帕卡 (PCAR) 2012 Q4 法說會逐字稿

Good morning and welcome to PACCAR's fourth-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; Bob Christensen, Chief Financial Officer and Executive Vice 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 good revenues and net income for the fourth quarter. PACCAR's fourth quarter sales and Financial Services revenues were $4 billion, and quarterly net income was $253 million and after-tax return on revenues of 6.3%. For the full year of 2012 PACCAR reported record revenues of a little over $17 billion. Net annual income was $1.1 billion, an increase of 6% versus 2011. This was the fourth best net income year in our history and PACCAR's 74th consecutive year of earning a net profit. Earnings per share were $3.12, an increase of 9% versus a year ago.

More good news. PACCAR's dividends increased by 22% during the year. I'm very proud of our 21,800 employees who have delivered industry-leading products and services worldwide. Our dealers and customers in North America and Europe are benefiting from good freight demand as evidenced by strong aftermarket parts and service business and excellent PACCAR financial performance.

Customer truck purchases are focused primarily on replacement as they continue to navigate the uncertain global economy. PACCAR delivered 31,700 trucks during the fourth quarter, an increase of 2% compared to the third quarter of 2012. I'm pleased to report that Peterbilt, Kenworth and DAF grew their market share to record levels last year, 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 28.9%, and DAF's share of the European above-16-tonne market was 16%. During the year, Kenworth and DAF delivered 6,300 trucks in the Andean region of South America -- that's the region outside of Mercosur -- and a record 2,700 units in Russia, an increase of 80% compared to 2011. Looking forward, PACCAR truck deliveries in the first quarter of 2013 are expected to be comparable to the fourth quarter of 2012, although they could be lower by 1% to 2%.

The fourth quarter North American industry truck orders were encouraging, but there continues to be pressure on truck margins in North America and Europe and we expect first quarter gross margins to be slightly lower compared to fourth quarter. Other good news, though. There's some improvement on vocational truck sales as housing starts are increasing, primarily in the United States. Looking at the truck market overall in 2013, US and Canadian Class 8 industry retail sales are estimated to be in the range of 210,000 to 240,000 units. In Europe, the greater-than-16-tonne truck market is anticipated to be in the range of 210,000 to 250,000 units. There may be some customers in Europe who will accelerate purchases of the Euro 5 vehicle ahead of the introduction of the Euro 6 emission requirements in 2014.

Reviewing 2012, I'm pleased to say it was a milestone year for PACCAR, as we launched more new trucks than at you any time in our history, and that's a lot of trucks. Kenworth, Peterbilt, and DAF have updated over 60% of their product range with new fuel efficient, ergonomic, and I like to say, stylish vehicles. We're very pleased with the excellent response from dealers and customers to the new Kenworth T680 and the Peterbilt Model 579. The new DAF XF Euro 6 powered by the PACCAR MX-13 engine will begin production this spring. PACCAR's global business initiatives are making excellent progress. New product investments continue in 2013 with many exciting launches planned during the year.

Capital spending in 2013 is estimated to be $400 million to $500 million, and research and development expenses are estimated to be $225 million to $275 million. Construction of our new DAF assembly factory in Ponta Grossa, Brazil is on schedule and is expected to begin production in late 2013. PACCAR, as you may know, has approximately 5% share of the total South American truck market and our medium term goal is 20%. PACCAR is investing in its network of 15 parts distribution centers to meet the demands of our customers and dealers. We're constructing a new 280,000 square foot distribution center in Eindhoven, The Netherlands, which will be opened in April of this year. We're also doubling the capacity of our distribution center in Lancaster, Pennsylvania.

Turning to PACCAR financial. PACCAR Financial Services revenues were $298 million in the fourth quarter, compared to $266 million in the prior year. PACCAR Financial's fourth quarter pretax income was $79 million, compared to $67 million earned in the fourth quarter of 2011. The excellent results benefited from growth in portfolio balances. For the full year, PACCAR Financial revenues were $1.1 billion, compared to $1 billion a year ago. And pretax income was a record $308 million compared to $236 million in the prior year.

PACCAR Financial with its strong A-plus credit rating has excellent access to the commercial paper and medium-term note markets. Last year, PACCAR Financial issued $2.2 billion in medium-term notes, all at competitive rates. So in summary, PACCAR continues to enhance its leadership position in the global truck market by investing in new geographic regions and the highest quality products in the industry. Thank you and I'd be pleased to answer any of your questions.

(Operator Instructions).

Andy Casey, Wells Fargo Securities.

