帕卡 (PCAR) 2011 Q4 法說會逐字稿

Good morning and welcome to PACCAR's fourth quarter 2011 earnings conference call. All lines will be on 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 fourth quarter of 2011. PACCAR's fourth quarter sales and Financial Services revenue were $4.85 billion, compared to $3 billion in the fourth quarter a year ago, a 58% increase. Quarterly net income increased to $328 million, a 92% increase versus the $170 million earned a year ago. I am pleased to report that this was the best quarterly profit since the first quarter of 2007, five years ago. Earnings per share were $0.91 in the fourth quarter, nearly double the $0.46 earned in the fourth quarter of 2010. PACCAR's 2011 yearly net income of $1.04 billion was the fourth highest profit in Company history, and marked the Company's seventy-third consecutive year of earning a net profit. Quite a record.

I'm very proud of our 23,400 employees who have delivered industry-leading products and services to our customers worldwide. Increased truck deliveries, higher aftermarket sales and 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 business and enabling them to replace their aging fleets. In the US and Canada, Peterbilt and Kenworth achieved a record Class 8 market share of 28.1%. Kenworth Mexicana achieved a record Class 8 market share of 45% in Mexico. Europe's 2011 industry registrations were up 33% compared to 2010, and DAF achieved a record 15.5% share in the above 15-tonne market.

You all read the newspapers -- or do it electronically, and you can see that economic uncertainties in recent months in the euro zone have resulted in lower industry truck orders. As a result, DAF has reduced build rates by a total of 20%, similar to many, in fact, most of its competitors since last November. The good news is that freight tonne miles in Germany, which is the largest market in Europe, is the highest in five years, which we hope will translate into increased truck orders as the year progresses.

PACCAR delivered 41,000 trucks during the fourth quarter, 69% more than the same period last year. Market pricing has improved and coupled with increased plant utilization has generated higher quarterly truck gross margins of 9.3% in the fourth quarter, compared to 6.7% a year ago. PACCAR does expect to deliver slightly fewer trucks in the first quarter compared to the fourth quarter, due to the lower production rates at DAF.

US and Canadian industry retail truck sales were 197,000 units last year, in line with our estimates. Wwe are estimating that they will improve to a range of 210,000 to 240,000 units this year, assuming ongoing replacement of the aging truck fleet and some economic growth. In Europe, the greater than 15-tonne market was 244,000 units in 2011. It's anticipated the European industry truck sales this year will be in the range of 210,000 to 240,000 units. While we welcome improved markets in the US and Canada, it's still a far cry from the 360,000 units which were the record about five years ago.

The Company generated over $1.5 billion in cash from operations in 2011, and we're very proud to say that we returned over $800 million to stockholders in dividends and share repurchases. Capital additions totaled $538 million.(Sic-see press release) PACCAR plans to continue to make significant investments in its business this year. Capital spending is estimated to be $450 million to $550 million, and research and development will be in the $275 million to $325 million range.

More good news. PACCAR's SG&A [percent] of 2.6% was a quarterly record, reflecting excellent productivity and cost controls throughout the Company. I thank all our wonderful employees for their hard work. PACCAR's increasing its investments to expand its geographical footprint and build on its technology and productivity leadership. I think many of you saw the press release of the ground breaking for the construction of the new DAF assembly facility in Ponta Grossa Brazil. We have begun production of the factory and look forward to building trucks in Brazil in the middle of 2013. PACCAR did deliver a record number of Kenworth and DAF trucks in 2011 in the Andean region of South America, where we've been present for 40 to 50 years.

Switching continents, following the establishment of the PACCAR Technical center in Pune, India, DAF participated in the Delhi Auto Expo. India's largest commercial vehicle show, that was about three weeks ago. Many of you have visited the European and North American truck shows, I would just tell you that if you go to the show in Delhi, over 1.8 million visitors attend that show over a two-week period. In fact, they limit attendance to 100,000 per day.

China continues to be the largest truck market in the world. However, industry heavy truck sales in China last year were down about 13% due to lower government incentives. PACCAR did expand its Shanghai purchasing office last year and increased the level of component purchases from Chinese suppliers. Finally, PACCAR established a new sales office in Moscow, Russia last year, and in December we opened a new Parts Distribution Center in Moscow. These actions are facilitating DAF's continued growth in the expanding Russian and CIS truck market, as well as Eastern Europe.

PACCAR Financial Services revenues were $266 million in the fourth quarter, compared to $244 million a year ago. PACCAR Financial's fourth quarter pretax income improved to $67 million, compared to $50 million in the fourth quarter of 2010. This was the highest quarterly pretax income since the fourth quarter of 2007, and was achieved due to better finance margins and portfolio growth. Past dues were at a low level of 1.5%. So, in conclusion, I'm pleased to say that PACCAR is well-positioned to deliver the highest quality products and services to our customers as we grow in traditional and new markets. Thank you and I look forward to your questions.

(Operator Instructions). Andrew Obin from Bank of America.

Just a question in terms of how we should be thinking about operating leverage at PACCAR going forward. Just looking at this quarter, I would have expected that we got more bang for the buck, given the improvement in Denton, in Chillicothe, but operating leverage was similar to the third quarter. So is that the new run rate for operating leverage at PACCAR or are there some period costs that are going to go away going to next year? Thank you.

