帕卡 (PCAR) 2012 Q2 法說會逐字稿

Good morning. And welcome to PACCAR's second-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 increased revenues and net income for the second quarter of 2012, compared with the second quarter last year. PACCAR's second-quarter Sales and Financial Services revenue were $4.46 billion, up 13% compared to $3.96 billion in the second quarter of last year. Quarterly net income increased to $297 million, a 24% increase versus the $240 million earned a year ago. Increased truck deliveries in North and South America and a growing Financial Services business contributed to PACCAR's increased profits. For the first half, revenues were a record $9.2 billion, and net income was $624 million. In addition, PACCAR's dividend increased 60% compared to a year ago.

I'm very proud of our 23,000 employees who have delivered industry-leading products and services to our customers worldwide. Our customers in North America are benefiting from increased freight tonnage, improved fleet utilization rates, and lower fuel prices. In Europe, freight transportation on German highways continues at good levels, comparable to last year. European transporters have also benefited from lower fuel prices in recent months. Due to the uncertain global economy, some of our customers are not expanding their fleets at this time and are focused primarily on truck replacement.

PACCAR delivered 37,700 trucks during the second quarter, about 10% higher than the same period last year, but down 5% from the first quarter of 2012. Peterbilt, Kenworth, and DAF grew their market share as customers recognized the benefits of our high-quality and efficient trucks. PACCAR's retail share of the US and Canadian Class 8 truck market was 29.9% for the first half. DAF share of truck registrations in Europe above 16-ton reached 16%.

Kenworth and DAF truck deliveries in the Andean region of South America -- that is the region outside of Mercosur -- increased by about 75% in the first half of this year, compared to the same period last year. Looking forward, PACCAR expects to deliver about 10% fewer trucks in the third quarter, compared to the second quarter, due to the weak economic growth in the United States, coupled with the ongoing uncertainty in the Eurozone.

Looking at the broader market, US and Canadian Class 8 industry retail sales are estimated to improve this year to a range of 210,000 to 230,000 units, up 12% at the midpoint from 197,000 units last year. In Europe, the greater than 16-ton truck market is also anticipated to be in the range of 210,000 to 230,000 units, down slightly from the 241,000 units last year.

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 our new DAF assembly factory in Ponta Grossa, Brazil, is progressing and we plan to be building DAF trucks in Brazil next year. We're also very pleased with the excellent customer response to the launch of the new Kenworth T680 and the Peterbilt Model 579, both very exciting trucks. During the second quarter, Kenworth and Peterbilt began limited production of these exciting new models and will gradually increase their production in the third and fourth quarters.

PACCAR is enhancing its network of 15 parts distribution centers. We're building a new 280,000 square foot distribution center in Eindhoven, the Netherlands, and our distribution centers in Madrid, Spain, and Lancaster, Pennsylvania, are increasing their capacity to meet the demands of our customers and dealers.

PACCAR Financial Services revenue were $266 million in the second quarter, compared to $258 million last year. PACCAR Financial's second-quarter pretax income jumped to a quarterly record $77 million, compared to $57 million earned in the second quarter last year. The excellent results benefited from growth in portfolio balances and a lower provision for credit losses. PACCAR Financial with its strong A-plus credit rating has excellent access to the commercial paper and medium-term note markets. In the second quarter, PACCAR Financial sold over $900 million in two- and three-year notes in the US and Europe. PACCAR also completed the renewal of its $2 billion credit line.

Overall, PACCAR is well positioned to further enhance its competitive position in the global truck market, due to the strength of our dealers worldwide, a robust finance Company, and the highest-quality products in the industry.

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

(Operator Instructions)

JB Groh, DA Davidson.

On your comments about 10% sequential decline, is that your North American US, Canada or is that global or Europe or what?

It's primarily in the US and Canada.

Okay. So Europe -- okay.

Europe is fairly steady.

I notice you didn't really change the outlook on North America and given that the orders have been a little underwhelming, so-to-speak, can you sort of talk about that against that backdrop?

We adjusted the high end of the range.

Okay. You brought that down a little bit. Okay.

Right. And you're right, we probably have been in times where there have been stronger order intake for the industry and I think that's why we're looking at the moderate production decrease.

And then the incremental margins looked pretty strong in the quarter. Can you explain that? Is it new models? Are you just managing things better? Supply chain? Where is it coming from?

Well, I certainly think the team's doing a very good job of managing as they do in every different type of economic market. I think overall we're getting good cooperation with our suppliers, the material side is in good shape. We've introduced some new models, but the models that we have had are in a good place in terms of production efficiency. And customers are interested in purchasing our vehicles and so that has some positive impact on the margins. Overall, I think it's just kind of managing the business as you've indicated in a good, professional manner.

