帕卡 (PCAR) 2012 Q1 法說會逐字稿

Good morning and welcome to PACCAR's first-quarter 2012 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 excellent quarterly revenues and net income for the first quarter of 2012. PACCAR's first-quarter sales and Financial Services revenues were $4.8 billion, compared to $3.3 billion in the first quarter of 2011, a 45% increase. Quarterly net income increased to $327 million, a 69% increase versus the $193 million earned a year ago. I am very proud of our 23,200 employees who have delivered industry-leading products and services to our customers worldwide.

Increased truck deliveries in North America, higher aftermarket sales and a growing Financial Services business contributed to PACCAR's increased profits. Our customers in North America are benefiting from increased freight tonnage and higher freight rates, which are generating good profitability and enabling them to replace their aging fleets. The vocational truck market in the US and Canada remains subdued, due to the low levels of new housing starts.

One of the highlights and we are very pleased with the positive response to the launch of the new Kenworth T680 and the Peterbilt Model 579. These exciting new trucks are the result of a four-year, $400 million program that designed and developed a new family of 2.1 meter wide cabs.

These new trucks expand our product range and complement our existing vehicles. For the first time in our history, Kenworth and Peterbilt have a 5-cab family. PACCAR's range of 3 cab sizes is similar in format to BMW's 3, 5, and 7 series of luxury automobiles. I think our trucks will haul a little bit more than those wonderful BMW cars though.

These investments and new products will contribute to the Company's long-term growth. PACCAR delivered 39,800 trucks during the first quarter, and our truck deliveries were about 45% higher than the same period last year. Market pricing has improved since the first quarter of last year and coupled with increased plant utilization and improving leverage, generated higher quarterly truck gross margins in 9.2% compared to 7.8% a year ago.

PACCAR does expect to deliver slightly fewer trucks, 2% to 3%, in the second quarter compared to the first quarter.

Economic uncertainties in the Eurozone have resulted in lower industry truck orders compared to last year. Most European truck manufacturers have reduced build rates and scheduled shutdown days to reflect the lower market.

The good news is that freight on Germany's motorways, which is one of the most closely watched freight statistics is comparable to last year, indicating that freight traffic throughout the Eurozone is at good levels and our customers are generating profitable results.

The US and Canadian industry retail sales are estimated to improve this year to a range of 210,000 to 240,000 units, up from 197,000 last year. This is being driven by ongoing replacement of the aging truck fleet and some economic growth. In Europe the greater than 16-ton truck market is anticipated to be in the range of 210,000 to 230,000 units.

PACCAR's business initiatives worldwide are progressing well. Capital spending is estimated to be $450 million to $550 million with research and development at $275 million to $300 million.

Construction of the new DAF assembly factory in Ponta Grossa, Brasil, is on schedule and we plan to be building DAF trucks in Brazil by the middle of 2013. Kenworth and DAF deliveries in the Andean region of South America, that is the region not included in the [Merca Suerte] more than doubled in the first quarter of this year compared to the same quarter last year. In addition, ongoing investment in our engine family, for our [EPA-13 and Euro 6], new product development and expanding our global purchasing efforts are all progressing on schedule.

PACCAR is enhancing its network of 15 parts distribution centers, a new $40 million, 280,000 square foot distribution center, will be constructed in Eindhoven in the Netherlands. The distribution centers in Madrid, Spain, and Pennsylvania are increasing their capacity with the addition of a combined 100,000 square feet of warehouse space.

Turning to PACCAR Financial. PACCAR Financial Services revenues were $261 million in the first quarter compared to $241 million last year. PACCAR Financial's first-quarter pretax income jumped to $71 million compared to $50 million earned in the first quarter last year. This was the highest level of quarterly pretax income since the fourth quarter of 2007, almost five years ago.

The excellent results benefited from lower borrowing costs, growth in portfolio balances and good used truck prices. The credit loss provisions for the first quarter were $7.5 million and past dues were 1.3% -- both at very low levels.

PACCAR is well-positioned to deliver the highest quality products and services to our customers through all phases of the business cycle. We are starting the year in strong fashion and are very pleased with the enthusiastic response by our customers, dealers, and the press on the launch of the new Kenworth and Peterbilt trucks.

Thank you. I'd be pleased to answer your questions.

Operator, we will take questions.

(Operator Instructions). Andy Kaplowitz from Barclays.

Good morning. It is actually [Marc Bushallow] on for Andy today.

Marc, okay. Good to have you here.

Thanks a lot. Just a few quick questions. Just firstly, could you provide an update on your margin guidance for the year. I believe on the last call you sent something along the lines of flat to potentially down growth in incremental margin. And just as on top of that just the cadence that you expect in terms of margins for the year 2Q through 4Q.

