帕卡 (PCAR) 2015 Q3 法說會逐字稿

Good morning and welcome to PACCAR's third-quarter 2015 earnings conference call.

(Operator Instructions)

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. Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead.

Good morning. We would like to welcome those listening by phone and those on the webcast.

My name is Ken Hastings, PACCAR's Director of Investor Relations. Joining me this morning are Ron Armstrong, Chief Executive Officer; Bob Christensen, President and Chief Financial Officer; and Michael Barkley, Vice President, Controller.

As with prior conference calls, if there are members of the media on the line, we ask 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 Ron Armstrong.

Good morning. PACCAR reported strong quarterly net income of $431 million for the third quarter of 2015. This is the second best quarter in the Company's 110-year history.

Net income increased 16% compared to the third quarter last year. PACCAR's third quarter sales and financial services revenues were $4.9 billion.

Gross margins for truck parts and other operations were outstanding at 15.3%. These strong margins were the result of our great product lineup and rigorous cost control, generating an 8.9% after-tax return on revenues. This was the highest return on revenues achieved since the first quarter of 2007.

I'm very proud of our 24,500 employees who have delivered industry-leading products and services to our customers worldwide. PACCAR delivered 39,400 trucks during the third quarter; a 6% increase compared to the third quarter last year. The European economic and truck market outlook continues to improve.

GDP growth expectations for this year are 2.6% in the UK, which is PACCAR's strongest market in the region. GDP growth is also accelerating on the continent.

Freight transport activity on German highways is up 3% year-to-date compared to the same period last year. DAF truck registrations in the European above 16-tonne market are up 30% year-to-date compared to 20% growth for the market as a whole. We've raised this year's 2015 forecast for Europe's greater than 16-tonne market to a range of 255,000 to 265,000 units. We expect the strong market conditions to extend into next year.

Our 2016 forecast for Europe's heavy truck market is a range of 250,000 to 280,000 trucks. DAF has begun construction of a $110 million cab paint facility in Westerlo, Belgium to support its future growth.

The US economic picture is also positive with GDP forecast to grow 2.5% this year. The housing and automotive industries are bright spots in the economy and create a large amount of freight. Housing starts are projected to grow 13% this year to 1.1 million and the automotive industry is expected to deliver a near record 17.2 million vehicles.

US freight tonnage is at strong levels. Our estimate of retail sales for this year's US and Canadian Class 8 truck market is a range of 275,000 to 285,000 units. For 2016, US economists are forecasting 2.7% growth in GDP, 13% growth in housing starts, and another year of strong sales in the automotive industry; all of which is positive for freight tonnage and truck sales. Next year should be another strong year for the US and Canadian Class 8 truck industry and be in a range of 240,000 to 270,000 units.

Gross margins in the fourth quarter for truck, parts, and other are forecast to be 0.5 to 1 percentage point higher than last year's fourth quarter. PACCAR's global truck deliveries in the fourth quarter are estimated to be about 9% lower than the third quarter, reflecting increased holidays and lower build rates in North America. This is partially offset by more production days and higher build rates in Europe.

PACCAR's parts business generated record revenues of over $2.3 billion and record pretax profits of $430 million for the first nine months of this year. Profit is a 17% increase compared to the same period last year. The strong results were driven by economic growth and strong freight tonnage in the US and Europe and the many innovative products and services offered by PACCAR parts and our dealers.

Excluding the effects of foreign currency translation, parts revenues would've been up 8% or $173 million for the first nine months of this year. For the third quarter of 2015, PACCAR parts pretax profit of $145 million generated an excellent return on sales of 18.7%. To support the growing demand for PACCAR and TRP-branded parts, PACCAR Parts will open a new 160,000 square foot distribution center in Renton, Washington in the first half of next year.

PACCAR Financial Services' third quarter pretax income was $93 million compared to $97 million earned a year ago. Excluding the effects of foreign currency translation, profit would've increased $2 million for the quarter. The portfolio continues to grow and perform well.