I think the leverage is very good at our facilities. Obviously, we pride ourselves on being the most productive manufacturer in our industry and so I'd say going forward, I don't know what you mean by that, but maybe this year, probably be in the same range.

Well, my only question is that historically coming out of the bottom of the cycle, even adjusting, and I understand that there was a mix adjustment, there was a lot of stuff going on, operating leverage at PACCAR was sort of at high teens, low 20s. And this is not to say that the results you have are bad--

No they're excellent, as a matter of fact.

Well that's what I thought you were going to say. But having said that, in the past you sort of -- there was more oomph so to say coming out of the cycle. And this time around is just-- you have steadier earnings pickup.

Yes. Well I'm not sure that the industry's coming out of the cycle as talked about. We're essentially at a market now of 200,000 units, and if you go back five or six years, you'll see markets 250, 280, 300, 340, 360. Those are not quite double but 50%, 60%, 70% higher and those are -- so it continues to be a great market, we enjoy it. But it's certainly not to the heyday that it was five, six, seven years ago.

And just a short question, are there any period costs associated with the startup of the Brasilian plant at this point?

Not significant, no.

Thank you very much, Mark.

You bet. Thank you.

Andy Kaplowitz from Barclays Capital.

Mark, your guidance for truck sales in the US and Canada is right smack in the middle, it's at replacement demand. When you talk to your customers, is there any evidence that they are going to start expanding their fleets? What I'm trying to figure out is if there's really any upside here given that the last few months have been a little stronger than some people would have expected in the US.

Yes, good question. Well we were just with a large group, sort of a cross-industry mix, if you will, last week and I'd just share a few thoughts. First of all, the customers that are operating today have survived a number of severe recessions over the last 10, 12 years, so they're very good operators. They know their business. They're flexible. They're adaptable. So our customers now are making good profitability. A number of them that are involved in the oil and gas boom are doing very well. And what's interesting, we find a number of customers that typically have not been in that business are I'd say gravitating to that or at least allocating a portion of their resources to explore being in that business.

You're now seeing a little bit of improvement in home remodeling, which has been pretty dormant for the last few years and you can track that through some of the big box retailers that focus on home remodeling. That can be good for the trucking business. The technology side, the engine side, we've got EPA-13 coming up in about 11 months. So we expect that the engines that we will provide because of things like common rail will generate an improved fuel economy of a couple percent. I think that will get people interested in upgrading their fleets.

And then finally, the age of the park is still six, seven, eight years old and depending on which statistic you look at, but it's certainly one of the oldest in the last 20, 30 years. So customers are doing well. Some are doing very well. Certain segments that have been quiet in terms of hauling are starting to improve. Products are coming out in the marketplace that will generate better fuel economy, and whether it's more aerodynamics or better engines, and you still got old fleets. So I think the customers are feeling better than they did a few years ago.

Thanks, Mark, that's good color. And then maybe just a follow up on Andrew's question around really the mix over the next year in 2012 between the US and Europe, Europe is obviously coming down a little bit and the US is improving. And we look at the margins of those two regions, how does that affect 2012 margins in general? Europe may be a little higher margin, or am I mistaken in that?

Well typically, I think when you look at our industry as markets go down, I'm talking about less trucks are ordered, margins go down because OEMs are scrambling for the business. So as you look at Europe and you see the press as much as we do, Europe is a complicated, multi-country coalition. You hear in the press today that unemployment is-- just hit a 10.4% which is the highest in a number of years, whereas Germany unemployment is the lowest in over 10 years. So there's a whole lot of things going on. But I think as a market is lower in Europe, that's going to have probably the effect of having some lower margins as market in the US, Canada improves, maybe margins will slightly improve. But I think overall it will be about the same as we saw last year.

Okay, that's helpful. Thank you, Mark.

You bet. Thank you.

Ann Duignan from JPMorgan.

Just to step back, talk about your own vertically integrated engine, you're still selling 79%, 76% of your trucks are going out with Cummins engines. Can you just talk a little bit about how the introduction of your own engine is going, have there been any warranty issues, just some-- and then some perspective on where we might be by this time next year?

Well we're selling about 25%, sometimes 30%, depending on the month of our own engine, that's in North America. Of course, in Europe it's a much higher percent of our own engines there. It's going well. We're now little past a year of in production and we're having customers that are ordering their second tranche of engines because of the good fuel economy and reliability and quietness. I think it's been a good startup and we continue to invest in the factory and putting in more machining capability, and I think it'd be great to have you come down later in this year, maybe in the fall, to sort of see the progress that's being made. I'll be down there in two days and I think it's been very, very good. So all in all, excellent strategic move for PACCAR and Cummins continues to be an excellent partner with us around the world.

Okay, thank you. And then as a follow up, just in Europe-- I mean in the US I appreciate that PACCAR both Kenworth and Peterbilt are pretty strong in the oil and gas sectors. In Europe, the share gain by DAF is that more because the geographies that DAF is leveraged to are stronger or are there specific segments where DAF is particularly valued?

That is one of the best questions you've asked, Ann.

Finally after 10 years, thank you. (Laughter)

DAF is the tractor leader in Europe, so that is the on-highway segment. And it's been a wonderful 15 years since we acquired DAF and I mean they're just part of the family. So really what happened is we grew the Company and we've got wonderful dealers, DAF dealers throughout the continent. The initial focus was to sell tractors on-highway. Those are the people that you would see more typically. And so they've grown that very strongly and have 19% share of the tractor market throughout all of Europe and now -- so that's been really the driver for the overall share growth.