I think the margins will be relatively stable is what we are seeing in the markets really around the world. I guess that is probably the forecast for the year.

And then just in terms of 2Q margin in terms of the production cuts at Chillicothe. Is there any expectation for a sequential decline in margin in 2Q versus 1Q, and then heading out to 4Q kind of an uptick there? Any type of guidance around that?

Let me kind of break that into two parts. One, in terms of Chillicothe where we -- the good news in the last year we have increased the employment at Chillicothe, we have almost doubled it and we have got a lot of wonderful employees there. We've had to make some adjustments.

What probably wasn't reported was the increase in hiring and facilities in Mexico and Australia. So looking at the bigger picture, we obviously hope that we can increase production at all facilities. But sometimes that is not possible.

Okay. That's helpful, Mark, and then just to follow up, in terms of Europe I believe a European competitor recently was talking about European build rates remaining weak and, obviously, you guys lowering the lower or the upper end of your forecast seems to correspond to that.

But just in terms of aftermarket opportunities, it seems like this competitor was saying that they're holding up relatively well. Are you seeing or capturing that? Are you expecting it to be better expected in the back half of the year in terms of European aftermarket opportunities?

That is an excellent question. Let's talk a little bit about aftermarket. Our parts group and all the aftermarket services are performing well and we continue to introduce a lot of exciting innovative programs, whether it is selling parts and services for our products or for competitive brands. So that is going well. As I mentioned in the prepared statements, we are looking to expand our facilities in Eindhoven and in Madrid. So I think that bodes well for the future as we look to continue to grow.

In terms of the truck side, the market overall when you look at the greater than the 16-ton over the last 10 years, this year will be the third or fourth lowest -- I guess I'd put it that way. It's going to be a reasonable market. We have made a minor adjustment to the upper end of our forecast range.

The good news is DAF just had a very successful truck show in Amsterdam at the [Rye], introduced their Euro 6 and some of their new aerodynamic products. Market share is holding up well for DAF. So, the Eurozone is certainly in the paper for a lot of other things besides the truck market and as that gets resolved, it may take time, I'm sure the truck market will improve.

Our customers are in good shape. We meet with them on a regular basis. A lot of them came to the show in Amsterdam, there's freight to haul.

But you know, like any good business people, they want to make sure what's going to happen in the next 12 to 24 months. So that needs to get resolved first. So, it's going to be a reasonable year. It's one of the lower years in the last 10 years, but DAF is doing very well in Europe.

Okay. Great. Thanks very much for the color, Mark.

Jamie Cook from Credit Suisse.

Good morning. A couple of questions. First, Mark, just a clarification on your commentary about the commentary about the margins. You said they think -- you think they will be relatively stable. Can you talk about I guess stable relative to last year, stable relative to the first quarter.

And then can you talk about --? I mean you had originally guided to margins being flat to down last quarter. So what surprised you on the upside?

Then my last question, how do you think the market reacts in Europe ahead of Euro 6, do you think there is a potential for any prebuy and then I'll get back in queue.

Sure. A couple of good questions. Euro 6 takes effect January 1, 2014 so we are still 19 months away. A number of our competitors and DAF, now, has shown their engines that will meet the Euro 6. Different countries are evaluating is there or is there not a benefit to having some sort of incentive program.

I think it is still early days. You are talking over a year and a half. So I think we'll start to see if there is going to be any sort of prebuy, that won't really happen until next year if it happens then.

In terms of margins, Michael?

Compared to last year, our truck margins are up on a dollar basis -- up 85% on 58% higher truck sales. During the quarter we were -- had slightly higher sales which resulted in better operating leverage which helped us achieve a little bit higher margin percentage than what we had originally anticipated.

Yes, but we still haven't seen improvement really on the incremental margins. Do you expect incremental margins to be where we were in the first quarter and consistent with last year?

Well, the incremental margins -- you know, we had 85% increase in truck margin on a 58% increase in truck sales, which is pretty good, and we also anticipate that during the course of the year with truck sales being down slightly, that there will be some softness in margins but it will be minor.

Echoing Michael's side, it'd be pretty stable to the first quarter and I think -- you guys and we have been around for a long time. On the US market this is still one of the lower markets and of course, in Europe, it is the third lowest in the last 10 years. So if you get back to the upper half in terms of market size, that tends to drive some margin improvement as people are more eager to purchase trucks and pricing isn't as competitive.

So unlike a few -- well, I see similar to a few other industries, it is being impacted by still an uneven economic recovery.

The good news is that we have got strong market share. We are introducing a lot of new products and I think Brasil is an exciting venture for PACCAR that has some opportunities for improved margins, if that seems to be the location or the region of the world where most of our competitors achieve their highest margins and, certainly, PACCAR is at a premium end of the scale, that could bode well. We will actually have to get our factory up and running and sell trucks there.