PACCAR's strong balance sheet and positive cash flow have enabled the Company to continuously invest in new products and facilities. PACCAR recently announced the launch of the PACCAR MX-11 engine in North America early next year. PACCAR successfully launched the MX-11 in Europe two years ago and has installed over 10,000 MX-11 engines in DAF trucks. In addition, PACCAR's engine factory in Columbus, Mississippi celebrated the production of its 100,000th PACCAR MX-13 engine.

Capital expenditures for 2016 are projected to be $325 million to $375 million and research and development expenses are estimated to be $240 million to $270 million. These investments will further enhance our global product ranges, aftermarket support, and our manufacturing facilities. In the third quarter, PACCAR repurchased 1.4 million shares of Company stock for $79 million.

In September, the PACCAR Board approved the repurchase of an additional $300 million of common stock. PACCAR continues to enhance its leadership position in the global truck market by developing the highest quality products and services in the industry.

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

(Operator Instructions)

Steven Fisher, UBS.

Great. Thanks. Good morning.

Good morning, Steven.

Just related to the 2% growth outlook in Europe for 2016, which market or markets within Europe do you think still have the most upside relative to replacement demand potential?

Probably in terms of the growth percentage, probably the southern markets would have the highest growth prospects just because they have been relatively low. So I think percentage-wise that will be the case.

Another opportunity for DAF is the Russian market, which has been down a fair amount over the last couple of years. And there's obviously a potential for that to grow from a very low level currently this year.

Okay. And on the buyback, can you talk about how you decided on the $300 million number and whether you think there's any motivation there to make that materially larger, potentially multiples of that number?

Yes. We've done $300 million over the last couple of times. It's a number that we feel very comfortable with. It provides a reasonable horizon and if we see the opportunity presents itself, we'll authorize an additional amount above and beyond that at the appropriate time.

Okay. So where the stock is trading now is not part of your thinking at the moment?

We obviously had bought back shares during the quarter and with the additional authorization, we have the capability to continue to buy shares as we go forward.

Okay. Thanks very much.

Thank you.

Nicole DeBlase, Morgan Stanley.

Good morning, Ron. How are you?

Great and you?

Good, thanks. My first question for you is around the 4Q production outlook. So within the 9% year-on-year decline, I'm just curious how you might frame that within the US and Canada versus Europe?

So Europe would be up probably in the 30% to 35% range with the fact that we've got more production days and a higher daily build rate. And offset by a similar percentage on the North American side reflecting increased holidays and lower build rates in North America.

Okay. Got it.

And then my second question is, with respect to what you guys are hearing from your customers, we've had a few big fleets decide to cut their 2015 and 2016 CapEx outlook. I know the market is super-fragmented, but I'm curious, in particular, about what you're hearing from your owner operator-customers about their plans for spending next year in North America?

I would say most of our discussions with our customers, again, mostly the large fleet customers, their expectations are to buy a similar number of trucks next year as they have purchased in 2015. I think we're seeing that in the quote activity that's going on currently with Peterbilt and Kenworth and as well as the order intake that's coming in. So people are starting to make decisions about 2016 purchases.

Okay. Thanks. I'll pass it on.

Nicole, I would add that we already have several of our large customer orders in the house and those volumes are the same as or larger generally than last year.

Okay. Great. Thanks, Bob.

Jerry Revich, Goldman Sachs.

Hi, good morning and good afternoon. I'm wondering if you could talk about the R&D budget for next year. Obviously, you've given yourself room depending on end market variability, but at the midpoint of the range is pretty good R&D growth within the context of mix and market outlook.

Can you just talk about the types of programs that you're increasing spending on 2016 versus 2015? Any additional color on US versus Europe that you might be able to share?

So much of our product lineup now is global in nature. I see next year being similar to this year in terms of investing, really, across all elements of our products from continuing to enhance the individual component offerings within our various models at Peterbilt, Kenworth and DAF.

We continue to invest in our engine technology. Obviously, we're launching the MX-11 in January in North America.