Congratulations on your new suffix, Mark. (laughter)

Let's just keep that between you and me, Andy.

Too late.

Thank you very much. I appreciate that.

You're welcome.

Let's turn to the world of trucks.

Sure. On the 2013 planned R&D reduction, is that just related to an exit from product transition?

Well, it's a good question. As you know, and obviously could share my enthusiasm for all the great things that happened last year, a lot of the R&D was focused on probably two primary areas. One was the launch of a lot of new trucks by every major division at PACCAR and also getting ready for Euro 6 and EPA '13 engine emissions. A lot of that work has either been completely done or is almost done. We have other projects but a big chunk was completed last year.

Okay. Thanks. And then I wanted to kind of skip to a bigger picture question on an item that you've covered before.

Sure. You bet.

The cycle-to-cycle margin headwinds, you've kind of mentioned we should expect more subdued this cycle relative to last decade with part of the reason related to this, as you just discussed, the incremental emissions content.

Right.

And in North America recently one of your European competitors that competes down in Brazil kind of mentioned the same thing showing up post-Euro 5 down there. And then looking forward, do you expect Europe to be similar to those other regions post Euro 6? And then what sort of actions actually can be taken to kind of offset that and reinvigorate some of the margin performance?

You bet. Obviously an area that everybody here spends a lot of time working very diligently. Let's take a look at it in sort of two segments, or maybe three. First of all, Euro 6, the additional cost just to meet the requirements, and I think you've heard this from many people in the industry, will be over EUR10,000 per vehicle. So there will be additional costs that customers will have to get comfortable with and we've seen every three years or so for the last 20 years, that has some impact on the OEM margins. So we just have to work through that and obviously we're very diligent about working with programs, whether it's Six Sigma or 5S or other program to try to offset some of that cost impact.

On a broader global view -- we're working hard as we get into Brazil and we talked about beginning production late this year -- Brazil so far has the highest margins of any truck market around the world and that certainly benefited our competitors and we look forward to sharing the benefits of that market as we really get up and running and growing our business in Brazil. So I think that's a positive. Another one is, as we bring in our own MX engine and we move things like a common rail, the fuel injection, and we continue to work on reducing the cost of the after-treatment and EGR cooler, I think there's some benefits for margin enhancement on that.

I guess complementing that is the continued growth of our after-market business as we get a bigger footprint around the world and continue to be the most focused and most efficient manufacturer in our industry. So I think there's some benefits out there that should enhance margins but of course the biggest driver and I think you and your colleagues have mentioned this many times is, let's get back to a market that's in the top five of the last decade and I think you'll see some exciting opportunities. That's really going to be the big driver for margin enhancement.

Okay. Thank you very much.

You bet. Good question.

Ross Gilardi, Bank of America.

Ross, welcome to the team.

Thanks very much. Good morning.

And please give our best to your predecessor.

Will do. Thank you. I had a few questions on Europe. I mean, it looks like for the industry you're basically guiding to flat at the midpoint and the registrations would have finished the year on a pretty weak note. Could you just give us a better sense of what you think the cadence of the year will look like and if we don't have a pre-buy in Europe, is that basically what the low end of the range for Europe of 210,000 is implying, i.e., kind of a 5% decline in 2013?

I think we look at Europe and North America, they're probably going to be similar, I think as has been pointed out certainly by competitors and industry analysts, we're really looking for a stronger second half in the North American market and in Europe also and some of that may be driven by a pre-buy. We've got a few inklings of some positive economic trends here in the US. We'll have to see how that translates into the broader economy. In Europe, if people decide that they want to take a little bit more of a wait-and-see attitude on absorbing the Euro 6 cost increases, that will have an impact. There may be ongoing challenges in some of the European countries in terms of their just general economies. I think that's why we have a little broader range there. Of course, as the months go on we'll all get a little bit smarter and be able to adjust that range accordingly.

Got it. Thank you. Talk a little bit more about pricing and what you're seeing in the different regions and maybe what we should think about in terms of a price contribution overall for 2013 at this point.

You're talking about truck pricing?

Truck pricing, yes.

The good news is that many of our dealers, because of their strong focus and work on their absorption, had record years last year or very strong years and a lot of our good customers are starting to report strong and some of them even record results in the fourth quarter from what you see in the different industry press. So that's encouraging. The people that are still operating and there's many, many good ones, have survived a couple of tough downturns in the last decade. But they're cautious. Some of them have announced that they're going to be increasing their purchases. But I think in that, it's still primarily replacement because I think everybody's waiting to see what the tone and the direction of the general economy is. And as we move through the year, if the housing gets going and that's going to be a benefit for steel and concrete and brick and everything, all the white goods that go inside a house, we'll see a lot of our customers perhaps expanding their fleet and that will be good for pricing overall.