Okay. Thanks. I'll get back in queue.

Jerry Revich from Goldman Sachs.

Good morning. I am wondering if you can talk about the first-quarter gross profit performance on a bridge basis the way you typically do in your Qs? And I guess specifically can you touch on the impact of pricing net of material cost?

I think, again, what you saw was primarily the benefit of higher production levels when you look at compared to the first quarter. More trucks, some operating leverage, and pricing costs are not a big factor at this point. Pretty stable and getting some additional price realization as Mark mentioned in his comments at the outset of the call.

Yes. I think that is a good one also on the suppliers. Six, nine months ago that was a topic we were talking about and suppliers are in good position. I know you have heard from a few of our suppliers and we will hear from more them over the next week or two.

Their factories are in good position. They are getting good returns. The pipelines are in good shape.

You know, one item that certainly has been in the news is Nylon 12 and the fire in the factory in Europe. I just would address that our suppliers, particularly [Ethan and Parker] and a few others, are working that very hard. We seem to be in good shape. The whole industry obviously is discussing it and that includes the automotive groups. A good thing and one of the things that we love about this industry is that when we do have these industry opportunities, everybody rallies around and they come up with some creative solutions.

So I think as Ron mentioned, I think good pricing from suppliers, good steady deliveries to our factories and people love our products, and some of you were at the Mid-America Truck Show and you could hear by the roar of the crowd when we unveiled the new Kenworth computable. There's -- we are just taking these products to the next level in terms of comfort, reliability, durability, low cost of ownership. So a lot of good things progressing.

Mark, how should we think about pricing versus material cost over the balance of the year? I think at the truck show we spoke about better built-in material margin on the new Kenworth and Peterbilt that are dynamic products. Are we going to see a greater tailwind on net pricing of material cost in the back half of the year?

I would say that it's certainly one of the benefits of these new products is not only better performance in profitable opportunity for our customers, but some reduction in cost. But I think have any meaningful impact it will be next year and we are just having a very limited released startup in terms of production.

On the R&D outlook, it looks like you trimmed it at the high-end. Is that a function of project timing or projects coming in below budget?

I think a little bit of both. We got a lot of projects as I tried to share with you and we have got a very dedicated team working and some of them have been able to achieve what they anticipate will be lower cost on some of these projects. But we have got a lot going on and it is going to be exciting next couple of years.

Okay, and lastly can you comment on how we should think about pace of stock buyback over the course of the year? Just refresh us on any capital deployments opportunities you have outside of Brasil. You had spoken in the past about potential (multiple speakers) opportunities . Are those

Yes. Well on the stock buybacks, as you are aware, I think we put in our press release we have authorization from the Board and we periodically go into the marketplace as it makes sense to repurchase share. So that is an open authorization and we'll just have to see how the stock is doing. That is really how we are looking at it.

In terms of other utilizations, we are -- one of the great things about PACCAR we have got a wonderful balance sheet and we are able to take advantage of opportunities as they come up. The big project right now would be building a factory in Brazil, which is going very well.

Thank you.

Ann Duignan from JPMorgan.

I am curious to get your color on what is going on in the US markets. We saw orders slow symmetrically over the last couple of months versus, to your point, freight tonnage is strong, the fleet [build] is the oldest it has ever been. Do you think it is just customers took pause a little bit over the last couple of months just because of higher diesel prices? Do you think there was some pre-buying at the end of last year? I'd like to get your color. You are closer to those customers than any of us.

Sure. I think the term you used is certainly the popular term right now. The pause. Now when I pause my television then I can't -- I lose the signal. I think what we are seeing here is not so much pre-buy. I think people have been ordering a good amount.

There's still certain segments of our general economy as I mentioned in my comments sort of the construction sigh and I focused in on the housing starts as one. But the commercial activity is picking up in some regions but still pretty low in a lot of regions. So that's certainly a percent of our business and we tend to do very, very well. So that market is very low.

Right now, if we get back to 225,000 for US and Canada that is replacement level or what we anticipate as replacement level. And as we talk with the customers and you probably saw a lot of them at Mid-America. They are pleased where their business is but they are not expanding their business. There's not that many, say, acquisitions of one truck company buying another. A lot of that has been worked through the system, particularly during the recession in the last few years.

So I think US economy is still at pretty low levels with GDP growth. I think people are just -- they are buying what they need. They certainly recognize the very tangible benefits of having a new truck versus a truck that is five, six, seven, eight years old. That can be measured in thousands of dollars per year. So I think they are just -- they are cautious.

All trucks are running. You don't go to a dealership or a customer and see trucks standing anymore. That is a thing of the past.