Now of course we've always had great product but we're focusing additionally on the vocational segment. Now, some of the vocational segment is good, some of it's a little bit slower. But that's a big focus, particularly on our, what we call our CF models. And so I see some real exciting opportunities as the years progress because we'll have a very strong base on the tractor side and continue to strengthen our vocational side, and then we also have call it the urban vehicle, the LF, which is growing and we're market share leaders, particularly in the UK and a few other countries, but that's got a lot of runway ahead of it. So I think DAF's done a great job of just picking the segments, designing the product, giving the support, getting leadership and then building on that into the next segment. Excellent question.

Thank you. And I presume you'll offer the complete DAF range in Brasil?

Yes, we do. And we're hoping to invite everybody there and give us about a year or so to get everything going, but we'll have the complete range from the LF, the CF and the XF.

Okay. I'll get back in line. Thank you.

All right, thanks a lot.

Yes.

Jerry Revich from Goldman Sachs.

Mark, can you talk about your business in Europe, you've picked up market share over the course of 2011, and I'm wondering if you can touch on whether you expect a tailwind to your sales numbers versus the overall industry because you're exiting the year at a higher market share rate? And I'm wondering if you could share with us how many dealer locations your partners have added over the past 12 months in the region?

Well, we have -- DAF has about 1,000 dealer locations throughout all of Europe, which is working very, very well. And I think you kind of touch on an interesting point and that is one of the real strengths of our brand is the strength of the independent dealer network, 99% of our dealers are independent. And I think that has been an area that probably doesn't get enough press and that is these dealers are really focused on working in their home territories. They live there, they work there, their families work there, and I think that's been somewhat of a contributor to the growth of DAF over the years.

In terms of the tailwind coming from 2011, we don't really forecast market share. We continue to grow and produce the best products and that has generated increased share as our customers benefit from our products and services. So we look to steady, steady growth. But some years are better than others, but we've been very fortunate and have grown pretty steadily over the last 15 years.

And Mark, can you comment how far out your backlog extends in the European business at this point versus where it was maybe a quarter ago?

Versus a quarter ago? Well, I think it's comparable. Obviously, we've had to adjust the build rates to maintain the -- let's call it the weeks of visibility for the production side and that's kind of how we manage it.

And on your Parts business, obviously we're hitting a transition point for the overall market, can you talk about what kind of order rates and demand you're seeing in Europe on the Parts side? Is it similar to what we're seeing on the new truck demand?

The Parts business is very steady, if that's what you're kind of asking. Parts -- once again, although the European truck park, the overall market is not as old as the US and Canada, it is aging somewhat and we have many new innovative programs, whether it's all makes branding, just more technology involved to make it easier to order parts, we continue to expand our production capability within our Parts Distribution Centers. So Parts business is pretty steady. And there's good freight still going on, as I mentioned, the mount statistics in Germany.

So customers-- as we say, if you don't read the paper, you don't read your electronic mail, business is pretty good for many of our customers. Yes, there's sub-southern Europe is more challenging but a lot of our customers are doing well. They're just cautious about ordering right now because there are some macro economic and political issues that frankly I don't think any of us know how that's going to get resolved. So customers that are driving and hauling freight every day are saying love the product, would like to order more, I'm going to order some just because if something unusual happens I want to be in good shape at their own independent company. So yes Parts are good business.

Okay. And lastly, can we talk about the margin structure for '12 versus '11 and the level of operating leverage we should be looking for? Obviously you're going to get some nice productivity gains out of your freshly added US workforce, but on the flip side, with lower production rates in Europe, do you still expect to deliver similar level of gross margin leverage that you did this year or in '11?

I think you summed it up very accurately, there's some slight upside potential in North America but that's countered or muted by what's going on in Europe. So I think it's going to be comparable, maybe a little bit down this year compared to last year, just we'll have to see how Europe shakes out.

Thank you very much.

Thank you. Good questions.

Henry Kirn from UBS.

On the mix in revenues, the fourth quarter revenues were a lot stronger than we expected, was there anything in the geographic or product mix that influenced the quarter or did pricing step up more severely than maybe I expected in the quarter?

I think across the board we had good orders, good productivity coming out of our factories. There was some element of improved pricing. I think we touched on that in an earlier question in North America. It was just a very good quarter all the way around. Parts were good, finance was good. I think everything contributed to a very good quarter.

And then as we go into '12 for Europe, not to kill the topic, but is it possible to get a little more granularity around expectations by region within Europe? And then maybe the cadence of demand as we go in 2012 as we sit here now.

Well I think of course we're in Europe in a big way. We're in every single country and it's a complicated subject in terms of what's going to happen for the market. That's why we gave a range of 210,000 to 240,000 which is down from the 244,000 a year ago. But I mean, you see the news every day, every week, every month, there's a slightly different or modified approach to dealing with some of the more troubled countries.

I think in terms of our specific industry, there's a lot of freight out there. There's a lot of people who have once again comparable to North America who have survived the last 10 years are in good position. They've got a good, solid operations. There's very few cancellations, so people are just cautious about what's going to be happening. But they're ordering trucks, they like the trucks. They would like to order more. We've got the big -- couple big truck shows going on this year in Europe, will be I think exciting to see how those progress. But there's just the over-hanging points about the general macro economic and political structure, how that's going to shake out. But you talk with the customers, they're loving our trucks. They would like to buy more and I think once things clear up they will buy more.

