 82% more than the same period last year. I'm really proud of our production, engineering and material purchasing teams. We've improved market pricing and productivity which has generated higher quarterly truck gross margins of 8.4% in the third quarter compared to 5.4% a year ago. And we've also improved return on revenue percentages.

Looking ahead, PACCAR estimates delivering approximately 5% to 10% more trucks in the fourth quarter compared to the third quarter. As we discussed in our July call, US and Canadian industry retail truck sales are estimated to improve this year to a range of 185,000 to 200,000 units versus 126,000 last year. Industry retail truck sales for the US and Canada for 2012 are estimated at 205,000 to 230,000 units, assuming ongoing replacement of the aging truck fleet and some economic growth. We estimate that Europe's greater than 15-ton truck market will be between 235,000 and 245,000 units this year versus 183,000 last year. It's anticipated that the European industry truck sales in 2012 will be in the range of 225,000 to 250,000 units.

As we highlighted in our press release, PACCAR continues to make significant investments to expand our geographical footprint and build on our technology and production efficiency leadership. PACCAR's innovative application of information technology earned the Company the number 1 technology position in Information Week Magazine's 2011 Top 500 Company listing. Leyland was also awarded the prestigious Shingo bronze medallion, which recognizes world-class organizations for creating a culture of continuous improvement. Which really sums up PACCAR's approach to our business.

PACCAR's global business initiatives are progressing well. We expect to begin construction on the new DAF assembly facility in Ponta Grossa, Brazil in the next month or so. And plan on building trucks in Brazil in 2013. This is an exciting week. DAF is participating in Brazil's largest commercial vehicle show in Sao Palo. And we're exhibiting the full line of DAF products and services. And that show is going on right now.

Speaking of South America, PACCAR will deliver record truck sales this year in the Andean region of South America with its Kenworth and DAF brands. Moving around the world, PACCAR's pleased to announce it has established a new technical center in Pune, India. This center will focus on engineering, information technology, and component sourcing for production and after-market operations. PACCAR's partner, KPIT, is a leader in providing world-class information technology and product development, particularly in the automotive segment.

China continues to be the largest truck market in the world. However, industry heavy truck sales this year are expected to be down 15% to 20% from last year's record levels due to lower government incentives. PACCAR expanded its Shanghai office this year to increase component purchases. And we continue to evaluate potential joint venture opportunities.

Switching to our finance business, PACCAR Financial Services revenues were $264 million in the third quarter compared to $238 million a year ago. PACCAR Financial's third quarter pre-tax income improved to $62 million compared to $42 million earned last year. This was due to better finance margins and a reduction in the provision for credit losses. The credit loss provision for the third quarter of 2011 was $10.7 million compared to $12.9 million a year ago. And past dues fell to 2.1%.

Overall, the third quarter results were excellent with several new records achieved. The Company plans to continue to make significant investments in 2012. Capital spending is estimated to be $450 million to $550 million with research and development at $275 million to $325 million. PACCAR is well-positioned to deliver the highest quality products and services to our customers through all phases of the business cycle.

Thank you. Look forward to your questions.

(Operator Instructions) Andy Kaplowitz of Barclays Capital.

Mark, so I recognize there's still economic uncertainty globally. But if I look at the North American market, its been constrained somewhat by suppliers in 2011. You've given us a 2012 forecast. Do you think maybe you have above average visibility or at least good visibility into that forecast given we still have this replacement demand and we haven't been able to make as many trucks this year as we wanted?

I think the industry estimates that replacement demand is approximately 225,000 units a year. And you're right, for the last 3, 4 years we certainly have not been at that level. Talking to a lot of the customers at the recent ATA meetings, as held in the last week, I think there's a good balance between the number of trucks and the freight they can provide and the demand for freight. And as a result, you're seeing improvement in freight rates, and also freight utilization as measured within the Company's own fleets. So that's good for our customers. They're making good money.

Its been an up-and-down decade for many of them but those that have survived are well positioned. They're, for the most part, continuing on a steady program of replacing their trucks. And we missed a cycle in, let's call it '08, '09, and '10. So they're going to lower the average age of the trucks in their fleet. I think only a few of them are really talking about expanding their fleets. Some may buy out a competitor. So until there's more fleets looking to expand, which means more GDP growth, which, as you know as well as I do, has been pretty limited in the United States anyway, I think the forecast we have shows some improvement. Which is good, but still trying to get to that replacement level.