So I think people are saying -- hey, when I really get a good feel and I think that the economy is really strong and people are buying refrigerators and more computers and fixing up their houses, then you are going to see some good growth. And at 225,000 it's replacement value, but it'd be nice to see the 250,000 and 275,000. That could be a while.

As one of the major capital spend going forward the construction sector, I mean Sandy Cutler yesterday was talking about quite bullishly about broader base construction activity and the acceleration in a number of sectors in construction. Is that the next leg up that we need in European?

Yes, it is. And I think, obviously, Eaton is a wonderful partner with us and they have their hand directly in the construction business with a number of the products that they sell and go into buildings. So they are -- I think what they said, they are seeing some of that on the commercial side which is certainly a driver. But we also have the residential side. It is still at -- well it is literally at 50-year low levels. So that needs a kick a bit.

Because the commercial side, that is one step. Then, you can get the residential side, another step. I think you'll see our customers are in excellent shape, and you see their finance results, the ones that are publicly traded. They are making good money. They love our products. They are excited about the new products as they come onstream. And right now we are just we are at that level. We have been able to grow our share because people like the products. So we are expanding elsewhere, like in Brazil.

Okay. I'll get back in line then.

David Leiker from Robert W. Baird.

Good morning, all. First, a numbers question. Can you break out for us the parts revenue and the profits?

Well, we don't have parts profits. We can tell you what parts margin is.

Sure.

Parts margin was $237.9 million compared to $219.2 million. Up in line with the volume growth.

Great. And then, Mark, on a bigger picture following up on what Ann was talking about. In an environment where we have got 2% GDP growth plus or minus, say, for several years, it seems like the market, overall truck market stays relatively flat over that time period. Is there anything you would think that would cause us to go one way or the other in that type of environment?

Well, it is an excellent macro question. I mean, 2% is okay growth for the general economy. I think we may get to a point and it may not be a truck-driven solution, it may be more in the political arena in terms of people's demand for housing in what let's call the more the broader financial institutions are able to do in terms of selling home inventory. And once we get that home inventory sold how that will then ripple into new home construction.

So I don't think -- trucking will be the beneficiary of that. I am not sure it will actually be the driver of that. So it could be, we could still have 2% GDP growth. But if there are other, let's call it macro political or macro financial stimuli we could really benefit from that. But as I say, our customers are really in good shape as I mentioned. We have good financial performance from our PACCAR Financial Group. The PacLease Group performing very well, very low past dues and as you talk with the customers, I know you do, they are reasonably bullish.

Then on a different topic if we look at your quarterly revenue here, you have got two quarters in a row at essentially $4.5 billion. If you go back in 2006, you have peaked at $4 billion on a quarterly rate, with your margins today, they are at the gross margin or at the EBIT are about 200 basis points lower. What needs to happen to be able to close that gap here? And do you think you could -- that can happen?

I think it goes back to the discussion we had earlier about the markets. The fact that in Europe, the market currently this year is expected to be about the third lowest in the last 10 in North America, US and Canada. It is 4th or 5th highest out of 10. So the markets just aren't as strong as we have seen historically. We have seen some of those peak margin levels. So at stronger market, stronger market conditions, I think there's upside to the margins.

And I would add one point to, I think Ron stated very clearly is that certainly there's been a lot of additional cost and we have talked about this in the past in terms of just meeting the different EPA and European Environmental Regulation. I think the good news is that over time the whole industry, and usually PACCAR is a leader, you work with our suppliers and keep refining the cost of these after treatments systems, meaning reducing their cost. These are big cost segments to absorb certainly for our customers.

And I would say, having been in the industry for 35 years, or the last 10 years has been the biggest series of cost adjustments that we have seen in 35 years. And I think that probably needs to get a little bit more air time. We didn't see it in the 1970s, 1980s, 1990s but certainly from 2000, 2002 on, we have seen it.

So the good news is we continue to work with our great suppliers like Cummins and others reducing that cost. If we can then couple that with a stronger general economy that drives the demand for more trucks as you have seen in your experiences as a stronger market, people are -- they are a little bit more willing to pay more, probably just for about for any item but I'm talking about trucks now. So, reduce the cost of the after treatment, get a stronger market and increase our pricing, and we will be doing very well. We're already doing very well. Had a great quarter.

Yes, I see that. Thank you very much.

Henry Kirn from UBS.

Good morning. Could you talk a little bit about credit conditions in Europe and maybe the opportunity bank stepping back gives to your financial services business?

Yes, I think we continue to not experience credit demand for our customers. They are able to get their trucks financed. PACCAR Financials in Europe has been beneficiary. They have seen their market share grow from 20% to 24% last year. So record share level for them in 2011 and we continue to see strong share performance in the first quarter. So our portfolio is performing very well and we see further potential for growth as truck sales evolve.