Great. Thank you very much.

You bet and welcome to the team.

Thanks again.

Andy Kaplowitz, Barclays.

Mark, maybe following on that last question, if you could talk about order trends that you've seen recently. Obviously we've seen maybe some of the political headwinds that have been out there in the US have started to subside a little bit and certainly the markets, the equity markets are doing pretty well. You mentioned some freight guys reporting decent results. Have you seen any subtle change in your customers recently?

I think in terms of our -- we have the same great customers we've been working with for quite a few years, but the positive aspect that we monitor on a daily basis is, say, quotations and inquiries in terms of who is looking for trucks and how many trucks are they looking for. I think obviously the first half of last year was pretty strong and then it slowed down in the second half as you can see by the truck data. In the last, I'd say, two months, we're actually seeing an uptick in inquiries and quotations. Customers are saying, you know, could be good this year or certainly better, so I think that's somewhat encouraging. That has not translated into a one for one order intake and you've seen a number of our competitors have announced a shutdown or layoffs and different types of programs to reduce their costs. So I think there might be some improvement in the fundamentals, just as we look at the number of quotations that our customers are interested in getting current pricing on.

Okay, Mark, that's helpful. If I could shift gears. If you look at your other revenue you report in your geographical presence, it dropped a little bit sequentially. I assume some of that, maybe a lot of that weakness is Mexico, but maybe if you could talk about that particular market and then any other sort of one-off markets and how they're doing, Australia, Middle East, that kind of stuff.

Sure. Well, Mexico, which we've been there since the late '50s, is really one of the jewels in the crown for us and the Mexican market is pretty good. It did slow down a little bit. I think what probably had more of an impact was the country of Colombia which has been on a very proactive, positive growth program for the general economy over the last few years and have taken a lot of our trucks and have done very, very well. They've completed some of their projects including a major pipeline, but they're now reviewing other infrastructure investments which I think will stimulate truck demand again. That's had a little bit of a slowdown last year. That may take a little bit of time to re-energize.

Australia continues to perform well and achieve many records the last year and we continue to be a leader with the Kenworth product. In the last few years we've also introduced the DAF product. DAF's done very well in Australia. So that's gone well. So overall, I think maybe a little bit of a recalibration in let's call it Colombia and a few other countries. But I think they're going to get back on track.

Thank you, Mark.

Thank you. You bet. Good questions.

Ann Duignan, JPMorgan.

Maybe you guys could talk a little bit about your truck sales, which were down 19% year-over-year, but Financial Services revenues up 12%. Is that a penetration story? Maybe you could just give us some more color.

Sure, we can. The Finance group has really done an outstanding job and our lease organization set many records which we're very proud of. So I think you've summed it up pretty well, that we're financing about 30% of our trucks on a global basis and the customers that we're financing are doing well. I mean, very low past dues and customers are making good money, as you've seen. So I think it's really a credit, I'd look at it as a positive, it's a credit to our finance organization who are coming out with the programs and working closely with our dealers and customers to continue to grow that business and $308 million operating profit, all-time record, is a nice credit to the entire finance organization.

Okay. Thank you. Turn it around to first quarter guidance, you said that it would be comparable to Q4, maybe slightly lower. If we add up the days, we would probably have a couple more days in Q1 versus Q4. So are you implying that you're cutting your daily production rates again or are we losing days because Easter is early or something like that?

We've had a few shutdown days like everybody else, so, yes, you're absolutely right on your math in terms of there are a few more days in the first quarter compared to the fourth quarter with the holidays in the fourth quarter. But I think just looking at the number of trucks and margins, it's going to be comparable. There's certainly some 2% pressure impact that we're looking at.

Okay. And just finally, as a follow-up, are you going to be offering the 12-liter Cummins Westport CNG engine and are you getting any inquiries on the CNG side? Is that where some of the potential pickup in inquiries is coming from, maybe just speak to that whole sector?

We're very proud particularly all of our truck divisions on being a leader on the natural gas industry. Been doing this for, gosh, over 15 years now. We offer the 9-liter and the 15-liter. We certainly are well aware of the 12-liter and have worked with Cummins. We continue to be Cummins' largest partner. We're proud of that, proud of what they've done.