And then just shifting gears, how much unusual inefficiency do you think is still being created in your business. You said 5% to 10% growth in production this quarter over last quarter. As you train your people, you add more people, when do you see that maybe stabilizing a bit so that that can help margins going forward?

A good thing about PACCAR employees, and that's all I can really comment on, is that we have well over 80%, 90% of our employees who, unfortunately, if they did have to be let go during the difficult times, come back. They love working at PACCAR and we love having them there. So the training, although there certainly is training any time you bring an employee in, I don't think has really been that much of a factor in our ramp up. Obviously, it does take time and you've seen production increase significantly over the last year or 2.

So I think we're in good shape. People are making great quality products. The suppliers' situation has improved quite a bit. A lot of that is because we're out working with suppliers, we're continuing to invest in some of their machinery. We're training them in Six Sigma and 5S. We're helping them on material analysis. Which benefits the whole industry, by the way. So I think we continue to be efficient and our goal is to improve efficiency 5% to 7% every year, and typically, we achieve that. So I think we're in pretty good shape in terms of production efficiency.

Ann Duignan of JPMorgan.

Mark, could you talk a little bit about Europe and what you're seeing over there? The question that gets asked over and over again, the lack or the potential for the lack of financing. Are you finding that your Financial Services business has to step up a little bit more or have you seen any change in the kind of deals, more leasing rather than buying? Could you just talk us through what you're seeing from that perspective in Europe?

Sure. A couple points. On the PACCAR Financing, we're seeing good interest. Many of the markets we're in are actually achieving record levels of financing percent in terms of the people that use our financing versus another source, so that's good news. We continue to add people to our financing teams. In terms of leasing, and I'll talk about leasing as we might know it in North America, our PAC Lease organization is strong in Germany and continues to add dealers and service points. So we're very pleased with that, and looking at how we can grow that over time. I think, generally, the financing aspect has been good for our customers, whether they finance with us or through an independent source. We don't see that as too much of an issue.

So you aren't seeing any fall down in potential sales because customers cannot get access to financing?

No, we're not seeing that. I'm not sure what the competitors are seeing. We get a lot of great customers, obviously, and most of them hopefully qualify for using PACCAR Financial. And as you know, our finance company's in very strong position so it sounds like an opportunity for PACCAR.

And it wasn't really a competitor thing. It's just given the financial difficulties the banks have or may have going forward. And your financing may be more difficult to come by across many industries, and I think people were just looking--

I think you're probably right. Obviously we all read the headlines. And, of course, we're there every day living it. And certainly banks are working through different challenges. But as far as the truck industry specifically seems to be in good position.

And sticking with the European theme, could you talk a little bit about, and I know that the range you gave for next year is probably pretty broad at this point in terms of by country. But could you talk a little bit at least about Western Europe versus Eastern Europe, or DAF more bullish on one or the other. Just a little bit of what the DAF team are seeing over there just by region or by country would be great.

Sure. And let me just say on a macro level, because we have a team that's been in place for a long time, measured in decades many times, I find that our forecasts are typically closer to reality than maybe some others. So I know you guys sometimes think we're a little conservative but usually as time goes on we seem to be pretty much in line. So, looking at the market, certainly there's been discussion about, let's call it, Central Europe perhaps being a little bit weaker. We do very well there. DAF is a market share leader in Poland and the Czech Republic and Hungary. The customers there really enjoy the product. I think those general economies might be a little bit more challenged than Western Europe. Certainly, there's been a lot of discussion about North/South and the southern countries in Europe. And I don't think we need to talk too much more about it, it's in the press every day. The good news for us is that we're gaining some share in the South and retaining or growing our share in the North.