That sounds good, congratulations on a good quarter.

Thank you very much, we appreciate it.

Andy Casey from Wells Fargo.

A few questions, the first is kind of a detailed one on the quarter and then the others are kind of looking forward. On Q4, can you give us the revenue and gross profit split between truck and parts, please?

The gross profit-- the margin percentages?

No, no. If you could give -- I know you gave it typically in the 10-Q and will in the 10-K, I'm just wondering what the revenue contribution and gross profit contribution, if you could give it just for parts, that would be very helpful.

We can. We don't have it right on hand, can we take that offline?

You bet.

Okay, good question.

Thank you. And then near term, within that slight decrease that you discussed for Q1 volumes and appreciating the relative share gain that you've had against a strengthening NAFTA market, could you help us understand PACCAR's latitude to increase production, specifically what I'm looking at is given the average monthly production in Q4 appears to be about 3% below the average monthly production that you achieved in 2006, and I know there's been a change --

2006?

I'm going back to the peak year.

Have fun.

Yes, I'm wondering can you maintain your current share if NAFTA volume goes back to that 2006 level over the next two years?

Now that is an excellent question. And I think that's an important point, that PACCAR is -- has been for 106, now 107 years focused on being the best quality, productivity, innovation technology, that is our focus. And if we had had this conversation 25 years ago, our market share would have been let's call it 10% to 12% instead of 28%. What I think has happened, gradually over time, is that the benefits of excellent productivity and services in terms of the products and services that we offer, more and more customers are saying, there really is an advantage to purchasing Peterbilt, DAF, PACCAR Parts, PACCAR Lease, PACCAR Financial, whatever it is there are some advantages in terms of helping me as a customer perform better.

So as the market goes up, our goal is to continue to provide those outstanding services and sort of the share takes care of itself. As I say, this is a record share. It's not something that we've said over years and years of conference calls that this is our goal that we want to get. It's happened because our customer said we love your products. So if you go back to a 360,000 unit market, which I don't see, maybe you do, we'll produce as much as we can but the more important criteria is always at the highest quality.

Okay. Okay, thank you. And then lastly, this is a bit of a longer term question, it's kind of been out there in discussions in investor circles. Could you kind of weigh in on your view as to whether the EU could potentially have a US-style pre buy in front of the Euro 6? I mean typically the region doesn't really react that way.

Yes, no that's a good question, obviously something that we spend a bunch of time reviewing and I think as you've indicated, typically they don't have that much of a pre buy. I would say that sometimes there is vocation-specific pre buys. Well a couple things are going on. First of all, and I think this will be an advantage for, certainly for PACCAR, is that you're now getting to a point in 2013 and sort of after that where the engine technology and the emission standards will be very closely aligned and I think that'll be good for almost all manufacturers and certainly for us, rather than working to an EPA standard and to a euro standard. So that'll be good.

Some countries in Europe offer a, let's call it environmental incentive to try to persuade customers to purchase earlier because the engine will be more environmentally friendly. Some countries just don't do that. A lot of times the new environmental regulations come with a cost, and we've talked about that over the last year or two, and so that sometimes stimulates a pre buy. Typically in North America, it's more of a laissez-faire capitalistic approach. There's no incentive, so there is a pre buy because people say I don't think I want to pay $8,000, $10,000, $12,000.

Euro 6 is going to have an increase of -- yes, you've seen the press, probably EUR10,000 to EUR15,000 and so that might -- it might have some people saying I'll do a bit of a pre buy. But right now, very few countries -- I think Switzerland, but very few countries have weighed in saying here's an incentive to get a Euro 6 early. So I probably won't expect too much of one in Europe. And by the way, it's January 1, 2014 is the new date for the emission change in Europe. So you're still two years away.

Sure. Okay, thank you very much.

Yes, thank you.

Joel Tiss from Buckingham Research.

I want to ask a really bad question because all the good questions aren't really getting answered.

(Laughter) Joel, we're counting on you.

All right. Well at least I've got to be consistent. Can you give us with the geographic mix of the other segment is, a little more color on that?

Other, as in Australia and countries around the world, is that what you're asking?

Yes, and even if you want to do sort of fuzz it up so we don't really get any information, do like Asia, Latin America, rest of the world, or whatever you can do.

Sure.

It's primarily would be the Mexico, Australia and the Andean region of South America which would be countries like Colombia, Ecuador and so forth.

So would Latin America be more than half of it?

No, I don't think it'd be more than half of it but it'd be a third of it, maybe.

Okay.

Yes, yes. So and we as I mentioned, so that includes Mexico and Australia where we've been there for 50 years, a long time. We are seeing some good growth in the Andean region, particularly in Colombia, where we have about 50% market share. That's going very, very well. We've added a Distribution Center in Santiago, Chile, so that market is growing and typically those products are -- a lot of them are made in our Mexican factory. And then out of Australia you might sell some -- well, we sell some to New Zealand, we sell some to say Papua New Guinea. We don't really-- so those would be the primary markets in other.

Okay, and then what about the goal for three to five years, where do you think your global mix, and now you can include the US and Europe?