I think we have had PACCAR Financials in Europe for 10 years. So this is our 10 -ear anniversary or thereabouts and so we are very pleased with the progress being made there. The dealers, it's just part of their integrated selling approach. The customers are comfortable and you recognize, if you're a customer and you have a 20-year relationship with a bank, it takes a while to shift allegiance to a different credit source.

But they can see the benefit of forking with one supplier, the dealer, who supplies the trucks, the parts, the after service and the finance. So that is very good. Good credit availability in all our markets. That's really good news.

And in North America, can you talk a little bit about the penetration of the engines here and maybe the factors that your customers are looking at today to decide whether to go with your 13 liter engine or [Cummins] 15 liter engine?

Sure. Well, we are very pleased. We've installed 22,000 engines of the PACCAR MX engines. They are doing well. We have got customers that are reporting excellent fuel economy improvement and I just -- so we are very pleased.

The factory continues to increase its production. I think you had an opportunity to visit it and, if you haven't, I highly recommend it.

One macro element that probably hasn't got a lot of press is that when we look at the industry in total, for the first time in North America, 13 liter engines are now selling slightly ahead of 15 liter engines. That is a little bit of a -- not a little bit. It is quite a sea change and there are a couple of reasons.

First of all, there's still good demand for 15 liter and we are very happy to supply 15 liter. Our customers love them.

But the 13 liter brings a lower price -- 300, 400 pounds lower weight. It can deliver a better fuel economy and it's just a very proven engine worldwide. So I think in terms of the timing, I have to take my hat off to our engine design group and production people because literally for the first time, I would say in history, the 13 liter is now selling slightly ahead of the 15 liter. So it is exciting.

Thanks a lot. Congratulations on a good quarter.

Thank you very much.

J.B. Groh, DA Davidson.

Good morning. I had a question sort of on that same 13, 15 liter PACCAR engine line of questioning. I was curious as to of the trucks you are putting out now what sort of what percentage of those are which [drawn] engine, what percent -- what kind of share are you getting there?

Still the 25% to 30% range and it's exactly on schedule; and we are, as I say, as we sell more of them and the customers are gaining the benefits, the word of mouth and the reports are positive and it's good.

Okay. I'm kind of curious as to what your customers are saying about driver shortages and the CSA impact, and improving economy, and competing for labor and how that impacts their truck buying decision.

It is interesting because it typically when housing is down that actually frees up people for the freight truck industry. In this slow period, it appears that a certain number -- I don't have the exact percent of those potential drivers who are working in housing decided, no, I am not going to do it. Not going to maybe spend the time away from from the family. There's probably overlaid on top of that is there some element in terms of the higher qualification standard, which is good for the industry in terms of getting, we already have -- the industry has great, great drivers and putting a formal guideline will continue to strengthen the great industry.

So that hasn't really been an issue in terms of driver shortage for many of our customers, particularly ones who are buying new trucks. They are attractive, they get good fuel economy, they are very comfortable and people that may not have been driving for a few years are very pleasantly surprised when they get into a new vehicle. Because they have really evolved over the last three to five years. So yes, it's healthy.

Okay. Thanks, Mark.

Andy Casey from Wells Fargo Securities.

Good morning. Just a couple of short-term questions. A lot has been asked and answered. On the positive pricing, does that include Europe and Australia?

I'm not sure what your question is.

In your comments, you had talked about a positive pricing environment and, clearly, US is in there. I'm just wondering if that positive pricing environment is something global or if it is driven by the US and not existing in Europe and Australia?

Well, Australia is good. Mexico is good. South America is good. I think Europe is probably relatively flat, stable. Does that answer it?

Yes. Short term, are you seeing any demand dampening from some of the reported slumping activity in portions of the US energy sector? Mainly, the hydraulic fracking.

Oh. That is a good question. Let me take it from a slightly different approach. The dealers that we have had in let's call it the shale oil areas, they have seen demand that has been unprecedented, whether it is in portions of Canada or Pennsylvania or the Dakotas. It is pretty amazing. To be a dealer there is to do well.

So, I think in terms of just the fracking itself, I can't really comment on that. I don't think I can really relate that to the trucking demand.

But the general focus on oil and gas has really been strong in terms of driving a lot of the let's call it local or super local regions. There has been a lot of demand for trucks in those regions.

Let me just sort of segue off of that in terms of there has been some discussion about alternative fuels, LNG, CNG, and I think once again the good news is that PACCAR is a leader in offering the complete range of products, including a hybrid. We have got a strong market share over 30%. And it, certainly in the press, may be focused a little bit more on the car side than the truck side. But we have got good customers who liked to buy that product. I think over time, what will be driving that particular industry is the difference between the pricing for diesel and let's call it gas.