Sort of across the board. Okay. Hey, thanks for your time. I'll let someone else jump in.

Andy Casey, Wells Fargo Securities.

Can you help us understand current -- we all have our own opinions, but when you talk about the current fleet fundamentals being pretty good, trucks are old, yet the truck buyers are slightly ordering below typical replacement demand. What do you think is going on? Is it just hesitation because of look forwards or government policy or something else?

That is a very topical question that has a lot of discussion in many companies around the industry, Andy. A couple of things. One, just to reiterate, I think for a number of years most of the industry would expect that the replacement size is approximately size is approximately 225,000 units a year, give or take, but in that range. So as you've noted, quarters have been below that for a number of years.

The other thing is, we do have an older fleet but when you look into that fleet, what you're going to find is a number of very good customers don't have too many miles on their vehicles. So they may be let's call it chronologically old, but when you look at it, they're not doing 125,000, 150,000 miles a year, so they're still in good shape. And so that's having an impact.

Our customers and many of them are publicly traded, so you can see their results, they're making good profits. They have survived a challenging 10 years with a couple of different recessions in there.

So they're managing their business very well. The trucks are performing well. And I think as we talk with our customers and we're out all the time, they're saying we'll just run these a little bit longer. They're in good shape. Obviously, there's some benefit for parts and service but the trucks are just made well and performing well. So I think it's a -- you see a term in most of the periodicals, the industry's sort of in a pause or it's in a reflective mode, there's lots of different terms out there.

I think people are saying I'm running a fleet, I've got 100, 200, 500, 1,000 trucks, they're good, I'm getting great service from whatever dealer is providing that, I've got good freight rates, fuel's manageable. There is a lot of freight. Let's just run them and see what happens over the next six months.

Okay. And to support the anticipated level of production in Q3 from Q2, which you said it's primarily North America, does anything have to happen in the orders or is that sized to your current order flow?

I think that reflects the order flow versus production levels, yes.

Okay. And then --

Good question. It's an interesting discussion and we're all discussing it.

If I can fit one other in. You've I'm sure noticed that one of your competitors had a pretty sizable engine strategy shift. And I was wondering if you would expect any near-term share gains or any other impact on just general market conditions because of that?

Well, PACCAR our focus is a couple of things. One is providing a return to shareholders. Two, we do that by designing, selling, and servicing the best products in the industry and that's been guiding our Company for 107 years.

So competitors are always evaluating different strategies. I can't really comment on that. I know what we do and hopefully we share that with you and your colleagues and we keep a pretty steady course.

Okay. Thank you very much.

Andrew Kaplowitz, Barclays Capital.

Mark, given the age of the fleet and that the customers are running the fleet for longer, do you think that the aftermarket opportunities that you have, both in the US and in Europe, will just be better over the next six months, year, 18 months, better than even the historic run rate that you've had?

So what you're asking, do we think that there will be -- It probably is a good time to replace my fleet, is that what you're essentially asking?

No, what I'm saying is the parts business could actually have higher growth now because these customers are running the trucks for longer than they have before.

Well, that has a -- I think probably a slight impact, but I would give the aftermarket group some praise in that they're developing a lot of new programs. There's a lot of e-commerce activity ongoing. We're reaching out to many more customers who might not necessarily actually operate our vehicles.

They're also looking at different industries, not necessarily truck related. So they have a pretty comprehensive thorough plan to grow aftermarket services and I'm also including Financial Services in line but a little bit independent of just the truck business.

Okay. That's fair.

Mark, how does -- I know you talked about this before but it does seem like one bright spot in the US is housing starts and they are continuing to improve. How do we factor in the upside from housing and its impact on trucks going forward? Do we need just a better US economy or can we have real upside from housing?

Housing as you've indicated, there is some -- little sunnier climate out there, talking about housing starts, maybe perhaps over 700,000 units this year, and that's a welcome relief for many industries. And I think when you look at the range of industries, whether it's the construction side with wood, concrete, timber, and then the furnishings, that all is brought to the site by truck.

So the average certainly over the last 10, 15, 20 years for housing starts is about 1.2 million. I think when it gets closer to that level, then you'll see some impact. I'm not talking about a lot, but certainly a 2% impact to the vocational markets, whether it's the dump truck or the flatbed or the steel hauler, all great customers of ours and certainly companies that have had a slow patch for a number of years.

So right now it's just starting to improve. Let's see how it progresses over the next couple of years.

Okay. Mark, thank you.

Seth Weber, of RBC.

Margins were better than what we were expecting for the quarter, so nice job there. I'm wondering if you have another 10% sequentially down quarter here in the third quarter, can you give us your view on the sustainability of the margins?