Well I think the biggest investment going on right now is obviously in Brasil and we've indicated openly that we want to initially get to 10% share. And if you've got a market of 125,000 units for Brasil, that's 12,500 trucks right there and we'd like to grow it farther. But it's early days for us. We're starting to put our dealer network in position. We're literally beginning the preliminary construction of the factories, so that will take time but that will be a good size market.

Then there's sort of the large market of China, which we are continuing to add people to and we're selling engines and we're selling trucks primarily into the vocational natural resource segment. That's still the biggest market in the world with this year probably about 800,000 units, which is pretty large. It's lower than 1.1 million but it's still an excellent market. I think the challenge there, and kind of what's interesting is how the commercial truck industry will respond to a market that's down 10% to 15%. Will there be consolidation? The government owns all the truck makers. Is it going to be a natural consolidation or will it be government-directed? There's still no profit being generated in the commercial vehicle manufacturing segment, so it's -- if you pick the wrong partner and the government decides that partner should be consolidated, you might have picked the wrong one. So it will be interesting to see what happens over the next three to five years in China.

And last one. How much do you expect to spend on your global expansioning initiatives in 2012, roughly?

Yes probably, probably less than $50 million, and a big chunk of that'll be building a factory in Brasil.

Right, okay. Thank you very much.

Yes, thank you.

Steve Volkmann from Jefferies & Company.

Good morning, Steve.

Good morning, Mark. Hope all is well.

Seem to be going pretty well, thank you.

Good, good. Most are asked and answered so let me just a couple of details. We had talked in some previous quarters about some issues with your supply chain kind of struggling to keep up, can you just update us on that?

Sure, sure, that's a good question, Steve. I would say that most of the suppliers have responded in a positive fashion. They've seen -- I'm talking particularly in North America right now, but they've seen pretty steady orders and demand from us and other OEMs. In fact, obviously increasing, so they've been able to feel a little more confident about hiring people back, maybe taking on a second shift, investing in some capacity, whatever their particular need is and just feeling a little bit better. And as they go into '12 with the let's call it the US economy, or GDP growing at let's call it 2% plus, even the car business is now starting to bounce back a little bit, I think suppliers are positive and so I think the challenges of probably last summer and early fall where many suppliers were just still not convinced that this market was going to continue, they've now probably mostly come to the realization that market looks to be pretty good.

Okay. So in other words, they're kind of catching up and delivering on time and on schedule?

That is correct.

Excellent. So second question is maybe a little longer. I know you've seen one or two cycles under your belt and --

In the last five years.

Exactly. And seems like you have some pretty positive outlook on sort of the fundamentals here, but predictably some investors are starting to question whether 2012 or '13 could be the peak of the current cycle and I just wonder if you might have a view on the longevity potential here?

Well, I think these cycles tend to run at about sort of five year intervals. I think there was an earlier question about some leverage and how we do it. I think to generate over $1 billion in net income, our fourth best year in a market that is about half of the record levels is really a remarkable result. I think we've got definitely some ways to run. There's a lot of segments of the economy that are still at pretty low levels. We talked about housing is at, what, 50-year lows. That's a big driver for so many industries and a lot of those industries are dependent on trucks. Cars production, which is another big driver for a lot of industries, you're talking rubber, electronics, steel, aluminum, glass, et cetera, they hit a high of, what, $17 million and then dropped down to about $10 million and now they're thinking about $13 million, so they're let's call it three quarters of the way back to record levels.

So I think if some of these things, there's a little more confidence and we get some positive pro-business government outlook, that this -- the whole economy in North America could be pretty good for a number of years. But it's a cyclical business, not every top of the cycle will be a record. I know it's nice to have that in the economist world but unfortunately in the real world it's just not that way. But replacement demand, which we have not seen for five years, we're certainly hoping to get to it this year, which call it 225,000 units. But when you get the economy operating positively on all cylinders, it will be very exciting for the truck industry and we're ready for it. Our factories are the most efficient and productive they've ever been. Our dealers are the strongest. We've got more new products. We're in more segments than ever before, so we're looking forward to it.

Sounds good. And I guess if that were to happen, in the past you've gotten very, very close to about a 15% gross margin, is there any reason not to think that could happen again?

I think we would -- I mean we're basically at 13% right now and the market's half what it was, so absolutely.

Excellent. Thanks so much.

Thanks. Appreciate it, Steve.

Jamie Cook from Credit Suisse.

Good morning, Jamie.

Hi. Good morning and congratulations on a nice quarter.

Thank you. And we appreciate your headline, thank you very much, it made our day.

Thank you. Two quick questions. One, longer term, Mark, can you just elaborate on your strategy to build out the Distribution Network in Brasil with regards to your DAF dealers and the potential investment required? And then just a shorter term question, just to reconfirm, so basically in response to Jerry's question you're saying incremental margins and gross margins could be flat to down for the full year relative to 2011? I just want to make sure I heard you correctly.

Yes, I'll take the second one first, that is correct depending on what's going on in Europe, Jamie.

Okay, all right, and then just-- sorry, second longer term question.