We have greenhouse gas requirements coming into play in 2017. So we'll continue to invest in our engine technology, our engine efficiency. The engines are performing excellently in the North American market and have for, obviously, 10 years in Europe. So, we continue to invest in those areas, as well as new systems and enhancements to our manufacturing capabilities.

Okay. And then I'm wondering if you might be able to share with us your book-to-bill in the quarter in Europe and separately in the US or if not, just maybe update us on how long your lead times stand in the two regions?

Europe, the order intake for this quarter is up about 30% over where it was last year. So we have a good solid backlog for the fourth quarter and as a result, we're increasing the build rates. We've seen the industry orders in North America and that has reduced that window some and as a result, we've adjusted build rates in North America accordingly.

Okay. And then lastly, obviously the concern is what the margin performance will look like if we get to the lower end of your outlook for US and Canada next year. Can you just talk about structural differences we should think about in your business this cycle versus last?

I guess your gross margins are certainly higher than what most people would've expected in this cycle. Can you just help us understand how we should think about decrementals, et cetera, if we get to the low end of your retail sales outlook?

I think it starts with the engineering of the product and our engineers with the development of the 2.1 meter cabs. Those products for Peterbilt and Kenworth and the Euro 6 products did a fantastic job of developing optimal designs with the balance of cost and performance for our customers. The manufacturability is excellent.

So we're in great position from an operating standpoint and the products are performing very well in the marketplace. So we feel good about, structurally, our position in our factories, our suppliers are performing well. And we're able to continue to make the 5% to 7% annual enhancement that is sort of our expectation for ongoing operating efficiency and overall operational improvements.

Okay. Thank you.

Thank you.

Jamie Cook, Credit Suisse.

Hi. Good morning.

Good morning Jamie.

A couple of questions. One, the margin performance in the quarter was impressive in my opinion, relative to where the sales came in. So can you talk about what the drivers were behind that?

Was there any material cost benefit? What was the FX -- how did FX impact the operating margin?

And then I guess just my second question, I know that you said you're optimistic about 2016 based on what your large fleet customers are telling you. At the same time, for the broader industry, cancellations have picked up over the past three quarters relative to what you'd see on a normalized basis.

Have you seen anything like that? Is that part of the reason why you're taking your fourth quarter production down? Is it just a function of people shifting delivery of trucks from the fourth quarter to 2016 or is it just orders going away at this point, but you're confident that the customers will come back? Thanks.

Okay. I'm going to try and tackle all of that.

So the first part about margins, Jamie, was really benefits of a lot of different areas. Obviously, as I mentioned, it starts with great product and pricing has been solid for us in the third quarter compared to where we've been. So products continue to earn a premium in the marketplace.

We are benefiting from somewhat lower material costs and commodity costs. We're seeing the benefits of operating efficiencies in our factories and the products are performing excellently in the marketplace and all of those really come together to sort of generate the overall margin performance.

In terms of cancellations, cancellations for us have just been very normal, nothing to speak of that's different than what we would normally expect. And in terms of timing of deliveries, obviously, there was a large order intake in the fourth quarter of last year/first quarter of this year and now the orders are being placed for 2016. And so I think there's a bit of a lull in the build as we see it currently, but the prospects for 2016 are excellent.

And I'm sorry, can you quantify the material cost benefit that you got in the quarter?

I don't have those particular numbers, Jamie, but it was 0.1% or 0.2% of margin percent, I think.

And what's, sorry, the FX as well?

The FX, we continue to benefit, We source a fair amount of our engine components for our North American build come from Europe and so we benefited from that during the course of the quarter.

Okay. But you won't quantify the amount?

I don't have that in front of me.

Okay. Great. I'll get back in queue. Thank you.

Thanks.

Andy Casey, Wells Fargo Securities.

Thanks a lot. Good morning, everybody.

Good morning, Andy.