The margins obviously reflect market demand and production capacity and utilization. So I think as you look at lower production levels there will be some impact on the second -- on the third quarter margin. But we'll continue to focus and run our business to optimize our returns.

Okay. If I could ask a housekeeping question. Could you give us the aftermarket, the parts revenue and the margin numbers?

Yes, we can. It's coming up.

(Laughter) I guess maybe in the meantime, Mark, can you talk about --

I've got it here.

Okay.

For the second quarter aftermarket parts revenues were $666 million. And the aftermarket parts margin was 34.3%.

Great. Thank you. Lastly, can you comment, have you seen any change in used truck inventories or used truck pricing?

Used truck pricing continues to be very good, particularly for our vehicles. We're actually seeing a little bit of an uptick on used truck values across the board, so that's good. We're feeling pretty good about that. In Europe, used trucks are kind of holding their own.

Okay. And no issue with inventories at dealers or anything like that?

Dealer inventory is very healthy, very healthy, yes, we're in good shape.

Okay. Thank you very much, guys.

Ann Duignan, JPMorgan.

SG&A was down a little bit sequentially, not that much but it was down a little and we've been hearing through the quarter that you've cut back on things like advertising spending in Europe. Can you talk a little bit about what kind of cost reduction activity might be going on in Europe in anticipation of potentially slower growth? Are you guys considering pulling out of IAA or anything like that or are you comfortable that you've got the right sized organization there already?

I need to get your contacts. (Laughter)

I could tell you exactly which magazines you've pulled out of --

No, Ann, you've been around. Don't read -- don't believe everything you read. You know that.

No, we're in good shape. In fact, I'm going to be at Hanover show. I hope to see you and your colleagues there. Always an excellent show.

No, we're -- we manage our business to reflect whatever the industry is. We've done it for decades, as you know, so we show that the earlier this year the Euro 6 engine that DAF is developing. So no, we're out there, regional shows, at vocational shows, just very normal, very normal. And you enjoyed the mid america show a few months ago here in Louisville.

Yes, but you did pull out of that a few years ago which was --

2008. Let's move forward here.

Yes, exactly. I'm curious also, second question, CNG/LNG related. We understand that at least on the LNG trucks that those are being leased. Can you talk a little bit about why the Financial Services business would want to take on the risk of leasing LNG trucks when there's no history for residual values? Just curious what's going on.

Ann, I have no idea what you're talking about. We sell our trucks.

The natural gas market certainly gets a lot of press from different corners of the business arena. We're very proud that PACCAR is one of the leaders, if not the leader in the natural gas market. It's a market that's only 1% to 2% of the total truck market. So I think we need to put it in context.

The CNG is used actively, particularly in the ports in California. But we offer both. And we're going to be increasing our product offering with a 12-liter next year.

So we're very pleased with where we are. If the market increases and certainly there's plenty of rhetoric in the newspapers and by political speakers, we're ready for it. We embrace it. And we're proud to supply those products to the industry.

Okay. I'll take my LNG specific question offline and follow up with Robin afterwards. Appreciate it. Thank you.

Jerry Revich, Goldman Sachs.

Mark, wondering if you could talk about over what time horizon you expect the business in Brazil to get to Company average returns or now that you're building out the dealer network,? Just give us an update if you would on how you view the path to the buildout and ultimately whether we can expect the same level of lean inventories, et cetera, that we're used to seeing in your other businesses.

Well, first of all, great question and I'm really looking forward to being able to invite many of our wonderful analysts to the factory when we get it up and running, because what you'll see as you've seen at all the factories, whether it's Mississippi or DAF or Sainte-Therese or Chillicothe, it will be exactly the same format and mode of operation. Will be sparkling clean, it will be high technology, it will be lean, it will be motivated workforce and very high-quality products.

In terms of returns, it will take three to five years, obviously it has something to do with the market. As you've indicated, we are beginning the process of appointing dealers and those dealers will be independent dealers. They'll be building their dealerships around the country. We have a very steady program under way, building the factory, so that's on track.

We're getting great cooperation and partnership with many of our suppliers that we work with around the world who are already in Brazil. And I think from the customers, of course, we don't sell any trucks in Brazil at this time but potential customers have been very positive and excited about DAF coming in. They know the reputation of the product from around the world. They've contacted many customers in Europe who they might have a relationship with and they're really looking forward to the great product, great support, and high-quality residuals and low-operating costs.

So it's going to be good. But it takes time to increase the business.

And Mark, you mentioned medium-term share target of about 10% for that market. Wondering if you care to comment on what kind of market share level would the operation be profitable for you, can you lay that out for us?

We tend not to break that out. But as you know, in PACCAR we like every group to be profitable.