Okay the one, yes on the Brasil Distribution, that's an exciting process, kind of springboarding off an earlier answer. One of the real advantages that we bring and is sort of reiterated by many of our dealers is that with an independent dealer network there's a lot more profit potential for an entrepreneur to be a dealer of ours versus our competitors. And I think you can see that not just in our industry but just any industry. So we have obviously had the ground-breaking, you've got the press release, we're investing the money, we've bought the land, and for the last year or so have been working very avidly on getting the Distribution framework in place. We now have the framework and we're getting excellent response and that is --there are every state from Amazonia down to the south of Brasil has trucks.

We want to cover every state from the early days of production, which is mid-2013. We've laid out the criteria in terms of what we're looking for. And to have a dealership, it's a $5 million type of investment because you need a number of acres of land. You need a facility. You've got to hire the people. But in exchange for that you've got a good, wide geographic territory that you will control. We bring in what we consider some great products and services, Distribution Centers, Financing, the Parts backup, and we're getting a great response from some competitors' dealers who are finding they have very limited opportunity to generate profit from industrial dealers who are used to equipment sales, from agricultural dealers who obviously are used to tractors, trailers and construction and ag equipment. So it's a wide range and even some automotive dealers who may be in the heavier range of the automotive sector.

What's interesting, and you probably appreciate this, Jamie, I know you've traveled a lot, is that a number of these dealers have come -- potential dealers have come to North America and come to Europe and talked to our existing dealers and saying what's really going on and they've come to our factories to see the quality and the innovation we put in and the response has been very, very positive. And they then go back to Brasil and sort of spread the word that, wow, I talked with a Kenworth, a Peterbilt, a DAF dealer, yes, there's an investment required, but the profitability over the medium and long term is excellent. So it's exciting.

Okay, great. Thank you. I'll get back.

Thank you.

Adam Uhlman from Cleveland Research.

Good morning, Adam.

Hi, good morning. Congrats on the successful year.

Thank you very much, we appreciate it.

Just a couple of cleanup questions here. I guess first, in Europe, could you speak to what dealer inventory levels look like and what the Company's own truck inventory levels look like today?

Sure. In terms of our own inventory, we basically don't have any inventory. We build to demand, so that is not -- so there's nothing really much to talk about there. Dealer inventory is still in very good shape and we've adjusted our build rates, our production rates, as you know, but the dealers are moving the inventory through their pipeline in a very normal process. The customers have got very good access to credit. There's still a lot of freight being hauled. So the people that are ordering trucks want those trucks and are putting them into service in a very normal fashion.

And do you believe your competitors' dealer inventory levels are also in good condition?

I don't really know. I drive by many of my competitors and sometimes they seem to have a lot of inventory but I don't think that's a very scientific approach. But we focus on what our dealers are doing.

Okay. And then what were the past dues for the quarter, and then also was there any impact from currency to sales or earnings?

Okay. On the past dues, we were at 1.5% and currency, let me turn that over to Michael.

Yes, the currency impacts were pretty small. There was $8 million for the quarter on revenues and about $500,000 for our pretax income.

Great, thank you very much.

Thank you, good questions.

Seth Weber from RBC Capital Markets.

Mark, just going back to your last -- the answer to the last question, the credit availability in Europe, is that an industry -- is it available across the industry or is PACCAR just becoming more aggressive with their own portfolio?

Well, first of all, I think I would say that we probably have the best portfolio of anybody in the industry, so aggressive is not typically a term that I would apply to our portfolio. In fact, I'd say very conservative and that's why we've generated very low past dues. And so I think the credit is pretty much available. When we go to shows and industry, whether we're selling people our trucks or they're buying a competitor's, credit is out there, it's available, yes.

Okay. And then just kind of going back to Europe, when you tempered your outlook for Europe for next year, I mean can you just talk about what you saw through the cadence through the fourth quarter and maybe what you've seen here in January and kind of when you decided to make a change to your outlook?

Well, I think we adjusted our production rate in November, so that-- we were seeing that going into October because it takes a while to adjust the production rates. And I think we've seen that gradual slowing of orders through the end of the year. Obviously, the end of the year particularly with all the conflicting news coming out about the economic political activities in Europe, it's very -- there's a lot going on. And now that we're essentially through January, I think we're -- I think we're seeing that more stabilized, but at a lower level and that's why we've made this adjustment to our production rate. As [Scandia] has, I understand that people like Mercedes and others they were shut down for close to a month which we haven't done that approach, but it's a whole industry just trying to work through what the ongoing demand. And so in terms of the range of 210,000 to 240,000, that's why we start out the year with a broader range because there's just so much going on. And we'll have to see how it shakes out.

Okay. Thanks very much for the color.

Thank you. Appreciate it.

Brian Rayle from Northcoast Research.

Good morning, Brian.

Good morning.

How things going for you?

Not too bad. Congratulations on the great quarter.

Thank you very much, appreciate that.

Most of my questions have been answered.

Okay. That's fine.

On the Financing side, great quarter in terms of profitability, was there anything that we should think about from loans issued say, two, three, four years ago in terms of tightening of standards or is it just truly the better profitability of your customers?

Well, I think primarily it's the better profitability of our customers, their cash flow has improved, it's strong. And so they're able to make their truck payments and we've continued to refine our credit underwriting from -- continually, just like we do in our factories. There's always room to improve. We continually refine our credit underwriting standards and so we're pleased with our performance portfolio position and where it will progress as we go forward.

Great.