And I'll just say in terms of DAF's approach to Europe, we're either number 1 or number 2 in every country in Western or Central Europe. With the exception of Germany, we're number 3 behind 2 local manufactures. So DAF's in good position. It really sees all of Europe. There's a lot of uncertainty out there. Certainly as we and others have adjusted build rates, we're just not sure. I'm not sure anybody on this call, I'm not sure who knows what's going to happen. But we obviously track it as closely as anybody. And the customers, we're seeing a little bit improvement in the amount which tracks German mileage on their highway system. So that's good. We're seeing good financial services reports. So the customers we have are in good shape. So it's just the overall macro-economics are very unsettled, and obviously that is having impact for customers saying -- Should I buy, when should I buy, how much should I buy. And I think that's going to take a while to work our way through. And it's much more than just the trucking industry.

Just a real quick follow-up. Just on your comments about build rates being up 5% to 10% in Q4 versus Q3, I just wanted to clarify that that was both US, Canada, as well as Europe.

Yes, that's correct.

Adam Uhlman of Cleveland Research.

Mark, could you expand a little bit on what's happening down in Brazil as we get ready to build a new plant down there? Maybe talk a little bit about signing up new dealers to handle the product?

Sure. As I mentioned just in the prepared comments, the largest truck show in South America is going on right now in Sao Paulo. And we've got a wonderful stand. So that's putting, let's call it, a face with a name since we made the announcement in the last month or 2 about building a factory in the State of Parana. And now we've got our products there and we have our senior leadership team there. We have a number of the sales team there. We've got a lot of customers and potential candidates for our dealer groups are now coming by and meeting with our teams.

I think one of the real strengths of PACCAR, and one that probably doesn't get talked about enough, is our dealer network, our independent dealer network. And many of our competitors have different approaches to their dealer network and I'll let them talk about that. But what we do is we try to partner with the strongest groups in each region and allow them to do well financially and invest in their business and really provide wonderful support for our customers. So as we go into Brazil, the reputation of our Kenworth, Peterbilt and DAF dealers around the world -- and we have 1,900 service points -- is outstanding.

So what we found, very pleasantly, is that there's a number of groups, whether they're in the automotive sector, whether they're in the truck sector, whether they're in the agricultural or industrial machinery sectors, who are saying -- Wow, how do we get involved with PACCAR and specifically DAF in Brazil because we know that we're going to get the greatest technology, we're going to be able to make a good return on our investment and we're going to deal with a Company that's been around for a long time. So we are actively sitting down and working with different groups. And we'll start announcing, let's call it, dealer partnerships, probably -- it'll be next year obviously. But the truck show has had a wonderful time and there's a lot of excitement about how do I get to sell DAF trucks because if I do, I know I'm going to have a very good business. So it's exciting for us.

And then an unrelated question. But with the Europe builds in the fourth quarter coming down a little bit and North America coming up a little bit, how should we think about the margin trends in the fourth quarter relative to what we saw in the third quarter with that mix shift?

Great question. I think the margins will be in line with third quarter.

Jerry Revich of Goldman Sachs.

Mark, can you update us on how you're thinking about capital deployment? Has stock buyback moved up higher on your list? And on the joint venture side, are there any other areas that are in the works? Just directionally, can you give us an update broadly?

Sure. I think we always have a balanced approach to capital deployment. Certainly in the last several months there seems to be an opportunity on the share buyback, which we have taken advantage of. And we still have some opportunity to do additional buyback. And any other buyback is obviously at a Board level. So we've done that. And of course PACCAR's balance sheet is in excellent position. We also generate good cash flow.

Joint ventures, I think we were just talking about that. We had our investor conference with many of you a year or so ago, and I think it was a good one out here in Bellevue. And I know a lot of you wanted to become professional truck drivers after our tour of the technical center. But all the areas that we discussed and detailed for you, we've actually accomplished or are in the process of accomplishing in the succeeding 12 months.

India, we're pleased with the direction that's taking. Obviously China, we continue to do some sourcing from China on quality products. We know all the Chinese truck manufactures. They know us. So we continue to evaluate opportunities. We're moving ahead in a strong way in Brazil. We're having record share in Europe, record share in North America. A record number of trucks sold in, let's call it, the western half of South America. So we're in a good position to continue to work on a variety of fronts. And stock buyback, investment in our existing factory, growing our engine business, building a new factory in Brazil, I think it's pretty balanced right now and it continues to be.