What is going to be the differential, obviously, infrastructure in North America in terms of offering LNG, CNG is very, very small compared to diesel outlets. I think we also have to recognize that the LNG or CNG in terms of the number of miles you can drive on 100 gallons of whatever the equivalent fuel you're using is about half what you can get with diesel.

So these are some of the elements that are not typically brought up in the press. But when you are operating a truck company, you are looking at those very, very carefully.

So the good news is PACCAR is a leader and we have got the product. And if that is what you want to buy, we are happy to sell it to you area

Thank you for that, Mark. On that last one, on the alternative fuels, are you recognizing that you have the flexibility to ramp up demand if it manifests itself? Are you currently looking at particularly some of the NATGAS power potential as more of a niche market or is it something that over time maybe five years could approach a meaningful size of the market?

That is a question that's obviously getting debated in the press on let's call it a macro level. Right now it's a niche market. It's less than 1% of industry demand. The people who want it are generally pretty happy with it, and we certainly are happy to build them and deliver them.

Looking out five years, it is really going to be impacted by how fast will the buildout of the supply infrastructure be. That is important. The cost is almost, it is almost twice the cost of just buying a normal Class 8 truck.

So you have got to have an operating environment that you can recover that cost. And for many, many customers they just don't see where it's viable. So five years out I think maybe we should be looking 10 years out. And if you look at the history and the automobile of hybrids and people like Toyota are probably leaders on hybrids, that is still a very, very small percent of the vehicles. In reading an interesting statistic in one of the magazines that the number of people who buy a second hybrid is roughly 25%. What that means is 75% of people that buy a hybrid don't buy another one. Because it is about 50% more expensive to buy it. So anyway, we are ready, willing, and able and have a full range of product.

Joel Tiss from Buckingham Research.

Do you think the 2013 trucks coming out will be pricing and mix improvement will be enough to that we will notice it on your margins, in your incremental margins?

You are talking about North America.

Yes. And when are those products going to hit? Probably late summer, right? Early fall?

Yes, that's right. That's right. Later in the year. I think there are some benefits to the new engine that are the new EPA 13 that could have some minor positive benefit. But we probably won't see it this year. Probably more next year.

Any signs that the owner operators are coming back at all?

(laughter).

There are whispers of it at the end of the show, but I don't know.

Were you at the show?

Yes.

Well -- I -- we talk about owner operators. We love all of our customers. I think it has to be taken in a broader light for any industry in that these owner operators, they are small-business people. They are very dedicated. They are wonderful customers.

But I think to continue to grow they typically aligned themselves with a larger company so they get whether it is the healthcare benefits. They get regular freight. They know the routing. They might have some sort of maintenance programs with larger fleets.

So, I think the concept of the owner operator, it is a wonderful thought, but I think it is moving on to, I would now say it is sort of small, medium, and large businesses. That is the way kind of I look at it.

Okay. Yes. I am just trying to gauge if the negative mixed shift that we have seen has run its course and if we can see enough profitability improvement, even if the US and Western Europe stay depressed over the next two years to continue to see some (multiple speakers) .

Yes. I think the mix has been very positive. We have seen continued growth as -- we sell to the medium, large, and extra large customers. That's great business or great customers. Great partners, and I think it's all good. It's all good and we are in a strong position. And as you saw the new product we're coming out with, there has been great interest from a lot of people and we are just bringing in the let's call it medium-sized cab over product and there has been a lot of interest, particularly for people in inner-city, urban distribution are very interested in that.

So right now we have the rawest lineup of products in our history and I think that positions PACCAR very, very well. We are very excited about it.

Tim Denoyer from Wolfe Trahan.

Good afternoon. Quick question for you on North American markets. If I look at North America overall including Mexico and I guess exports, your market share I think was a record in terms of the data that I have at about almost 32% which was up about 5 percentage points year over year. Obviously that's a very impressive result and I am just wondering if the oil and gas business that you talked about earlier was having a significant impact on that? And Allison Transmission said yesterday afternoon that they are seeing some cuts from oil and gas customers in terms of orders.

So, I'm wondering if you can give us a little bit of a sense of how you expect your market share to develop throughout the year? And when in fact do you expect the oil and gas sector to have from here?

Good question. The oil and gas sector for us is they are very good customers but it has sort of minimal impact on market share for us. We are -- our market share is driven by right now on Highway [polymers]. We sell certainly to the oil and gas and other groups and we love working with him. But in terms of market share it is really very very minimal.

I think the growth has just been -- you know, people like the Kenworth and Peterbilt product and as you followed our Company you recognized that, first, is really build the premium product and premium service, and over time the market share has increased as a result of that. People love the product. It the low cost to operate. There's a lot of pride driving our products around the world.