Okay. And you saw very good deliveries out of your legacy South American business this quarter as you pointed out. Can you just talk about the order trends and visibility, how far out is your visibility in that part of the business? And is that what's offsetting what we might expect to be bigger production cuts in the US?

Well, Mexico in particular continues to be strong. We have approximately 50% market share. We've been there since the late 1950s, so we have a strong legacy and strong position within the Mexican market and many of the trucks we're selling in South America are manufactured in Mexico.

Colombia has been a particularly strong country, particularly for oil transport, but Chile, Peru, our other countries that are doing reasonably well. And it's not huge numbers but they're steady, they're growing.

We did open up a distribution -- parts distribution center in Santiago over a year ago, I guess, and that's providing some very good aftermarket service. We're appointing some new dealers in the region. They're enthusiastic and making investments in their own businesses.

So it's all coming together in a very orderly, straightforward manner. We're encouraged by it.

Excellent. And on the US side, to get to the production reduction you're talking about for the third quarter, can you just give us a sense, is that for additional holiday shutdowns or the mechanism by which you're cutting production?

Well, we don't usually break that out. We do all of the above as appropriate.

Okay. Thank you.

Henry Kirn of UBS.

Some of the recent checks we've done have indicated that credit may actually be easing for truckers in North America. Could you talk about credit availability in general. And maybe more specifically your appetite to grow PACCAR Financial?

Credit has been very good, very normal for -- certainly for us and for our customers. We've seen some new entrants into the industry. Obviously, a number exited during the recession. Some have come back in, dipped their toe in the market place, but for our customers who are usually very well financed and capitalized, we're seeing very normal, steady business.

In terms of PACCAR Financial, of course it's very much linked with our production side and it's one of our aftermarket services that we are able to offer to our customers and our dealers. So I think the growth is sort of in line with our overall production.

That's helpful. And with the choppy environment, is there any changes -- are there any changes to the way that truckers are specking trucks, maybe if they're higher end or lower end than more specifically 13- versus 15-liter?

That's a great question and probably choppy is an appropriate term on certain aspects of the business. I think the 13-liter versus 15-liter is a multiple chapter book that we are beginning to delve into. You do see on some measurements that the 13-liter is outselling the 15-liter. That tends to have a little bit of to and fro depending on what fuel prices actually are and what our customers perceive them to be in the future. But nevertheless, the 13-liter and the 15-liter both have strong positions to play, at least in the short term.

As you know, in the markets outside of the US and Canada, 13-liter tends to be the largest engine size that you would see in Europe or South America, Asia. And I would think over time that will probably be the way that the North American market will trend.

That's helpful. Thanks a lot.

Joel Tiss, Bank of Montreal.

Congratulations. Can you give us any insight into the age of the fleet in Europe? And I'm just trying to get any sense if we're getting to the point where we could see some pent-up demand and need for a replacement cycle as we move past 2013.

Well, the fleet in Europe is probably one to two years younger than North America. Sort of five, five to six years. And some of the fleets don't travel quite as many miles as their counterparts would in North America. So I don't think there's that pressure for customers to necessarily say I need to replace large segments of their fleets at this time. I think just normal replacement to take advantage of ongoing technology improvements.

As you may know, DAF introduced recently their ATE, advanced technology I'd call it fuel efficiency improvements. So that's causing a number of our good customers to say, wow, that could really be a benefit for me if I turn in some of my trucks.

But overall, I think we were just in Europe a few weeks ago and we traveled from Ireland, the UK, Holland, Belgium, through Germany, all the way to Hungary, and I'd say for the most part customers were reasonable in terms of their outlook. They were feeling that business was pretty good. It wasn't just booming, but it was pretty good.

And dealers, many of our dealers say inventory's in great shape. They're seeing some good aftermarket business. Used trucks were holding their value. So it's just, if you read the paper or read the internet, it causes you to think what's going on.

But when we really talk at the ground level to the people hauling freight, there's business out there. People are buying. Not every industry or certainly not in every market, but it's reasonable.

And then just trying to get at the margins a little bit, can you talk about some end markets, is energy still strong? Is that helping your mix? What's happening with your share in Class 6 and 7, just some of the factors that might also --

The oil and gas, I think it's still good. It might have slowed down a little bit but it's going at a pretty strong rate.

Medium duty is doing okay, particularly in Europe, over 10% share. And in fact, I think a few months it actually bumped 11%. That's probably pretty close to a record or might be a record for us. And we keep working it.

Thank you.

Jamie Cook, Credit Suisse.

A couple questions. One, can you talk about -- one of the suppliers in the market came out with a 2013 forecast, I think calling for build rates of 260 to 280 relative to their forecast of 280 this year. So it's the first truck supplier that I heard talking to a potentially down year. So can you talk about your comments on that or what you would need to see to get that -- I guess to get that bearish?