And Mark, can you talk about your vision for the TATRA business? Specifically did you anticipate at some point owning a bigger piece of the company? What's the extent of the opportunity here?

Full points to you for asking that question. TATRA, of course, we've known TATRA for a long time. They've been around for over a century. And right now our focus with TATRA -- and I just came back from Europe recently and drove an 8-by-8 TATRA through our most rigorous off-road course and it handles beautifully -- is really to sell that product through our DAF dealer network in addition to TATRA's own network. I think you've seen a picture, there's been a couple of articles in the commercial truck press. I know there was a good one in Commercial Motor Magazine in the UK in the last couple weeks. So that's going to be the focus initially, will be in Europe. It's an adjunct product. This is not a mainstream product. It's focused off highway, but there is good demand for it. And then over time, we'll take a look at are there opportunities to use that product around the world. The initial focus is certainly in Europe.

And lastly, Mark, can you comment on whether you're seeing pricing discipline in Europe holding up? It's great to see the uniform production cut announcements. Are you optimistic that the industry will be disciplined or do you see any risk-based on recent market data points?

That is what makes our industry so exciting. We certainly have a approach to pricing that is consistent decade in, decade out. You all know that. What our competitors do depends on who's at the helm of the ship with our competitors. It's a great question and I think the answer is each company has its own approach to the marketplace. And we're going to continue to provide outstanding quality service and great products for our customers and our dealers. And we certainly hope that our competitors do the same. But we'll have to see how that shakes out.

JB Groh of D.A. Davidson.

Could you give us an update on your North American engine penetration and maybe some updates on the engine business?

Sure. It continues to do very well. And I know a number of you, I'm not sure, JB, if you were in the group, went down and toured our Mississippi factory. I know Robin has taken a number of people there and we continue to do that on a regular basis. If you haven't, we invite you to go around that factory. I think you'll be impressed by the technology and the efficiency that we have there. The PACCAR engine continues to perform well, as we expect it will for a long time. It's 25% to 30% share of our Kenworth and Peterbilt product. So that's good and certainly in line with what we expect. We're also having a lot of success with the PACCAR engine around the world. You may have noted we won in China for the fifth year in a row the Bus Engine of the Year award. And of course in Europe, it's just a normal part of doing business.

I think over time, even though there's a lot of excitement and a lot of discussion now, I think the engine business will just be part of what we do in our business. Probably will just be like when you buy a car, when you put the hood up, the name of the car is probably on the engine also. So I think it's going well. We continue to invest with more machining lines being installed currently, adding people, and it's going well. Good question.

Should I read into that that your goal for penetration is 100%?

That's probably a goal we have for many things. I think what you should read into it, that we're pleased with the steady progress we're making. We've been in the engine business for 50 years or longer. And we certainly will be in it for a long time. So it will just be part of what we do. And it is part of what we do.

I may have missed this, did you give currency impacts for revenue?

Yes, we have the benefit from currencies on revenues for the quarter was $159 million. And pre-tax income was about $8 million.

Henry Kirn of UBS.

Could you talk a little bit about price-cost as we go through the balance of this year and what you're thinking as far as tail wind or headwind as we enter into next?

Sounds like a good question but help me understand it. Tell me a little bit more what you're asking here.

In terms of are you expecting raw materials and your component cost to be a tailwind or headwind as we go into next year? And is pricing able to offset any headwinds that you might be seeing on the cost side?

Okay. The raw materials, if you track the price of a barrel of oil and you try to estimate, I guess there's some people making money on that but there's not as many as there used to be. Raw materials saw a big increase, and then some of them have fallen off, as we talked earlier about China reducing their production in the truck side. The car side, I think, is doing pretty well. And India perhaps slowing down a little bit. Still having really great GDP compared to North America and Europe. So there may be a little bit less pressure on some of the raw materials.

I think in terms of our pricing versus the cost, I think we're going to try to be a little bit more in line now. We aren't seeing quite as much pricing pressure. There's good demand out there for our products. The costs aren't going up as much as they were in the last 6 to 18 months. So I think the balance is probably a little bit better right now.

And Mark, does the holdback in China influence your thoughts on the time frame for entering that market?