So in terms of our share probably be in about the same range you are looking at. But that is not the number one driver for us. Number one driver is great premium product and that is what we work on hard every day. Highest quality.

And a follow-up on Brazil. There were some recent announcements of new local content regulations essentially trying to localize more of the supply base down there. Has that had any impact in terms of your plans in terms of building out the facility? I mean, specifically on engines, I believe, you had said that you are planning on exporting from Mississippi. Is that still the case?

Yes. You are correct that Brazil as a country continues to evaluate local content requirements. Once again, the good news is we meet all the requirements. That is certainly one of the first areas that we took a very hard evaluation of. The vast majority of our suppliers have been in Brazil, are in Brazil. We are working with them closely.

In terms of the engine, we will be sourcing essentially the vast majority of the content of the engine in Brazil, and if Mississippi was mentioned one time, maybe that was a thought. But we have suppliers in Brazil and will be sourcing a large percentage of the content in Brazil. We may do some additional machining or things outside of the country, but it is being bought in Brazil.

But you are planning to be vertically integrated on engine production in Brazil?

Well, I mean we are going to be -- we will only offer the PACCAR engine. I think that may be one part of your question. We are buying the major components, the heads, the blocks in Brazil. That's the big element and those are certainly the big cost drivers for an engine.

Yes. Absolutely. Thank you very much.

Rob Wertheimer from Vertical Research.

Good morning. Just one quick question. I know it is kind of basic but I wonder if you could just walk through pricing and how in the timing of when it flows through, my impression is you took a big hit on the components and the engine with the 010 and that you have been slowly recouping that. And I wondered especially this year whether you get the list price increase benefits in 1Q, 2Q, 3Q timeframe and you describe the pricing as being sort of smooth throughout the year. So I just wanted to understand how that flows through.

I think you actually described it pretty well. You absorb these large cost increments and then you work with suppliers and try to keep refining it. The customers who are the -- they are the final judge on what they are going to purchase work through. They see the benefits of buying the new componentry. They are perhaps a little more willing to pay a little bit more because they can see the benefit will come to their bottom line.

In terms of this year, I think suppliers are in good shape. You know, we have got the vast majority of our agreements are multiple year, long-term agreement with our suppliers. So I think it shouldn't really be, I think it should be very smooth in terms of supplier cost increases affecting us; and as a result, I think the pricing will be stable. I think you also have to incorporate what is going to be happening to the general economy and that is more than just trucking.

Your list price increases though. When would that sort of benefit your revenue for the current model year?

Very similar to the rest of the industry. You either have one or two list price increases during the years or the beginning of the year in the middle of the years. It is pretty typical. So that is the timing and you hope that it will have some impact. But that is really all I can offer on that.

That's fine. Then if I can ask you, kind of addressed this, Mark, just a second ago, but the market share look forward throughout the year, the build rate, your share has been phenomenal. The build rates in the first quarter were a little bit strange with one of your large share competitors having sort of a lower build rate.

I just wondered if you could address whether your market share and build is similar to your market share in the order book? In other words whether you would have built more of your backlog down or whether it just -- you know, the build is a true reflection of the share you have gained in the order book as well.

Yes I think our share and I think -- I just want to jump in. We build the highest quality product in the industry. That is what we provide to our customers and we've been very fortunate and we thank our customers for buying them and that is what has driven the share. I think our production, our dealers are in very good shape. Our inventory is in good shape. So when we build it, it gets to our customers and they register it and that is what reflects the shares. It's a pretty straightforward process.

Great. Thanks.

Adam Uhlmann from Cleveland Research.

Good morning. I was wondering if you could give us a little bit more color on what your order trends have been like in the US and in Europe. I am trying to put this [fee on build reduction] in the second quarter of 2% to 3% in perspective so we can understand why the builds are going down.

Sure. You bet.

Our order intake in the first quarter was similar to the fourth quarter of 2011 if that is what your question was.

Yes and we had some adjustments and you are aware of those. In Europe, it's pretty stable where we took the adjustments essentially in the fourth quarter, a little bit in January. In North America the orders have seen some decline on the industry for the industry. We'll have to see and I think and ask a question are we sort of in a pause mode. So we reflect that also as our competitors do.

So we are saying second quarter might be 2% to 3% down and first quarter we got some improvement in other markets. Mexico and Australia and South America is going well. So that is kind of where we are.

Great. Thank you. And then congrats on the success with the Peterbilt awards and (multiple speakers).

Appreciate it. Thank you very much.

I'm wondering, going back to the discussion about vocational if you are able to size what the construction markets could be for or PACCAR, sounds like it's meaningful, just so we can think about the upside opportunities as that market starts to come back.