My second question, can you talk about your strategy to gain market share, given the dislocation in the market with Navistar and whether you or anyone else is -- how sensitive I guess the customers are to price and given the market dynamics?

And then third, what are your assumptions for build rates for Q3 and Q4 relative to Q2 in the US specifically? Thanks.

Sure. Okay. Well, production in Q3 as we said will be down about 10%.

In Q4?

In Q4, we didn't put a number out there yet.

Do you want to?

(Laughter) Not at this time.

Okay.

So that's one item. Two, in terms of market dislocation, as you so kindly indicated, we're not driving to get to a particular share. Over the last 30, 40 years, by building great trucks, our share has steadily increased.

But there's always competitors who have a share target and they'll use typically price to achieve whatever that number is. We don't do that. So share will bounce around. It always has for all the competitors, in all the markets. But our strategy is quite simply we're going to build the best products in the market that give our customers the lowest operating cost, and share will in a sense take care of itself. So that's really all I can make on that point.

In terms of any supplier forecast for 2013, probably a little bit premature to talk about that.

But I mean, you must have -- Mark, you've been in this business --

Forever.

For quite some period of time -- know more than us. So I guess, I was surprised by two things. One, I was struck that you didn't lower your US forecast more and I think the market is viewing a potential down year next year or flat year. Just what you would need to see to get to that level in the market. Where would orders have to try to mean or handicap the probability that you think we could have a flat to down year?

Well I think it really depends on the general economy. And you can start with the elections in November. You could talk about tax policy. You can talk about general confidence of the consumers. We can talk about the overall housing industry which as we talked a little bit earlier in the call has had some uptick, but you know what, I've seen it before and then it can go another way.

So there's a lot of macro elements that are going to influence what our excellent customers finally do. If several of those line up in what I would call a positive pro-business alignment, truck business will be pretty good.

But as you say, I have been doing this and the whole PACCAR team's been doing this for a long, long time. Will it be as good as this year or will it be better? I would say that if we get a little bit more of a pro-business attitude and it impacts several key industries, it could be reasonable next year. If that doesn't happen, it could be comparable to this year, which this year we're saying is going to be slightly better than last year.

It's not at replacement cycle, but certainly eventually you're going to have the impact of trucks that were built in 2005, 2006, 2007, that will need to get replaced. And there are a lot of trucks built in that cycle. That was a very strong, call it irrational exuberance in many industries. So those trucks will eventually have to come into the marketplace, and that will be good for truck builders like us. So all in all, 2013 has got a lot of variables that need to be finalized before we can see how it's going to shake out.

Can I ask one more question, if possible?

Please, ask as many as you want.

Surprised in the quarter that your bad debt expense came down to 1.9% in the quarter, just given everything that's going on in the macro. I would think this would go the other way. Can you just try to -- can you talk about that, please? Thank you. And then I'll get back in queue.

Sure. Tying in with Joel's or Henry's question. Our customers are in good shape. And our dealers are in good shape.

And if you don't read the paper, you don't read the internet and just get out and go to the towns and cities around North America and Europe, these people are saying, is it booming? No. But is it reasonable? Yes.

The customers that we're financing have got good balance sheets, they're making money. They've got great customers that they're taking care of. They've sized their fleets according to the demand from their customers.

So I think it's a good question you're asking. And people tend to sort of say, well, is the world like Greece? No, It's not. There are a lot of great companies out there that we're proud to partner with that are doing very, very well.

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

Steve Volkmann, Jefferies.

Just a couple quick follow-ups. Given the pullback I forgot exactly what words you used, Mark, but the consolidation that we're seeing in orders, can you just let us know if you're seeing anything with respect to price cutting in the market?

I would say in the 35 years I've been in this business, there's always price cutting somewhere in the market so that's not really a big indicator. It depends what competitive strategies our competitors are employing at the time. I think as you see the market go down and we have a cycle every three to five years in a down market, margins are impacted because customers are going to take advantage of the economics at the time.

Is that happening now or is that not the market we're in?

I think there's certainly some of that going on.

Okay. Thanks. And then I'm curious about your 680/579 launch which you mentioned at the outset here. Can you give us a sense of what percent of orders that might be, if it's meaningful and where you might think it would be, say, 12 months from now?

Well, it's right on schedule in terms of our very gradual introduction. These are really very wonderful products and they're a great complement to our existing products. We've installed a lot of new machinery in our factories, which are undergoing their final evaluations and that's all on track and on schedule and looking good.

So it's early days now. Over the next 12 months, we will see a gradual ramp-up. We're getting good orders. People are saying I'd like to order these products when they're available. And a year from now I would be hard-pressed to tell you what exactly the number's going to be, but it will be making a contribution.

Could it be 20% of volume in a year?