Ron, I just wanted to go back to your comments about US/Canada truck 2016 order placement looking like it's good. Does that suggest, despite the production commentary that you gave earlier, that we should kind of expect a positive change in order trends for the last three months of the year?

I would say that would be the case. Orders for the third quarter are at 17,000, 18,000 a month, I think you'll see an increase in that. I know, certainly, that the Peterbilt and Kenworth numbers should increase from what they saw on the third quarter.

Okay. Thank you.

And then if we can go back to the question on the margin, because clearly you're going to be -- you're anticipating mixed market conditions next year. You had a really good margin performance in third quarter. Within that, though, you had the aftermarket parts margin up 240 basis points year-on-year and it's remained above 18% for, really, the third consecutive quarter. What change is really driving that performance? Is it structural or is it just pricing and material like you kind of intimated?

No, I think it's more structural. Obviously, we just, as I mentioned, celebrated the production of our 100,000th MX engine in our Columbus engine factory. So the population of MX engines continues to grow and we're seeing an increased percentage of MX engine parts sales and other engine parts sales in the market and that is beneficial.

And our team has done a great job of putting together some really innovative programs and offerings and leveraging their cost structure for their parts warehouse. So it's a combination of a lot of different elements, but I'd say that the increase in proprietary parts is a key part of it.

Great. Thanks.

And then last question, it looks like you're projecting capital investment to go up in 2016 versus 2015. Is that driven by the projects that you talked about in your monologue or are there --?

It is. It is.

We've got the cab paint shop in Westerlo. We've got some other plant projects at Chillicothe and at Denton, we've got the product projects with trucks and engines. We've got -- continuing to enhance our systems to be able to continue to move our business forward. So all those elements contribute to that.

Okay. Great. Thank you very much.

Thank you.

Ross Gilardi, Bank of America Merrill Lynch.

Good morning, Ross.

Good morning, thank you. Just a couple of questions, just back on the Europe topic.

Clearly, you've seen a lot of strength in Europe year-to-date. But you're forecasting a pretty significant deceleration in 2016 and I'm just wondering, does that reflect what you're seeing in your order book now or is that just conservatism?

If you look of that range of market, that will be certainly the best market since 2008 and a top-five market, probably in the history of the European market. So, it's quite a good market.

With expectations of 1.5% growth on the continent to continued strong growth in the UK, we feel like that's our best estimate at this point. We'll know more -- every time we report as we progress through next year, we'll have better insight, but we feel good about the European market and what the prospects are for next year.

Okay. Thank you.

And then I'm just wondering if you've seen anything in Europe, any type of change in order momentum or customer discussion and the aftermath of what's happened with VW in the auto space? Has that impacted any of the cadence of what's going on in Europe and has it opened up any type of market share opportunity for you over the next 12 months?

I would say that's been a non-event from our market and our business perspective. It's certainly related to the automotive, but no effect on our business.

Okay, and I just want to make sure I understood your comments before on Europe versus North America. When you talked about 35% production changes, were those year-on-year or sequential comments?

Sequential.

For both Europe and for North America? So, Europe up 35%, North America down 35%?

Yes.

Okay. Thank you.

Stephen Volkmann, Jefferies.

Hello, good morning, guys.

Good morning, Stephen.

I'm wondering if maybe I can push you a little bit on some other of the drivers of 2016, just to kind of get your thinking directionally? I know you've put a lot of effort into improving your parts distribution and all that. Is there any reason that parts business would not be up again next year?

Yes, I think a lot of it is economic-driven. It's the amount of freight tonnage. As I mentioned in my comments, freight tonnage in North America is strong, near record levels and the same is the case in Europe.

We monitor the mount statistics and other freight metrics in Europe and those are really also at near-record levels. As long as the freight movement is there, there's going to be a need to service and support the truck and keeping the uptime going. We think with our innovative practices, some of the things that our team does with their fleet services program, some of the online programs, that we can continue to grow our share of that aftermarket parts business as we progress through 2016.

Great. That's helpful. And then I don't know maybe similar comments on finance, you're also I think penetrating a little more in that market?