I think in terms of the natural gas, we've got great product. In terms of the inquiry pick-up, I'd say it's more on the vocational side and perhaps more on some of our just online truck load customers. Natural gas will be a factor, but at this time it's a pretty small factor. We'll just have to see of time how the infrastructure shakes out across North America and certainly Europe. We offer a full range and we continue to be the leader and we're proud of it.

And Mark, was that a no on the 12-liter?

We have 12-litres running in our fleets and we continue to look at a wide range of offerings. Of course, we're very excited about an engine called the MX-13.

Hence the reason I was asking. Okay. I'll talk to Robin offline.

Good questions. Good to hear from you, Ann.

You too. Take care, guys.

All right. Thank you.

Jerry Revich, Goldman Sachs.

Mark, I'm wondering if we could talk about the R&D budget for 2013 and can you just frame for us the reduction -- was it an opportunity to combine some engineering across a couple of platforms or are there any projects that you're pushing out? Just give us some context if you don't mind on the better productivity or otherwise.

Absolutely. Well, I think as we might have mentioned earlier, we've completed a lot of major, exciting projects and launched a lot of new products. R&D, I think the change is really minimal, because we're continuing to work on new projects and products every year. And I think as 2013 progresses, I know a lot of our engineers have got new things they want to share with the industry so that will be a lot of fun and good for our customers and our dealers. I think that's the very straightforward story.

Okay. And then if you could just flesh out for us the production outlook for the first quarter versus the fourth, if you don't mind. We heard from one of your competitors reducing build rates in Europe and I'm just wondering how does your Europe versus US production mix look like relative to the production guidance that you gave?

I think in line with my comments and a little bit of what we talked about in the press release, that the production, both in Europe and North America, will be comparable, though could be 2% down compared to the fourth quarter. And customers are liking our products and we continue to look at new products and maintain the strong growth in the share that the teams have been able to achieve over the last number of years. So I'd say comparable, though there could be 1% to 2% down.

And lastly, you have a meaningful new product launch in Europe. I'm wondering if you could just comment on the margin structure of the new product compared to the one it replaces. Are there any material cost reductions or otherwise and then what are the implications of the product roll-out on your production schedule in 2013 versus what might be a more typical seasonality at your facilities?

Right. That's the new DAF XF Euro 6 which we launched at the Hanover show in September. People are very excited about it. I think in terms of pricing to the customer, it's going to be comparable. We're obviously excited about some of the aerodynamics and benefits that the vehicle will bring to our customers and that will -- so it starts coming out April, May time and I think there's just a gradual buildup over the rest of the year. Hopefully there will be some small benefit on the margin side, but we'll just have to see how the general economy plays out across Europe because that is the large macro impact that all of us have to work through. But very exciting, great-looking truck, just got a lot of positive press, our customers and dealers are really looking forward to production.

Okay. Thank you.

Thank you. Good questions.

Stephen Volkmann, Jeffries.

Couple things, follow-up. First, you made some sort of encouraging comments about the vocational market. If that were to flow through, is that margin enhancing for you, an increase in the mix vocational?

I think slightly, yes. Obviously, we work with a number of the major body builders and they are slightly encouraged by what they're seeing and there's -- yes, it's good business.

Okay. Great.

Over time it's good business for dealers, parts, and service, because these vehicles are in some rugged applications.

Super. And then I wanted to ask a couple things on the MX engine that you mentioned a couple times. What's the mix right now in your most recent few months of orders of MX engine for you guys?

It continues to be in the 25% to 30% range.

Okay. Great.

Yes, we just passed the -- I think we're up to about 35,000 out running and that's going well. We've got a lot of very positive stories from our customers about excellent fuel economy, reliability, low noise, easy to drive, so we're very encouraged. Have you been down to our Mississippi factory yet?

No, I'm afraid I may be the only one who hasn't. I look forward to that.

We'll get you down there. You'd enjoy it.

Can I just ask, I'm assuming that all of these engines are now coming from Mississippi and that you're no longer importing anything meaningful from Europe on this MX engine is that correct.

That's essentially true, yes.

That should be helpful to margins in '13 versus '12 I'm guessing.

I mean, a little bit. We're actually making a few things now in Mississippi that we're sending to Europe. So the factory is fully engaged and completely outfitted with wonderful robotics and new machinery and we have a great workforce there. So I think over the next couple years you're going to see a lot of really wonderful things coming out of Mississippi.

Thanks so much.

You bet. Thank you.

Jamie Cook, Credit Suisse.