It's possible, yes. Sure.

I guess the reason I'm asking is because I'm thinking based on your conversation that you just had and some other things that we've talked about that the margin on that product should be probably better than your corporate average.

I see. That's a good analysis.

And yes, there are some benefits to the product in terms of the margin. I think let's talk about it as the quarters go on. We'll give you a little bit more clarity.

All right. Appreciate that.

And then the tax rate was a little higher than I expected in the quarter. Do we have a forecast for the year?

The forecast for the year will still be in the 32.5% to 33% range. The tax rate for the quarter reflects the mix of US versus foreign income and the higher US rates that we have.

Okay. Thanks. And then just if you don't mind, can you give us just a broad sense of maybe production at the engine facility here in the US? Maybe something in the line of engines per day that we have now and where you think that might exit the year?

Yes. The engine production has increased on a steady pace throughout the year. We're as I indicated, 25% to 30% of our production, so going into Kenworth and Peterbilt trucks, and that seems to be a good pace at this time. I think it will increase over time, but we continue to add machining capabilities and become more and more efficient as we increase the utilization of the factory. So I think it's making a great contribution, not only on the production side and the integration of our powertrain, but we're also seeing some benefits in the aftermarket side.

Okay. But just so I'm clear, would we be expecting higher production levels by year-end than we have right now?

I think reflecting the slower production rates that are in the truck side, probably the engine side will be pretty level.

Understood. Thanks so much.

Tim Denoyer, Wolfe Trahan.

A couple questions on Europe. Can you talk about the order rate in the quarter, maybe just directionally, was it up or down from the first quarter? And specifically if you could comment on pricing in Europe and how that might compare to other markets? And I believe it was Volvo this morning said that France had weakened a little bit in the second quarter and I believe that's a pretty important market for DAF. I was wondering if you could comment on what you're seeing there?

Well, the order rate has been pretty constant through most of the year for us in Europe. France, like every country, is an important market and a little factoid for you is that DAF is either number one or number two in every country with the exception of Germany where we're number three in terms of share. Obviously, each country has a different sized market, but the good thing DAF is in all the markets and it's also grown and is the market leader in central Europe and is growing its business in the Middle East, Africa, and Russia. So that's a nice addendum to our business in Western Europe.

Okay. And one other just question about the potential for prebuy ahead of the Euro 6 standards. Are you seeing any demand for build up in the fourth quarter of 2013?

Not at this time. A number of our competitors introduced one or two models that were Euro 6 ready. They did that earlier this year. But if you're talking to a customer to talk about what are you going to buy two years out, is usually a little bit of a stretch.

Yep. Sure. And then if I could just throw one more in back about the North America construction cycle and replacement there. We typically talk about three or four years as the early end of the truck load replacement cycle. Can you give us a sense of what that is for customers that are hauling -- using mixers and dump trucks and those kind of things, the real construction types of trucks?

Yes. Those trucks, because they do significantly less miles, they can be seven, eight years, easily.

We still could have a few more years before that replacement cycle kicks in.

Actually, I think that's a very insightful point you're making.

Okay. Thanks very much.

Rob Wertheimer, Vertical Research Partners.

One quick question. So industry build rates in the first half have been a little bit interesting in North America and obviously you guys have taken some very appropriate cuts. I'm not sure the industry has followed. So if you're willing to answer a general question, does that have necessarily a pricing impact or do those trucks somehow they already had orders attached so it's not a pricing risk? If that's too general, maybe if you could tell us --

Happy to jump in on that one. That's an excellent question, Rob.

I think what you'll probably find and in fact, I think it's been in a few of our competitors' quarterly filings, is that you'll probably be seeing some production adjustments from the industry as a whole. And sometimes that's not spelled out completely clearly, but it may be shut down days. It may be just reducing build rate while maintaining the same number of employees. It may be actually reducing build rate. So I think everybody is facing the same demand.

That's helpful. I guess I was wondering if those trucks that were already built and sitting around were a price risk for the industry and/or if you could say what portion of your mix in North America is sort of specked out specific for a fleet and if overbuilt trucks really are risk or most of them specked out?

Actually I think the inventory's in very good shape. I think we need to put a stopper in the bottle on that one. Inventory's in good shape, particularly our dealers. And our philosophy has always been to build to a customer specification.

So if we've got an order, we're happy to build your truck but we really don't build a spec truck. Some of the competitors may do that. I'm not sure how they're doing.

Okay. That's great. And if I could ask one small follow-up. Are you able to say when you would need to see orders in North America again pick up to hit the higher end of your estimated range for the year?

Any time would be good.

All right. Great. Thanks very much.

Adam Uhlman, Cleveland Research.