As is typical during the cycle, when things get really good, there's a lot more lenders that come into the market and think that they're going to be able to take advantage of that. So we're in that particular phase and so we continue to focus on what we do very well. We have a great customer support mechanism. We're focused on serving the commercial vehicle business and our guys do a great job and we'll continue to be in that 25% to 30% share of the finance market as we go forward.

Okay. Great. And just finally, on the MX engine, I assume you would be expecting to sell more of those next year as a percent of total. And maybe any thoughts on what types of volume the MX-11 might be able to drive?

The MX-11 is not as prevalent an engine in the market as the MX 13-liter engine is. But now we have our own engine that we can offer in that range and so that will add several percentage points to our PACCAR engine penetration as we get into next year. I think in the near-term, we'd expect 40% to 50% of our engines to be PACCAR engines.

Great, thanks so much.

Thank you.

Patrick Nolan, Deutsche Bank.

Good morning, Patrick.

Good morning, everyone. Just a couple of follow-up questions.

First, on North American pricing, in previous cycles, as volumes started to come off from the peak, we saw pricing start to get weaker. What are your expectations for that as we go into next year, as the market starts move more towards a trend demand level over the next couple of years?

I think we're very comfortable with pricing being comparable to current levels. We're competitive in the marketplace, we've got a great product and our products realize a fair price in the market. I don't see any significant price movement in the near-term at all.

If I could just go back to the margin question, again, maybe ask it a different way. So next year, Europe will be up a bit. It's your more vertically integrated market, so in theory, the incrementals are better on that volume growth.

And North America, based on your guidance, is going to be off a bit and then there's some cost savings on the gross margin line. Do you think that measures up to kind of a flattish gross margin next year or do you think gross margin would be down slightly if revenue declines a bit?

I would say it'll track volume a little bit, but I'd say it would be flattish margin achievement next year compared to this year.

That's very helpful. What's your preliminary view on taxes next year as Europe becomes a bigger portion of the earnings?

Michael, do you want to --?

Yes, we still expect the overall tax rate to be around 31%, 32% depending on the mix of our needs and other factors.

Thanks very much, guys. I'll get back in the queue.

Thank you.

Seth Weber, RBC Capital Markets.

Hello, good morning.

Good morning, Seth.

Most of the questions were asked already, but can you just comment on what you're feeling about dealer inventories? We've been hearing some chatter about inventories across the industry maybe getting a little bit elevated. Are you seeing that or have you heard anything to that effect?

No, not at all. Our dealers are typically, PACCAR dealers have sort of below industry average inventory levels. And we're in that position currently and dealers are in great shape, so I feel good about where we're at.

Okay. Just, sorry, going back to Europe again, how much of the strength do you think is being driven by replacement demand versus -- you mentioned the German freight volumes. Is it macros getting better or is it just the age of the fleet is old and you haven't seen a cycle there? Do you have an opinion to that?

I think it's a combination of both of those, just like we saw in North America. There's a combination of some pent-up demand, as well as some capacity growth.

Thank you very much, guys.

Thank you.

Neil Frohnapple, Longbow Research.

Good morning, Neil.

Good morning, guys. Could you just talk about used truck pricing in North America? What are you seeing in the market?

We've heard some signs of deterioration the last 30 days, 60 days. Are you guys seeing something similar and just any color you can add there on how that will potentially impact the new trucks sales side?

Yes, I don't see used truck pricing having a significant effect on the new truck sales levels. I would say, in the third quarter, pricing was comparable to what it was a year ago. But you're coming into periods now where there's going to be more trucks in the market and we'll see how that will develop as we progress in the coming quarters.

Okay. Do you have an updated industry outlook for heavy duty industry registrations in the South American market? I think previously you had mentioned 70,000 to 80,000 for 2015 and just any initial thoughts on 2016?

I'll let Bob talk to that.

We think that 70,000 to 80,000 is a good measure for the balance of this year and we'll probably experience a similar level of demand in 2016.