Two questions. First, Mark, just on the margins -- if we look at margins as we end 2013, let's talk about operating margins relative to 2012. You'll have lower R&D, Europe potentially more profitable products, vocational potentially more, you talked about more engines from Mississippi and stuff like that. Overall, given the forecast that you've given, do you think your margins in 2013, your operating margins, do you expect them to be up versus 2012? And then my next question is can you just talk about, as we ended 2012, trucks going into sort of the energy markets, how much they were down and what your expectation is or what you're seeing in terms of order trends more currently for trucks going into the energy markets? Thanks.

Sure. I think on margins, I think it's going to be as I mentioned at the beginning for 2013 will be --

for the full year, as we end the year, not for the first quarter.

Right.

Okay.

I think it will be comparable to 2012. We really -- and you've been very excellent and diligent about asking these questions for many years and we try to give you good answers. You know, the overall market is still down and we've got to get the general economy going again. It's not just us as representatives of the commercial vehicle market. There's lots of different industries that want to get this market going again. And I think as that happens, with the improvements and the investments we've made in our factories and our processes, we'll see some margin enhancement.

So if we can get back to a solid 2%, 3% GDP growth and customers are feeling good about growing their fleets, which is important. I think we started out the comments by saying it's going to be primarily a replacement market. Then you'll see some enhancements. Because our factories are ready, they're the most efficient in our history. These trucks are the best we've ever built in our history. So we're ready.

No, I get that. But to some degree you could say you have an R&D tailwind which we didn't have before. You know what I mean?

Yes, sure.

You have a more profitable mix. I'm just surprised it's not better than what -- is pricing the biggest factor when you're thinking about things, besides the market?

Absolutely. We still have plenty of competitors that let's say have a slightly different view on pricing than we do.

Okay.

And that's the world we live in.

Okay. That's fair. Thank you. And then just, sorry, on the energy side, what you're seeing there.

The energy, it -- we sell to the major energy producers. They're great customers. I think that side has slowed down a little bit. There was strong orders last year, we still continue to get orders but I think it's now shifting back more towards the, let's call it traditional on-highway customers.

Okay. Great. Thank you.

Thank you. Appreciate it.

Tim Thein, Citigroup.

Just following up on the mix, but it was actually trying to get at the truck versus parts mix, and you had mentioned a lot of the work you've done in terms of expanding your distribution centers. I'm curious when the benefit of having these 30,000 MX engines in North America in operation, when do you start seeing a -- when do you get enough mileage accumulated where that starts to become additive to your parts contribution?

Absolutely. We've got a great history, of course, with the MX engine in Europe and it's going to be a couple years. Of course, the good news is, we want these engines to be fantastic and they are and so to have parts business is some benefit but we're really working hard to not have too much. It's a couple years.

Okay. And just so I understand it, Mark, what leads to the changing in terms of how you -- the capitalization versus expensing of the new product tooling? Why does that occur, I guess. I'm trying to understand why it was --

You're talking about the little footnote we had?

Yes.

Okay.

We identified certain production tooling investments that were long-lived assets and therefore were capitalized.

Okay.

Yes, pretty straightforward.

All right. Thank you.

Thank you.

Patrick Nolan, Deutsche Bank.

Couple of questions. First, as we think about a Euro 6-equipped truck, it's EUR10,000 more expensive. When you look at the operating costs for the customer, does it go up and what happens to fuel economy?

Actually, the fuel economy with the additional after-treatment is able to stay at the same level as Euro 5 which is a big plus. There's a lot of additional equipment and we've been able to maintain our weight position. So the truck is one that's receiving a lot of attention from customers with the attractive operating characteristics as it will be launched in the spring.

Okay. And if you I could just follow up on the R&D questions. It makes sense that the R&D would be coming down post some of these product launches that you had in 2012. Would you expect the R&D to pick back up going forward in 2014 and beyond as we get into a more volume business in South America and hopefully volume in North America and Europe comes back?

I think R&D will be in the range that you've seen over the last couple of years. It may not have the peak for a number of years because we've updated and replaced over 60% of our trucks, so that's the majority of the trucks. The big engine emission requirements are done, although now we're working with the greenhouse gas which, it really goes from 2014 to 2017, in that time frame. So I think it's going to be in the range. The factories that we're building will be complete in Brazil this year. But there's always opportunities and new great ideas that come up from our teams. I think it's in the range. It may be a little bit lower for a couple years. We come up with a great new idea, we're going to fund it and put people on it and work hard on it.

Thanks very much.

You bet. Thank you.

Seth Weber, RBC Capital Markets.