I guess the first question maybe just to follow up on the inventory question, PACCAR's own inventories stepped up from the first quarter, although the sales were down from the first-quarter levels. I was wondering if you could help us understand better why that is.

I think inventory levels are pretty consistent. Are you talking about PACCAR?

Yes.

Yes, so I think that's just a reflection of timing of production schedules and build rates. It's all -- the inventory's in good shape and balanced with our production need.

Okay. And then could you talk about I guess you had commented about the Europe orders recently had been somewhat steady through the year. What do your North America orders look like relative to what we saw in the first quarter?

Well, as I indicated, we'll be looking at a 10% fewer trucks, primarily in the US and Canadian market in the third quarter versus the second quarter and Europe is pretty steady.

Okay. Got it. And then can you talk about what price realization was for this quarter? I think last quarter you had roughly $157 million of price, or maybe 4% to sales and I'm wondering how that played out this quarter, if you have that figure handy.

Okay. Just a moment. If you're talking about the contribution to margin from truck sales prices?

Yes.

$66 million in the second quarter.

Okay. And then was there any impact from currency or did you talk about the magnitude of the impact, sales and income?

The overall impact on currencies was a reduction compared to the prior year of $139 million in revenue and $4 million in pretax profit.

Great. Thank you very much.

Patrick Nolan, Deutsche Bank.

Mark, thanks for your commentary on the North American pricing. That was very helpful. Can you just comment what you're seeing as far as industry trends and any competitive movements on the European side of the business as far as pricing?

In Europe primarily, Patrick?

Yes, I think you spoke at length to North America.

Okay. I think in Europe -- are you based in Europe?

No, I'm based in New York.

Okay. Well, as you travel around Europe, it's obviously many different scenarios being played out in different countries and you have to be mindful of that. I think several of our competitors who are perhaps more focused on Southern Europe are feeling the negative impact much more than certainly others are. And that probably will have an impact on their pricing.

In terms of what we're seeing is pretty steady. Obviously, it's -- the market is slightly lower than last year, but reasonable.

And we've gained some share as people like the products that we're building and where the economies are a little bit stronger, we tend to be the leader in those markets. So that for DAF is a positive scenario. I think everybody in our industry would like to see an increased market size and that's probably not in the cards in the near future, but eventually it will be.

That's helpful. And can I just sneak one more in? Just to clarify?

Sure.

The Q3 production outlook, so overall PACCAR production down 10% with Europe flattish. That implies US and Canada's going to be down in the range of 15% to 20% sequentially?

I think it's probably in the ballpark.

Okay. Thanks very much, guys.

Basili Alukos, Morningstar.

One question, going back to the engine penetration. I was wondering if you could bifurcate that 20% to 25% or 25% to 30% of the internal production between your current run rate of -- or at least normalized business on the US side, call that your 25% traditional market share versus the about 4% or 5% of the market share that you picked up over the last year.

Well, we kind of look at it that we've really picked up 25% to 30% over the last year or two, since that's when we started our factory up.

Yes, sorry, maybe like the 25% of your current business on the truck side, what percentage of the MX engines are on those versus call it the 5 percentage points of market share you've gained on the North American Class 8 truck share.

Oh, I see.

Just trying to get a sense of on those new customers.

I think it's probably in line. Probably about 25% which has added up to I'd say 30%.

Great.

If that's answering your question.

Yes, I was trying to get a sense of obviously with what's happening with --

I think broadly the engine is doing well. We're having a lot of good response from our customers across different industries and different locales who are seeing improved fuel economy. It's very quiet. It's an easy engine to operate.

Once again it's been in the marketplace for let's call it a 1.5 years. And we're stating to get some good endorsements, which is causing other great customers to say, it's been out for 1.5 years, let me try some of those. So it's positive.

Do you think maybe you're winning new business due to the engine or just due to the quality of the truck?

Both.

Both. Okay.

Both, yes.

Great. And then just following up on your 10-Q called out the formal investigation with the SEC. I'm just wondering if you could provide us with any follow-up.

No, I think it's all on track.

Okay. Great. Thank you very much.

Jeff Kauffman, Sterne Agee.

I'd like to follow up on the ForEx question a little bit. Could you possibly, would you be willing to give us an idea for how much of that ForEx impact was more of a European base versus, say, rest of world, because the riyal's down almost 20% against the dollar. The peso's down. I just want to get a sense of how that's affecting things.

And then secondly, when you're looking at these capital investments you're making in Brazil and around the world, I would guess it just got a little cheaper for you. So could you discuss the benefits you might be seeing in terms of capital allocation?

Okay. The ForEx impact that we're talking about are primarily the movements of the euro versus the US dollar which is down about 7% compared to the prior year on average. And certainly as the riyal declines, it does reduce the dollar impact of capital that we are investing there at the moment. And so that's why we have a range because we don't know exactly what's going to happen to currencies going forward. Good comment.