Great, and then just one final housekeeping question. Of the 24,200 units in US and Canada, do you have a specific breakdown by region in the quarter?

Between US and Canada?

Correct.

I don't.

All right. I'll follow up with Ken. Thank you, guys.

Thanks.

Joe Vruwink, Robert W. Baird.

Hi, good morning.

Good morning, Joe.

I wanted to go back to the earlier comments on what the large fleets have been saying, because I think other than Swift, actually all that have made 2016 comments have actually said they're going to continue to grow their fleets next year in addition to normal. And some have even said accelerated replacement to get the average age down.

With that dynamic and then looking at your forecast for next year to get the retail sales decline in the industry, is the bridge between those two things maybe just a deceleration in fleet growth? So 2015 was a very healthy year of expansion. Next year is going to be good, but just not at 2015's level?

I think that's a fair way to think about it. Again, our discussions have been that people are going to invest about what they've invested in 2015. I think just the pace of maybe how they go about that may be a little bit more even-keeled because of the higher -- extraordinary high order intake in the fourth quarter of 2014 and the first quarter of 2015.

Based on your prior cycle experiences, it would seem to be unusual to have that sort of commentary from the large fleets, even though they're a small piece of the industry, directionally they're helpful. To get those comments and then expecting there's been whispers that volumes are down 15%, 20% next year, that just seems to be too great of a disconnect. Would you generally agree with that view?

Our thoughts are as long as the economy is in that 2% to 3% growth and there's continued strong housing and automotive activity and consumer spending is up 3% or 4% year on year, I think the fundamentals of the economy and therefore, the effects on our business, I think, are all good. I would agree that 15% to 20% is probably overly pessimistic.

Great, I'll leave it there. Thanks very much.

Thank you.

Alex Potter, Piper Jaffray.

Good morning, Alex.

Hi, guys. I was wondering if you can comment -- I guess just give an update on Brazil?

Obviously, your macro down there seems like things are pretty much coming apart at the seams, but less of a material issue for you guys since you're growing off a non-existent base. But just maybe an update on how volumes are ramping down there, I guess dealer development, and then maybe South America more broadly speaking, as well.

I feel very good about the progression our team has made. Our team is very solid. We just got recognized as having one of the top truck models in the marketplace.

The market is a difficult market, but our team is growing and establishing a footprint and doing all the things necessary to position us for long-term growth in that market. Bob, do you have other things to add?

We're continuing to add dealers, even in a very difficult market. They're continuing to invest in their footprint.

We will be introducing some new truck models at the large South American truck show, Fenatran, next month. Our production volume is small, but it is growing slightly. The fundamentals in Brazil are difficult right now, but the long-term fundamentals for trucking are very good.

Okay. Great.

And I guess one question on the truck cycle in North America, then I'll pass it on. Shifting specifically to medium duty, there's been some commentary regarding, I guess, the staying power of the medium duty market maybe not getting whipped around as much as the heavy duty market. Would you say that's generally consistent with the way you guys are viewing things looking into 2016?

I think that traditionally has been the case and I think that's how we think about it as we go forward. The ups and downs of that market typically are a little more muted than the heavy duty segment.

Okay. Great. Thanks.

Thank you.

Robert Wertheimer, Barclays.

Good morning, Robert.

Good morning, thank you. A quick question for you.

You gave some detail on the 11 liter, which seems to be very successful in Europe. Do you happen to have the current mix? Has it reached its natural level in Europe or is it still growing? And the potential for the US as a follow-through.

So I think it hasn't reached the total potential in Europe. I think as time goes on and greenhouse gas requirements and fuel efficiency expectations increase, we'll see more and more downsizing. The MX-11 has capability to go up to 430 horsepower and 1,550 foot pounds of torque, so it's a very capable engine.