I think I'd just add on to that, and I think Ron summed it up very well, we've also continued to invest and strive to be a leader on the technology side of the finance so that we are able to analyze the credit worthiness of our customers, give that to them in a very timely fashion, allow them to access their own accounts electronically, make the payments, look at the scheduling over the next one, two, three years, how that affects their particular business. So you're actually bringing a valuable add-on benefit.

It's not just about who has a rate but it's who has a service that allows the customers -- I mean they could be hauling wheat, they could be hauling electronics, they're all different cycles. Who has a program such as PACCAR Financial or PacLease in a slightly different way that works with the customer's needs. So I think our Information Technology group, I want to give them a plug right now, PACCAR's number one Information Technology Company in the country, according to Information Week Magazine. I think that's been a real benefit throughout our Company.

Yes, absolutely. Have you seen any difference between the sort of purchaser versus the lease customer, or have they both trended up at the same rate?

I think they both are doing well. I mean I think, again, the whole freight environment, there's plenty of freight. The rates are good and so we've seen all of our customers have better cash flow performance in their businesses as we came out of the recession.

Okay, great. Thank you for the time.

Thank you. Good questions.

Patrick Nolan from Deutsche Bank.

Thanks for all the color on the truck business. I just had a couple of quick follow ups on the Financial Services business.

Sure.

For the full year this year, can you tell us either-- you can either do it for full year or for the fourth quarter what your provisioning versus charge-offs were?

For the most part, our charge-offs are probably comparable to our level of provision. We've seen some provision benefits as our past dues have come out but our portfolio's growing as well. So all those things sort of work to offset each other.

So when you look at it on a full year basis this year there's no reason to think there's any anomaly as far as low provisioning as you reduced your allowance, that wouldn't reoccur next year?

No, no I don't think so at all.

And just one other thing I noticed, I noticed the Financial Services assets stepped up pretty substantially from Q3 to Q4, even more so than you saw your revenue increase in the truck side of the business, was there a big tick up in your share of the sales that were running through PACCAR Finance?

Yes, for the year we ended the year at 31% financed market share compared to 28% last year, so a good quarter, a lot of customers in-servicing units, lease units in the fourth quarter because of the tax benefits that are available to those customers. So we had the benefits in our retail lease portfolio and so it was a good quarter for the Finance Company.

I think another point, Patrick on that is you've been covering the market for a while, you sort of got the ebb and flow and cyclicality of the business the PACCAR Financial and PacLease, we're there every day for the customer. And a few years ago when we had the calls, some of the focus from the analysts were whose departed the industry. And there were some fairly big names, some names that only have one or two letters in their names. They departed the industry and customers, they don't forget that. So I think some of that share improvement has people saying you know what, PACCAR or maybe it was Mr. Kenworth or Peterbilt or DAF, you were there for me during the tough times, things are improving, I want to continue and even grow that business with you. And that -- once again, I think that's a real strength of PACCAR, it's something we don't probably get enough play on.

Thanks very much, everyone.

Thank you.

Jeff Kauffman from Sterne Agee.

Good morning, this is Sal Vitale on for Jeff. Just a quick question. With financing becoming more available, are you seeing more activity in the owner/operating market?

Well, the owner/operator market is a little bit of a misnomer nowadays and maybe this will be the last quarter that we really talk about it. There are still some entrepreneurs, some companies that will have a handful of trucks but that's probably 10% of the total market and typically they've aligned themselves with either an end customer or a major freight company because there's just a lot of benefit, whether it's cheaper fuel, insurance, healthcare, the availability of freight to haul. So I think we continue to supply everybody that wants our products but more and more it's let's call it the small, medium and large trucking companies.

Okay. Thank you, that's helpful. Then just a follow-up question on your pricing comment earlier. I think you said that you're seeing some good pricing in North America in the fourth quarter, is that like low-single digit, mid-single digit, can you provide any additional clarity on that? And then additionally, is that pure price that you're referring to or are there additional components, is it price per truck going up, is it pure or is it just additional componentry? Thank you.

Good question. I think we're seeing some of the pricing going up and some of that's being driven by the continued strong used truck market. We're now rebounded on used trucks to a level that we saw a number of years ago. So as the used truck values go up, more and more truck companies, operators saying, it may be a good time to trade in, a new truck isn't that much more expensive. I mean there's still an increment, but with a new truck I can get better fuel economy, lower operating costs, I don't have to do as much maintenance on it, et cetera, et cetera.

So that tends to push up the actual price of the new truck. I don't think the componentry -- we've already kind of worked the componentry in, particularly the after treatment and new emissions. I mean, that's -- we've talked about that for a long time, so let's move off of that. Now it's just people saying hey, I'd like to get a new truck because there are benefits to it, so I think it's -- I don't know what you mean by pure, but the margins we're getting are because people are willing to a pay a little higher price for a new truck.

Okay. Thank you.

Thank you.

Rob Wertheimer from Vertical Research Partners.

I had two quick questions. One was on just the improved pricing that you just -- actually on two topics you just touched on, price and mix. On pricing, is it better realization on past increases, is it mix between the larger fleets and the medium fleets, or is it a new price increase? And can you mention the last time you took a new actually list increase?

We typically have a list increase twice a year. Whether all of that list increase generates or translates into more dollars depends on the market. But we're always working with our major suppliers who some of them you carry who seem to like to increase their prices. So we increase our pricing. The more vehicles you buy, it's kind of like anything, you buy more, you're going to be looking for some better price. And that's very true of the industries in which we compete every day. So typically if you're buying a couple hundred, pricing will be one element. If you're buying five trucks, the pricing is something else. But what we want to make sure is that every customer gets the best product in the industry and delivers them the benefits they need.