No. When we say pullback, we're talking about pulling back to 900,000 trucks a year, which I don't expect you to know all of the numbers but it's basically more trucks than the rest of the world combined. It's a big market. It's a market very similar to what we've seen in, let's call it, North America and Europe a number of decades ago. Meaning that there's lots of competitors and there's always discussion about will there be a shakeout, will that be government-led. Because all of the Chinese truck manufactures have a ownership structure in which the government is involved. And if there is a shakeout, then who are the winners and who gets consolidated. But no. As far as we're concerned, we know all of the players. There's been a lot of investment in the infrastructure in China. We just had our senior team, I was just there a couple weeks ago. And we're actually adding to our employee base in Shanghai. We're finding a lot of interest for our products, trucks and engines. And we're waiting to see what makes sense for the right joint venture. When we decide that, I'm sure we'll let the world know but right now, we're just evaluating.

If the right joint venture popped up tomorrow, could you enter China at the same time you're entering Brazil, fighting 2 wars at once?

As you've seen from a number of joint ventures in China on the commercial truck side, there's a time period in terms of the necessary approvals at many levels within the government. And let's say it's 18 to 24 months, is probably a good average for processing a major joint venture.

Andy Casey of Wells Fargo Securities.

A few questions, a lot have been asked and answered. On the supply chain improvement in North America, I'm just wondering how we should view the transition period. Meaning is the Q4 production ramp still a little bit constrained?

No, I don't think so. In any manufacturing channel -- it doesn't have to be trucks, it can be anything, it can be electronic equipment -- there's always an ongoing discussion whether you're going up in build rate or flat or down with suppliers. Because it's part of what you're doing. But no, I think it's pretty much business as usual right now. As I say, we've worked with many of our suppliers and they've made some investments and we've made some investments. And everybody is working hard because it's in everybody's best interest to be able to meet the customers' demand. So I think suppliers in the fourth quarter would just be normal business.

And then looking over in Europe, do you think the industry inventory levels today are in good shape? And I'm not talking about PACCAR, just industry. In the event of a more prolonged production decline than what is being talked about in Q4?

Are you talking about finished inventory or inventory in factories?

Finished inventory.

So trucks, built trucks.

Yes.

I would say right now probably the industry is in pretty good shape. A number of competitors have had a couple of week shut downs to balance inventory. And some of them have more ownership of their distribution network and we don't. We focus on independent. So sometimes what we might consider a finished vehicle is a little hard to tell how they measure it since they own their dealerships. We're in great shape. Our dealers are in excellent shape. I don't think this slowdown, it's not as severe as it was in '08. We all lived through that, so I think the industry is probably in pretty good shape.

And then briefly, on the industry credit trends, you talked about decreased provisions and past dues for your credit business. Are you seeing the same sort of trends in Europe, meaning are the provisions being decreased over there, as well?

Yes, we've seen continued improvement in the performance of the portfolio with reductions in past dues, both globally and in each of our markets. So we're seeing good performance in all of our finance companies.

You're talking about also our competitors?

No, just yours.

Yes, we're in very good shape.

And then a hypothetical question. I'm curious as to your view on what the replacement demand would be in Europe.

You mean the number?

Yes, similar to the $225,000 you talked about for US and Canada.

I think it would be probably in that same range. If you go back over 10 years, obviously the North America and Europe, sometimes they're higher, sometimes they're lower. The trucks in Europe tend to be newer right now. That's a little longer discussion but essentially, the recession was sharper but shorter in Europe versus North America. So you didn't skip a buying cycle. And that's what we found in North America in the, let's call it '08, '09, and '10, with production so low. So I think probably when you have take in a number of different economic factors, I think replacement is probably 225,000, 235,000, probably in that range.

Joel Tiss of Buckingham Research.

You coined a new phrase. You're actively having a feat, that's very good.

You broke up so you're going to have to repeat that. What did we coin?

Actively having a feat, you're having a feat with all your dealers in Brazil, actively, so that's pretty good. I have to use that with my wife on the weekend.

Okay, good luck, Joel. How can we help you?

So I wonder if you can just talk about any signs of financing getting tougher in Eastern Europe? There's been some talk about that but I don't know if you're seeing it or not.