The customers that are using it in Europe are very satisfied with its capabilities and I think we'll continue to see a migration to a higher percentage. It's about 25%, 30% of DAF's build at this point and we'll ramp that up in North America as we go. I think as more customers experience its capability, we'll see, just like we've seen with the MX-13, we'll see a progression of more and more customers taking that engine on.

Is that fully on sale in 1Q or is it going to be a staged ramp?

It'll be a ramp up during the course of next year.

Perfect. If I could ask one more, in Europe, could you speak to your share -- your share gains? Is that geographic more or is it gaining presentation in truck versus tractor that you've aimed for, for a long time? Maybe if you could give us any color on that, thanks.

I think it's really across almost all the markets. 2014 was impacted by the Euro 5 pre-buy, which was really across most of the geographies. And so we've seen a recovery this year across all elements and we're up about 1 percentage point across the breadth of Europe and we see similar progression in most countries.

Thank you.

Joe O'Dea, Vertical Research.

Hello, good morning.

First, it looks like you did take build down in September, in Class 8 for US and Canada. So just whether or not that fully now reflects your expectation for what both build rates should be at into the end of the year or if there's a little bit more work to do on taking build lower?

I think we've adjusted build rates to where we think they need to be and we would anticipate, based on where we're at today, that will be how we'll start next year.

Okay. And then also on North America and within vocational, you've previously talked about having very strong share within that market. The order trends within Class 8 straight have been softer recently.

So if you could just talk to whether or not that has affected some of the applications that you go into or if you're more protected from it? And then your kind of outlook for how that should trend moving forward, if we get some relief from some of that softness?

That order trend that you refer to is seasonality. We have two new models; one on the Kenworth side and one on the Peterbilt side that are doing very well, the 567 and T880. And we would anticipate that we would have another strong construction season upcoming.

Okay. Thank you.

Ted Grace, Susquehanna.

Good morning, Ted.

Good morning, gentlemen. I was hoping to dig into the parts business a little more and follow up on some of Steve's questions. Could you walk through regionally how that business performed and also give us a sense for what the impact of FX was in the quarter?

In terms of the performance regionally, both North America and Europe participated in about 7% to 8% growth year-on-year for the year-to-date period. So they both have done very well with their programs to get a greater share of the market and take advantage of the strong freight markets. I'll let Michael talk to the exchange rate effects.

The impact on parts revenues for the quarter was $50 million, for the year-to-date figure was $155 million. It has been running at about the $50 million pace during the --

Any impact on profit?

The impact on profit for the quarter was, pretax income impact, was about $10 million.

Okay. And can you remind us what it is year to date?

Year-to-date would be about $30 million.

Okay.

About a $10 million a quarter pace. That will diminish, of course, as we enter into different comparatives going into 2016 with exchange rates that have been relatively stable at these low levels for the past few months.

I guess, as we just think about the growth, I know you said it's been pretty even between North America and Europe. Can you talk about -- and largely kind of economic and freight volume-driven -- but can you talk about how we should think about maybe the underlying growth versus some of the Company-specific initiatives to take share, whether that's more store growth or the DC initiatives, et cetera?

Just so we can get a sense for what the underlying -- because obviously, freight volumes aren't growing at high single-digits. So just trying to understand that dynamic.

Well, a lot of facets to that, obviously. First of all, we continue to invest in new distribution capability or expanded distribution capability.

We've built the new warehouse in Eindhoven. We've recently expanded our racking capability in our Budapest warehouse. We doubled the size of our Lancaster warehouse. We're essentially doubling the capacity in the Pacific Northwest here with the new PDC in Renton. We're continually investing to provide that best in class service for our dealers and customers.

One of the things that we've done and we talk about it in the press release is we've opened TRP stores -- TRP standalone stores to really support the TRP brand and gain greater access to the second and third owner, to the All Makes trucks, as well as buses, trailers, et cetera. And then our dealers have added lots of locations in North America and Europe to increase the penetration and the presence of their businesses and we're seeing the benefit of that as well. And then you add on the additional initiatives, the programs that our parts team have put together, all of those things together are supporting that 8% growth.