All right. And one last follow-up. Cost of goods sold, raw material costs were starting to come down. Can you talk about where you're seeing the impact of let's say raw material costs coming down and are you able to keep a fair amount of that internally?

Well, you're correct, raw material is coming down. I think with the exception of probably copper and natural rubber and this is obviously reflective of what's going on in the global business markets.

We have over 75% of our components are covered by long-term agreements and those long-term agreements I think are really an excellent tool for both us and our suppliers. So there are some mechanisms that will reflect lower commodity prices, but they're not just instantaneous. So they go down, but can you tell me in three months are they going to be back up?

There might be some slight improvement, but overall the good news is our suppliers are in good shape. They are making investments. They see that some of the markets are a little slower. But they're getting ready for when they do improve and they're able to improve their quality and their capacity and that's healthy for the whole industry.

So overall, it's pretty steady.

Mark, thank you very much.

David Leiker, Baird.

Two questions for you.

Sure.

On the 13-liter that you're building here in the US right now, how much of that supply chain and materials production do you have now domiciled here in the US versus bringing it over from Europe?

Well, I would say that it's -- I don't have exact percent but it's increasing in terms of the local content and it will continue to increase. Obviously we started out 1.5 years ago importing key components from our DAF factory, but as we've ramped up in production and brought on suppliers, we're shifting that on a pretty steady basis over to North American suppliers.

And then as the euro goes lower at what point does it make sense to continue to bring that from Europe?

Well, we plan to eventually have the majority of the components in North America because we're not really doing this for an exchange rate hedge. We like to source in local currency. Because yes, you can get an advantage but you can also get a disadvantage.

Our focus is on the highest-quality products at the lowest overall manufacturing cost. The exchange is good but then you also have the longer time and the freight cost. So we're going to move it higher and higher to be in North America.

This might have come up earlier and I had to jump off a little bit. Six months ago or so there was a lot of discussion around the industry of the cumulative increased cost of emissions and the inability to recoup that in the marketplace. Where do you think you're at or the industry's at right now in terms of being able to recoup those emission costs?

I'd say over the last six months there's been some positive movement, but certainly have not recouped the costs and looking out to the future, it's going to take a very strong market to make a sizable dent on those costs.

Okay. Do you think the transition that Navistar's going helps alleviate some of that and everyone's able to recoup some more of those costs?

I'm not sure what they're doing.

Okay. Thank you much.

David Raso, ISI Group.

One quick question. The targeted US/Canada build schedule, want to try to think about the build schedule beyond 3Q. Did you target a build schedule that's consistent with the recent order pattern we've seen? Or if the orders stay the same, as we've seen, is that up or down for the fourth quarter versus third quarter? I'm trying to get a feel for how much you cut the third quarter relative to the recent order patterns.

I think that question was pretty well answered earlier on, that 15% or so cuts in US and Canada.

That's not my question. My question is that cut, are we then at a level that's consistent with the recent orders, thus say if orders pick up your build schedule goes up in the fourth quarter or if the orders stay the same, I'm trying to get a feel of the orders --

The way we operate, we try to have our production rate reflect incoming orders at a reasonable backlog and that's what we're doing. And so if the orders come in at the rate they've been coming in for the last two months, then the production rate will be held pretty steady. If they increase, we will very gladly increase production.

Okay, so the third quarter reflects the recent order activity, so any movement from that level should flow right into your build schedule.

That's accurate.

Okay, great. Thank you very much.

Mark Rogers, Gagnon Securities.

I want to make sure I understood what your strategy is for internally sourcing engines. And if you could frame that with respect to the LNG and CNG opportunity I'd appreciate it.

Well, those are a little bit two different elements. But our strategy is to continue to grow our PACCAR branded engines in Kenworth and Peterbilt. If you go to Europe, and I'm sure you have, you'll see that all engines in our DAF lineup, LF, CF, XF, are PACCAR branded. That is our strategy here and so we're making good progress on that.

-- to continue sourcing your LNG engines from your partners such as Cummins or do you eventually plan on being able to do this in-house?

We work with Westport and Cummins, both excellent companies. And at this time it's a very good partnership and it seems to work well and provide our customers with a very high-quality, efficient solution in the natural gas markets.

Great. And then if I could, you are introducing that 12-liter Cummins, Westport branded engine. And I was wondering if you could just give a high level commentary on the anticipated demand for this engine platform.

Well, we have the 9 and the 15. So I think the 12 will provide a nice middle point for customers, but I think as I indicated earlier, it's a market that's only 1% to 2% of the total truck market. So we'll see what happens.

Great. Thank you very much for your time.

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.