We're not seeing that. I know what you're talking about. But our customers seem to be in good position. But you can read the press about financing in general, and I don't think that specifically truck-related in central Europe, is perhaps a little bit more constrained. But as for our industry, our customers, we're in good shape.

And then are there any signs in North America that the financing is getting easier enough for the owner/operators in some of the smaller fleets to come back into the market? I'm sure that can't be helping the mix with those guys absent recently.

I think there's always good quality customers in all categories. And we're willing to finance and I think others are willing to finance. We have not seen the lack of financing as an issue with customers being able to buy trucks in this particular market.

And then just I think someone else asked you the question about cost increases. But we've been hearing more about supplier price increases. And you talked a lot about raw material cost increases not being a big deal for 2012. But what about supplier price increases? Are you going to be able to pass that through as we move into 2012?

We have about 75% of our supplier partners we have on long-term agreements. So we have mechanisms to moderate these, let's call it, price increases and material fluctuations. Certainly, our goal -- we're the end of the stream, the OEM, and that is where the rubber meets the road. It's certainly more difficult to pass along price increases to our end customer than it seems to be for our suppliers to try to pass along their increases to the OEMs. That's the ongoing creative tension in the supply chain ladder.

Steve Volkmann of Jefferies & Company.

Just a couple quick follow-ups and fill ins here. Unfortunately, I got a little static right when you said what you were doing with DAF in the fourth quarter. Could you just repeat that?

With DAF, we are going to be building more trucks but we are taking the build rate down 5% to 10% in December.

So overall build will be up for the quarter and then it's just taking it back a notch in December?

Correct. That is correct, sorry about that.

And then the shares outstanding at quarter end, Robin?

Yes, we have that. You mean the number of PACCAR shares?

Yes, please.

358 million.

And tax rate in the fourth quarter?

We expect the tax rate to be around 31%.

And then, Mark, if I could more conceptually, you called out that you have a fair amount of cash on your balance sheet, and you seem to be generating it faster than you can figure out how to spend it internally.

I'm not sure if that's correct but keep going.

Please feel free to disagree. But I'm wondering if it's time to start looking for some external ways to spend that money.

And we certainly are and have been. Certainly, we made some excellent investments in our engine factory, in our current products in a new factory in Brazil. And we talked a little bit about China opportunities. And of course repurchasing shares. And even though you may not look at it, some of the credit rating agencies seem to like us to have cash in the balance sheet. So there's always a good discussion about that. So I think we're in very good shape and we're glad we are where we are right now.

Jamie Cook of Credit Suisse.

Just 1 question. Given as you sit here today and you look at your industry outlook, for both US and Europe, you said pricing probably is going to be a little more favorable. We could walk through other items whether it's the type of truck or geography or absorption rate, a whole bunch of things. But how do you think about incremental margins in 2012 relative to 2011? Should we expect an improvement overall?

There's a lot of ways to measure that. I think we indicated our margin for the fourth quarter is going to be comparable to the third quarter. And next year, we don't see anything dramatically changing but I think when we look at how we're performing with the improvement on return on sale, return on revenue, we're improving. We're getting good leverage that way in our truck margins, and seeing some improvement even in the after-market margins. So I know that's a particular area that you focus on, and we appreciate that. So we're continuing to look at, let's call it, the operating margin, how we can improve on that.

I would just say that sometimes people look at '06 which is the high watermark for margins in our industry. And I think in some people's minds they've tried to normalize that and that's the goal. I was around in '06, I was around in '96, and '06 was a remarkable confluence of economic indicators and factors that are we going to see that again? I certainly hope so. But as one of our leaders in the economic world said, irrational exuberance was at its heyday in '06 and that certainly trickled down to the truck industry. So I think we're doing very well. We've got strong margins, good return to shareholders, outstanding product. So we continue to work it and we appreciate your thoughts.

Seth Weber of RBC Capital Markets.

Just going back to an earlier question, can you maybe give us a little bit more color on what you're seeing with the owner-operators versus the fleets, how you see that progressing into the first part of next year maybe here in North America?