Okay. And then the last thing, if I could just sneak it in, in follow-up to the question Jamie had about pricing, I know you made the comment that pricing overall was solid. Could you actually speak to pricing in the US versus Europe and are you seeing any signs or isolated pockets of pricing weakness in Europe?

No, pricing in both markets, I'd say, is very solid. With again, the markets, as we see them currently, our top five markets and products are performing well. They've got a lot to offer a customer in terms of efficiency and low operating cost and so we're seeing good solid pricing with our products.

Okay. I was thinking more from the standpoint of competitors, from select competitors than from progressive.

I guess it's typical business. We have business that we think is very important to us and other OEMs have business they think is important to them. And so that's just normal, I would say, it's all normal marketplace behavior that we see in both North America and Europe.

Okay. Great. Super helpful. Thanks a lot and good luck this quarter, guys.

Thank you.

(Operator Instructions)

Mike Shlisky, Seaport Global Securities.

Good morning, guys.

Good morning, Mike.

I wanted to touch back on your Class 5 to Class 7 share in the quarter. It looked pretty solid.

I was wondering if you could give us some kind of color as to perhaps, were there any kind of products or end markets that did better than others in the quarter? Or any initiatives that you guys took in the quarter to kind of gain some additional share there?

No, nothing. I think as time goes on, more and more of our dealers appreciate what that product can do for their customers. And we continue to see those products perform very well and they just continue to get a growing share of that Class 5 to Class 7 market.

Great. And then secondly, I also just want to ask about the upcoming new paint facility over in Europe.

Is paint currently a pinch point for production or for margins? Can we expect the opening of that facility to perhaps unlock some kind of margin upside either in 2016 or possibly in 2017?

As we look out for DAF's growth expectations, we've talked before about medium-term targeting at 20% share of the European market. We need more capacity in our paint operations. And in addition to giving us the capacity, obviously it will be state-of-the-art, very environmentally friendly, and really provide some good efficiencies and qualitative performance that we'll enjoy for years to come.

All right, guys. Thanks so much.

Thank you.

Ann Duignan, JPMorgan.

Good morning, Ann.

Hi, how are you, guys?

Good.

I think most of my questions have been answered by now, but I did want to circle back a couple of things. The MX-11 engine, that will replace or compete with your current medium duty engine, which, if I recall correctly, is built by Cummins. Is that correct?

Yes, it will compete with Cummins' offering. Basically, this will replace the offering from Cummins.

Okay. Yes, I just wanted to make sure that was it, because I think Cummins builds it for you, but you brand it, don't you?

We have a nine liter that we buy from them that is branded and we'll continue to buy that nine liter, but we also buy some 11 liter and 12 liter engines from them that this would essentially replace.

Okay. (inaudible) I just wanted to make sure.

As we look at orders over the last three months, Canada and export orders have been down significantly. Canada down more than 50%, export orders down 70%-plus. Can you talk about those markets as you head into 2016 and how divergent those might be versus your outlook for the US?

I think the Canadian order levels have been impacted, obviously, more by oil and gas, I think, than what we've seen elsewhere. So obviously, lower oil and gas prices are very positive for almost all of our customers.

But there are some regions that get impacted by the lower oil and gas prices and so Canada is one of those areas that has seen that, but the rest of the Canadian operations and fleet activity et cetera is very good. Export, I'd say those markets are down compared to where they have been and Bob talked about some of the South American markets, 70,000 to 80,000, probably more normal range would be 100,000 trucks or so per year.

You have baked those two markets into your outlook that you've given us today? You're not expecting those to get any better?

No. Just part of the --

Very similar.

Okay. Those were my two questions, I think, that hadn't been addressed. I'll leave it there and if I have anything else, I'll take it off-line.

Okay. Thanks, Ann.

I appreciate it.

At this time, there are no further questions. I'll turn the conference call back over to Mr. Hastings for closing remarks.

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

Once again we'd like to thank you for your participation on today's conference call. You may now disconnect.