Yes, why don't we take that off-line because that is a pretty complicated answer?

Okay.

Seth Weber from RBC Capital Markets.

Good morning. Most asked and answered, but appreciate you sticking around. Just to tag along to -- a couple of tagalong questions if I could maybe try and approach that last question a different way. Can you frame how much the vocational business has declined for you from peak to where it is today?

Let's not make something that it is not. I mean we would love to have housebuilding strong again. That would be wonderful because it is timber, it's concrete, it's glass, it's carpets, it's refrigerators. You know, it is a whole host of products that obviously many, many industries are involved with, and the good news, our share has gone up. The Kenworth Peterbilt DAF have done a fantastic job of growing on Highway business. We are into many, many more medium and large customers. So I think that is really the focus. We are selling to customers who are out there. That's pretty basic.

Okay. Maybe just switching over back to the engine side then. Can you give us, I guess, your build rate and I think last quarter you had talked about targeting 130 units, 130 a day. Where we are in the ramp to that number and kind of your capacity utilization?

You bet. We have got plenty of capacity. That is the good news. 130 is not an accurate number but we are increasing it and over the course of the 12 months we are looking to double the engine production and that is kind of -- and we're on schedule.

Okay. Thank you very much.

Patrick Nolan from Deutsche Bank.

Good morning. Most of my questions have been answered. I have just got a couple of quick follow-ups. Just on the parts business you had said the topline was basically in line with the profit growth. So margins are similar as they were last year. Is that what --?

That is correct.

Okay. That's what I thought. And I assume volumes in the quarter were pretty much down slightly in line with the guidance. Correct?

Yes.

When you compare to the fourth quarter?

Yes, compared to the fourth quarter. Yes.

That is correct, down about 2%, 3%.

And Mark, I just wanted to follow up on the earlier question about build versus sales. You clearly have made strong progress multi-US and Canada taking market share. But it did look like the production was a little bit higher, at least with the public data that we have, than the sales rate. Is that just kind of timing of orders just if you can help.

Yes. Very simple, yes. Just timing.

Okay. So going forward build and sales kind of equal to each other. That is how we should think about it?

That is typically the way we look at it. You bet.

Okay. Thanks. Good quarter, everyone.

All right. Thank you. Appreciate it.

Basili Alukos from Morningstar.

Good morning. Seems like my questions --

Okay, have a good one.

But I will come at it from a different perspective. (multiple speakers)

When you thought about building the engine facility and going back to when you started, what did you expect or what were your goals for production rates to be so that the engines would ultimately be accretive to gross margins? At least the way I think about it, because you are at a lower production rate or penetration rate on your engines. You are having that fixed cost or holding down gross margins. So I just tried to get a sense of what --

No. That's a good question but I don't think it is quite reflects what is actually going on. We are right on target. It is accretive. It has been excellent for our customers obviously benefiting for our dealers, because it gets them into the engine powertrain business which is also good on, let's call it the aftermarket support. So no, it gives us additional global volume which is a real benefit when we are talking with suppliers. And it also increases our expertise in engines which, as we look at doing things like Brazil, just enhances our opportunities to deal with customers around the world. So it has been a real win. A real win.

Okay. That helps. Then I just want to follow back, you had said first-time 13 liter engine's selling slightly ahead of 15. Do you think that the pie is shifting as more people are going more towards 13 or is it because rail is becoming more efficient you are seeing those 15 liter engine customers transferring their load to rails? And so the pie is shrinking and as a result --.

I think that is a great theoretical question. I think people enjoy the benefits of the 13 liter. I think we'll just leave it at that.

Great. Appreciate it. Thanks a lot.

Brian Rayle from Northcoast Research.

Good morning. Again, most questions have been answered. Just if we could look into Europe. I mean, I know you have the long-term target for 20% market share. Obviously you -- (multiple speakers) .

And we are at 15.5.

Right, 15.5 was the end of the first quarter?

Yes. It was.

15.5. Okay. Obviously your marketshare targets in North America have been lower and you have blown past those. Is 20 where you really think the ceiling is or is something that is achievable here in the near term and --?

24 Europe?

Yes.

Well, you know, our DAF -- (multiple speakers)

You throw it out as a medium-term goal so (multiple speakers).

Yes, I know, it is the medium-term goal. It continues to be the medium-term goal and it is a wonderful goal. Why don't we talk when we achieve it and then we can take a look at that?

All right. So next quarter?

(laughter) . I like

Operator, we have time for one more question. Thank you.

Mr. Easton, there are no further questions.

Yes. We have time for one more question. Thank you.

(Operator Instructions).

All right, thank you, operator. I think we've -- time is up now.

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

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

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