Okay. I guess just to be clear, then, you probably did see some improved price realization on past increases in 4Q and would probably presumably roll on another list price increase in 1Q.

Yes, that is correct.

Okay, perfect. And then just more broadly on industry mix, I'm curious, and I understand quite well the owner/operator just being sort of a marginal part of the fleet at this point. There's still is large and medium, or medium and medium large fleet, have you seen any shift where the more medium size people are starting to come in, especially in the quoting and backlog activity?

Yes, I don't know if we've seen more. I think it's been pretty consistent over the last year and we do track as everybody else tracks of what's the size of the customers. But you can also break it down by segment. We mentioned earlier the oil and gas boom, and you're seeing that in a lot of different areas of North America, whether it's Alberta or North Dakota or Texas or Pennsylvania, I mean there's-- it's sort of been a bit of a resurgence going on which has been great for a lot of our customers. And some of those are small customers, some of those are larger customers.

But I think that our -- the people want the product, they see the advantage of the product. And there's just a little more confidence in the general population now as the general economy is improving that they're willing to pay a little bit more because they feel that they can charge their end customers a little bit more. So it's sort of a pass through along the logistics chain.

Great. That's helpful. Thanks very much.

Thank you.

Tim Denoyer from Wolfe Research.

Quick question on the -- I wanted to follow up on the MX market share question. In the US and Canada, I think you had said something like was it 25% to 30%, I--

Yes, that is correct.

Okay I've seen some data that looks more like 21% for the year for North America, or you're just--

Well that's what we've delivered but we've got obviously lots of engines we're building for customers so, yes.

Okay and did you specify a target for 2012?

No, no, we're continuing to invest and we look forward to that growing over time.

Okay. And then a different question on your comments in the press release on sourcing more components from Asia. Can you give us any sense of maybe what percentage of your material spend is coming from Asia at this point and how that's been changing and what types of components?

Well, that's a great question. We have increased our purchases but of course we've also increased-- and from Asia, we also increased our purchases from other parts of the country or other parts of the world, as the general markets have improved over the last few years. So I think in dollar terms, we're buying more from Asia. In percent terms, it probably hasn't changed all that much, but certainly in dollar terms it has.

Okay. And then one last one, on the natural gas, the oil and gas segment in general. Can you give us a rough sense of what percentage of your US and Canada deliveries were to that segment of the market this year and what that has been historically?

Yes. It's just a few percent of our total production. I mean, let's call it 1% to 2%.

Okay. 1% to 2%, even in 2011, which was a very good year?

Yes. Yes, I'd say sort of the 1% range, and some months it might actually be lower than that. You're talking about for an LNG, CNG type of vehicle, right?

Okay I was going to ask for that as well, I was actually talking about two customers like--

Well I don't think I have that number off the top of my head, but that's gone up because they're great companies, Haliburton, Schlumberger, different groups, they are definitely increasing their purchase. I don't have the exact number. On a LNG, CNG, it's probably-- that's still less than 1%.

That actually have the natural gas engines?

That is correct. I mean it's increased, but it's still a very small number.

Yes and are those the -- is that the Cummins Westport engine, is that the 9-liter essentially or is there another engine that you use--

It's that one-- Westport has carved out a good niche in that marketplace.

Okay but is there a bigger engine, is it just the 9-liter that you offer?

Well, there's a 9-liter-- I'll have to get back to you on that one.

Okay. All right. Thanks very much for the time.

Thank you, appreciate it.

Michael Regan from Levin Capital.

Quick question. You guys are one of the few companies that truly understand return of capital to shareholders either in the form of dividends or timely repurchases of shares, has had a huge impact on your total return to shareholders and obviously --

We appreciate that, Michael. Thank you very much.

Well, I think the question that comes out of that, Mark, is that despite a stepped up dividend and being more aggressive with the share repurchase, net cash on the balance sheet ended at its highest level perhaps ever in PACCAR's history and even looking at it as a percent of the total market cap of the Company, the highest in five years, and I'm wondering is there a message in building so much net cash on the balance sheet in terms of concern about where the economy is? Or why, despite again, nice moves on the dividend, I actually thought it could have been much higher given your cash and the buyback with the shares trading where they are, why not even more aggressive? Why is cash continuing to build by another 22% this year?

Well, we've got a lot of opportunities but first of all let me take it on the positive side with the special dividend, with increased in the quarterly dividend, with the repurchases. We believe and many, many shareholders are giving us very positive feedback to keep doing what we're doing. It is a cyclical business. We're not trying to send any message but we do understand the business very, very well.

And you've just seen in Europe within the a matter of three months a 20% decline. There aren't a whole lot of industries that see moves that quickly to that magnitude. We've got some great opportunities. We're going to be investing several hundred million or more down in Brasil. We're still investigating opportunities in Asia. Got a lot of new products, like many others, we continue to work on. And we want to make sure that we typically have about a 45% to 55% payout rate to our shareholders of our net income and that seems to be well-received by the vast majority of our shareholders. So we keep working it. But I appreciate your points.

Thank you.

Thank you.

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

I'd 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.