When I started almost 35 years ago, there really was a segment called owner-operators. I'm not sure that segment -- it's certainly not as populated as it used to be. And most of the people with, let's call it, less than 5 trucks, and there's still a group out there but it's a pretty small group and most of them have aligned with medium and large fleets, whether it's for improved healthcare or better routing or more access to end use customers. So I think the owner-operator segment, it's important in a smaller way. I don't know what an owner-operator is. We build a truck one at a time. But even the people that have only a few trucks are about as sophisticated as the large companies. They've got all of the electronic tracking, and we're helping them with a lot of that. So we just look at it as fleet sizes now.

So it's not a significant delta to the outlook one way or the other at this point?

No, it's not. It's a great group and wonderful history, but like many industries there's been a real evolution in the customer profile.

And then just quickly, is there a number you can give us for parts revenue?

Parts revenue was $655 million in the third quarter. That's up about 18%.

Andrew Obin of Banc of America Merrill Lynch.

Yes, most of the questions have been answered, thank you very much.

Andrew, I need to compliment you. You wrote a very good analysis of the Brazil truck market. It's been widely disseminated amongst the industry and I think it captured a lot of the key points. And certainly one of the main drivers within our industry, I would say more our competitors, is how important the Brazil market has been to their profitability and margin performance. And I think, as you rightly pointed out, it's probably the highest margin market in the world. And so it was a good write up, so hats off to you.

Part of the reason I went there was trying to figure out what you guys saw there. And (inaudible) is sitting right here next to me. Thank you, Mark, we appreciate it. Just a question, just to confirm on sequential improvement in North America, just want to make sure that, where are we in terms of hours per truck, asset turns versus your internal targets, as we are exiting the month of October? Are we finally hitting the internal targets at Denton and Chillicothe, without disclosing the target? But are we finally hitting the internal targets?

We've achieved many of our targets every month of this year. So I'm not sure exactly what you're talking about. I think you've had a chance to tour those facilities. And certainly as the supplier bottleneck, if you will, of the summer has cleared up, they're performing well. And of course our teams in all of our factories were lighter. They're very dedicated. And the good news is, every truck we deliver is the highest quality. So I think we're doing well.

Tim Denoyer of Wolfe Trahan.

If I could ask a question about Europe in a little bit of a different context. Obviously it's tough to know how bad things might get near term. But as you look at the second half of the year, and given the wide range in your guidance, are you expecting any pre-buy to start ahead of the 2014 switch to Euro 6 standards?

A good question. I think in terms of the guidance, of course I think that's pretty normal guidance, still being a couple months away from actually being in the year. I think if we go back through the last 10 to 20 years, I think probably that same range is pretty typical. So I think that's normal. In terms of pre-buy, there might be some in the second half.

And what would you be expecting in terms of 2013? Obviously that's a long ways away. But with the addition of EGR, certainly it seems like a good precedent to that would be the pre-buy that we saw in North America, although it's obviously a much different economy.

That is something that a lot of us discuss. In some ways, the European economic model tends to smooth out the, let's call it, pre-buy. There may be incentives by country to adopt technology faster. We certainly have seen that over the last 10 years. And it's not by every country. It's certainly usually by selected countries. And as a result, there's not this great pre-buy swell. It tends to be more modulated. And I would say that probably that's what we're going to see again. So it's not pushed into 1 or 2 quarters. It's more over the course of 4 quarters, which is a year. So looking back in history, it's not so dramatic as you see in North America, which is oftentimes more of a cliff.

And are you seeing any increase in those country-specific incentives? I know Germany has some pretty significant toll road incentives for driving newer trucks. I think Denmark was talking about it. Have you heard anything more on that front recently?

I think there are some country initiatives to come up with some incentives. But the incentives that we've seen so far have been pretty modest and few and far between. Probably more will happen in the coming months and years.

And then just one last one, if you don't mind. Getting back to North America in terms of the near-term order trends, it seems like your guidance is more like 5% to maybe 15%, 20% growth next year for retail sales for Class 8. I've certainly heard a lot of expectations, more in the 20%-plus kind of range. Can you give us a sense of how October orders are trending?

Seem to be reasonable. When you're looking out for the guidance, 12%, 15%, 18%, 20%, it's all pretty fluid because there's lots of moving parts on that. So I think right now orders are pretty good.