Wanted to ask about Brazil. So you're talking about production starting I guess in the fourth quarter. Should we expect an expense ramp ahead of that as you add staffing and tooling and things? I mean, is that something that we need to factor into the margins for the second half of the year? And I guess the follow-up is, when do you think you would be at kind of a critical mass of production there?

Yes. So as the Brazil plant continues to develop during the course of the year, we would expect to see a little bit of investments there that will affect our results. But it will be a gradual as we go throughout the year.

That's on the expense side. And then in terms of ramping up, well, certainly we hope that our customers, our potential new customers get excited about the product. We've had a lot of early indications and we're putting our dealer network into position throughout the country of Brazil. But, it will take a couple of years to ramp it up because we build to order, as you know. But early indications are people are looking forward to the product.

The product is performing well. And a lot of the customers are aware of DAF. They either have connections with European operators or they've seen the DAF operate in different countries in South America. So they've also seen how it competes very well against the current suppliers in Brazil and they know that DAF is now number two in Europe and that gives them great comfort that DAF will offer a very robust, high quality product for the Brazilian and Argentinian market.

Okay. Thank you. And if I could ask a follow-up. Seems like your CapEx and your R&D is peaking here or has peaked so may be heading back the other way. Does that change your thoughts on capital allocation at all with share repurchase or increasing the dividend?

That's a great question. Of course, one of the wonderful opportunities of working for PACCAR is we have a very strong balance sheet, very conservative focused Company so that we're able to do, within reason, a lot of these different activities, have a good CapEx program and repurchase shares and continue to invest in the overall business. So as CapEx comes down a little bit, I think it's important to recognize, we have still many, many projects going on. We have all these wonderful ideas being generated every day by our teams throughout PACCAR that we'll continue to fund these great ideas and we want to make sure that we have a very attractive program for our shareholders. And you've seen over, well, decades a very good quarterly dividend program, occasionally a special dividend if that's what's merited and a share repurchase. So we try to work on all fronts with equal facility.

Fair enough. Thanks very much, guys.

You bet. Thank you.

J.B. Groh, D.A. Davidson.

I might have missed this. Did you give the truck and aftermarket parts sales numbers.

We will to you, J.B.

Thank you.

For 2012 the part sales were $2.667 billion compared to $2.577 billion in 2011.

Okay. All right. So I can back out from there.

You bet.

Okay. And then great picture of the new Eindhoven facility. Would we expect to see any sort of inventory impacts from opening that in early part of the second quarter?

No, but I'm glad you raised that, because I think a few people talked about general inventory and I think you all noted that inventory has come down and I would anticipate inventory would come down a little bit more, particularly as the few remaining EPA 2010 engines are installed in customers' vehicles. So we pride ourselves on excellent inventory turns and low inventory. I think you'll see some improvement in the first quarter.

Okay. Thanks, Mark.

Thank you. Appreciate it.

Alex Potter, Piper Jaffray.

Wanted to come back to the natural gas theme here. I know that you guys have historically, I guess I'd characterize it as, hedged your comments there. You're acknowledging it's a theme. You're prepared for it. You have the product.

And we're the market share leader.

Exactly. All of that.

No hedging there. We're full-in.

Right. But you have stopped short of saying that this is kind of a fundamental change. When you talked about it just here a couple minutes ago you were talking about mostly on vocational, not yet on long-haul trucking. You have people talking about this year or at some point presumably this being kind of a transformational thing but it sounds like maybe this year you don't see that coming. Would you say that that's accurate?

Well, there are certainly numerous conferences and maybe you've attended some of them or read about them in industry press. We're excited about the opportunities in natural gas. We have the products, we've got the experience, our dealers are ready. We certainly have some long-standing customers, particularly a number of them in the port areas. If the infrastructure and a major Company, whether it's in the resource industry or somebody else, makes an investment to allow online highway natural gas trucks, we're ready for that. That's all we can do. We're ready; we're the leader. So we're excited about it. But until that happens, we'll continue to sell to people that have other requirements in the industry, which is diesel, is a wonderful fuel and is very productive.

Okay. Fair enough. And then I guess my last question here on G&A. If you could just comment on what tools you have in your toolbox for trying to maintain G&A, maintain flexibility in the face of kind of this production uncertainty. I know last quarter people spent a lot of time talking about production cuts across the industry to try to realign themselves with this kind of new normal. Would you say that that theme has basically played out or are we just going to see this continue to bleed out over the next couple quarters?

G&A and SE&A and managing our general budgets has been one of -- I'm glad you brought it up because that is one of PACCAR's strengths for 107 years. We run a very efficient, tight ship. I think we typically lead the industry in the up cycle and the down cycle and the status quo cycle so that's one of our great strengths. If the industry is sort of similar to last year, we work it. We continue to see how we're going to become more efficient. I think as we've shared over the last, gosh, couple decades, we're trying to get 3%, 4%, 5%, 6%, 7% productivity improvement in our factories every single year. We now have a program where we go out and we'll work with our suppliers and our dealers and teach them how to manage efficiently, whether it's through Six Sigma or 5S. And it's a nice little business that we've been able to generate. So that's one of the core strength of PACCAR.

Very good. Thanks, guys.

Thank you.

Tim Denoyer, Wolfe Trahan.

A quick follow-up. I didn't really understand your answer on the tooling footnote on capitalization. Was that related to Mississippi or to some new products or is that just sort of the normal course of business?

New product tooling.

Okay. Okay. Thanks. So that would be sort of an ongoing change, not a one-time thing, right?

Yes, it was a normal change related to new product tooling in Europe.

Okay.

It's really focused in Europe.

Okay. Thanks. And I guess just one other sort of housekeeping. You can you give the margins between the truck and aftermarket segments?

We'll have that broken out in our annual report when we report it as a segment.

Okay.

I think we mentioned in the press release that with the growth of our parts business, we look forward to having that as a separate segment. So we'll have that broken out.

Okay. Not sure if you'll be able to answer at this point.

Fire away.

Going into 2013, obviously production is going to be down pretty significantly on a year-over-year basis. We are expecting an improvement through the year in both North America and Europe. Overall, can you give us any sense what you're expecting for sales for 2013? Are you expecting up, down, or flat?

First of all, on the production side, I think we're looking that it's -- in Europe, could be comparable. North America, there's some improvement, should be comparable. I think that's more of the take-away I think you want to be looking at is, sort of comparable to last year. I mean, some ups and downs depending on the economy. That's the main one. On sales -- (multiple speakers)

Is there headwinds coming from the engine?

Sales really follows production. So sort of comparable.

Okay. Should there be a little bit of a headwind given what you talked about in Colombia and in some of the Andean markets. Was that sort of overbuilding a little bit relative to normal this year?

No, no. We build to order and all those trucks, if you go down to Colombia, you'll see a lot of good looking Kenworths driving around. So they're in operation. They're being reassigned to different types of haulage. But we're looking for that to pick up. It may not happen this year in Colombia. That's just one market. But as I say, if you got the housing market improving, which it's gone from a low of something over 400,000 starts and now there's projections of 700,000, 800,000, 900,000, that's going to have a positive impact on many, many industries and certainly trucking will be one of them.

Lot of truckloads in a house. Thanks very much.

There seems to be. We like it. Thank you.

Rob Wertheimer, Vertical Research.

I had a question on the sequential change in gross margin, went from 12.4%, to 11.9% if you back out the accounting change. Is there any production disruption or issue there or should I assume it was maybe pricing related?

I think pricing related is a very astute judgment.

Perfect. That's helpful. Second question will be -- you mentioned the ramp-up in Brazil. Are you going to be shipping product or are you already shipping product from one of the Western plants to Brazil in order to prep the dealers in order to stock the inventory in order to get sales rolling? Will that have an effect on margin? You said a couple quarters ago you had not done that. I don't know if you've started yet.

We certainly have test vehicles running in Brazil, very normal as you go into a new market, and we also have a lot of experience in other countries of South America. So there will be some trucks placed in-country so that the dealers have product to sell. But we're really -- we're building that factory because we're going to supply South America from our Brazil factory. So that's our focus right now.

No, for sure. I understand that. The underlying question is just whether you saw gross margin hit because you had to pay a tariff on stuff that you were stocking the dealers with until the factories ramp.

No impact at all.

Okay. Perfect.

Good question, though.

Thank you very much.

Thank you. Of course, we want to invite everybody down to Brazil probably early next year, we can show you our beautiful facility.

Great. That will be fun.

Jeff Frank Kauffman, Sterne Agee.

Let me ask you a fluffy one here. (laughter) We talk about the new product. You talk about how we're pushing MX and you've got the new XS Euro 6 engine with DAF. What are customers asking you for today that you don't do?

That is a great question. We should get you on our strategic planning group. ( Laughter ) I've been in this business 35 years. I've got a lot of wonderful friends, customers and dealers. The list is probably long of things that they would like us to do. The good news is that we are ahead of their requests the vast majority of the time and they're very, very happy. There's always, whether it's minor design enhancements, different services, but I'd say the vast majority of the time we're ahead of what they're expecting.