Patrick Nolan of Deutsche Bank.

Most of my questions have been answered so I've just got 2 quick follow-ups. Just on the finance business, can you tell us what the charge-offs were in the quarter?

They were very comparable to the provision number. Just slightly different but very comparable to the provision number.

Why don't we get back to you on that with a number. Oh, we have it.

They were $9.9 million for the quarter.

So charge-offs seem to be coming down. That's pretty consistent with your previous comments. So going into next year, are you pretty happy with where your allowance is? Or should we be thinking about provisions tracking along with charge-offs next year?

I think it will depend a little bit on the portfolio and how it grows. And so the provision will typically track the portfolio size and the trends in portfolio quality. So those 2 things will drive our provisions and our reserving approach.

And you gave the revenue for the parts business. Can you also give us the margin as well?

The margin was $227 million for parts in the third quarter.

And Mark, I just wanted to follow-up on your comments about the suppliers, basically you think things are pretty much back to normal in the fourth quarter?

I think they've improved.

Do you think most of these constraints are going to be worked through as we get into Q1 for next year?

That's certainly our plan.

Brian Rayle of Northcoast Research.

If I look at your market share goals in North America, Europe and Brazil, you said 18% roughly was parts and service here in the quarter. If you hit those market share goals, does that get to a 20%, 22% of revenue number as you vertically integrate, or even higher than that? Just your thoughts on where that position is.

I don't think we've actually shared any market share goals. Our goal, as you know, is to provide the best quality product to our customers and our dealers. And the good news is, as we do that the share seems to improve. So that's probably a broader discussion but I'm not sure we've actually detailed that out for, let's call it, the industry in general.

Right, but if you have the 20% target for Europe and North America. And if you take that and then layer over the fact that you're becoming obviously more vertically integrated in North America, your market share goals there, your 18% in the current quarter, the math comes out to be low 20%. For parts and service. Percentage of revenue that will be driven by parts and services, not those actual market share goals.

There's no 18% share of parts and services.

Yes, there's no share. There's maybe a little bit of confusion here.

It was an increased number.

Yes, it's an increase. And in terms of the shares for Brazil or Europe, those are medium terms, so those are looked at in years, not quarters.

Yes, and I'm not trying to get a quarterly number. What I'm trying to get at is, if you hit your, even, midterm goals on market share for the actual truck sales, what percentage of revenue do you think will be driven by parts and service, might be a more direct way?

Let's take that one offline. It's a good thing but just a much broader discussion and something that we don't really delve into that way.

David Leiker of Robert W. Baird.

This is Joe on the line for David actually. Most of my questions have been answered. Just more maybe a strategic or long-term one. I think Daimler was out in the news recently, or Freightliner, about their Detroit brand and maybe increasing their own vertical integration. I know you're probably in innings 3 or 4 with complete engine strategy here in North America. But is that something you would maybe consider in the next 5 years to pick another piece of the powertrain and maybe vertically integrate?

We pretty much have our engines PACCAR branded. And looking out at other components -- that would be gear boxes and axles and other smaller components -- we have got very good supplier partners who appreciate the high quality customer we are. And we'll just have to see how that unfolds.

Do you happen to have your, let's say, axle, gear box, and transmission suppliers under the 75% that have long-term agreements with you?

Yes, we do, good question. That would be Z-F and Eaton and Dana, other good companies out there.

Ben Elias of Sterne, Agee.

I have a question about your outlook for Europe. You're talking about expectations of European sales of about 225,000 to 250,000 for the next year. And just wanted to understand what you're thinking in terms of present inventory levels. Is there still some inventory in the channel? Is that pretty lean or is production going to really match what you look at in terms of industry sales?

Yes, the inventory is very lean. It's at a 3 to 4-year low. So the dealers are in great shape. So, as we look at, whatever happens in 2012, I think those numbers will be pretty much represented by production levels.

So you're not going to have to take any restructuring actions or any structural adjustments with footprint, or anything of that sort. You're pretty much well matched, is what you're saying?

Ben, this is the PACCAR call. we don't even think about that. We're in great shape. I'm not sure what you're driving at here.

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

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

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