But occasionally there's some really good ideas that we do incorporate and we have customer panels, groups of people that get together. We have dealer groups that get together. We have supplier groups that get together and this is going to -- you asked me a nice fluffy one. I'll give you a little bit of a fluffy answer. We pride ourselves on the highest quality products with the best residual and the lowest operating costs. That's what we deliver. When you're getting that as a customer, you're generally pretty happy.

Okay. So outside of say natural gas, which as you say we're poised and we're ready but it's not ready. There's nothing meaningful the industry's asking for that isn't in the product lineup right now?

No, no, that's a good question. No. We have a very broad array of product offerings and options that we bring to the market on a global basis. And in the markets where we are, I think we do a very, very good job. As we move into China and India, they have slightly different demands and that's what we're working through to get a better understanding of what that market requires and that's a ways off but certainly now with our growth in India, we have a couple hundred of wonderful employees working there, whereas a couple years ago we did not. That is certainly opening our eyes to another opportunity and we're bringing that on-board.

Okay, guys. Great. Congratulations.

Thank you very much. Have a good one.

Brian Sponheimer, Gabelli & Company.

Congratulations on your great award in Great Britain.

Thank you. I appreciate it very much.

Just a question on December and concerns heading into the fiscal cliff around bonus depreciation. What sense, particularly in the used market, did you get from your dealers that there may have been some sort of, I don't want to even call it a pre-buy, but concerns that there might have been the loss of the bonus depreciation, maybe some purchases pulled forward from the first quarter?

Well, let's talk a little about used trucks because that is an important element certainly in our life and the life of our customers and our dealers. As we look over the last four years, going back to the late part of '09, the good news is that used trucks are up about 65% in value over the last four years. And that's very, very encouraging in terms of our average sales price. Towards the end of last year, there was a little bit of a fall-off but starting out this year we've seen it pretty steady in terms of used truck valuations. So that's one of the real core strengths that we bring to our customers with Kenworth, Peterbilt, and DAF is that our vehicles three, four, five years out will be worth significantly more than our competitors and we see that time and time again in the used truck marketplace.

Are you comfortable with the amount of used inventory in the system right now on an industry-wide basis as far as holding up prices for your trucks?

We're comfortable with it. I mean, just general inventory for our dealers is actually pretty low. I think our dealers are adding -- I'm talking about new trucks now, but adding new trucks to customers as they see a little bit of a pick-up. But used truck inventory is -- it's reasonable, yes.

All right. Great. Congratulations.

Good. Thank you. Appreciate. Talk to you soon.

Satish Athavale, KSA Capital.

Mark, looking at your aftermarket spare parts business, that business was growing at double-digit pace last year and throughout 2012 it looks to have decelerated pretty rapidly and in second half looks like it was actually down year-over-year. So you commented that your customers seem to be doing fine. So why is there this seeming disconnect between your aftermarket spare parts business and --?

The good news, aftermarket was at record levels.

Yes.

So let's lay the foundation there. That's important. In fact, it's the third consecutive year of record sales for parts, so I think the parts team have done an outstanding job. In terms of any slowdown in the parts sales, remember, this is a slowdown to a record, very important, I think that'd primarily be in Europe as some of the Southern countries, which are well-documented with challenges, we've seen some definite slowdowns there.

But on the other hand, we're going to be opening a brand-new distribution center. I know a number of the tech companies get a lot of press when they open up distribution centers. I hope we do also. And we've already had probably close to 1,000 of our parts and service people from the dealers in Europe going through our new center and I think there will be some renewed enthusiasm for the aftermarket business in Europe.

Okay. Great. So for this year, 2013, what kind of growth should we expect from the aftermarket business?

Yes. We don't typically break out that, but the team is working hard to do another great job.

I'm sure they will. So one last question. What was your effective tax rate excluding the one-off item in the fourth quarter?

Be around 32%.

Okay. Great. Thank you.

Thank you very much.

Jay Van Sciver, [HedgeQ].

Great quarter.

Thank you.

Could you provide your backlog at year end? And secondly, could you give us a sense of what you expect in terms of market share next year given what you see in present order trends?

Those are two great questions which we typically don't really share too much. Backlog is probably coming down a little bit but our share is driven by how successful we are in the marketplace.

Okay.

Okay. Good questions.

(Operator Instructions).

At this time, there are no further questions.

I'd like to thank everyone for their excellent questions. Thank you, operator.

Thank you. Ladies and gentlemen, that does conclude today's PACCAR's earnings call. Thank you for participating. You may now disconnect.