帕卡 (PCAR) 2015 Q4 法說會逐字稿

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

(Operator Instructions)

Today's call is being recorded, and if anyone has any objections, 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 statements and above risks and uncertainties, including general, economic, and competitive conditions that may affect expected results.

I would now like to introduce Ron Armstrong.

Thanks, Ken, and good morning.

Thanks to PACCAR's 23,000 employees around the world, 2015 was an outstanding year for the Company with many records established. PACCAR achieved record revenues of $19.1 billion and record net income of $1.6 billion, an after-tax return on revenues of 8.4%. Net income increased 18% versus the prior year. 2015 was PACCAR's 77th consecutive year of earning a net income. These excellent results reflect the strongest North American heavy truck market since 2006 and the highest European heavy truck market since 2008.

In addition, PACCAR parts earned record pretax income and PACCAR financial services achieved another strong profit year. PACCAR celebrated several important milestones in our 110th anniversary year. These included the delivery of DAF's one millionth truck, the production of the 100,000th engine in our Mississippi engine factory, and 35th anniversary celebrations at Peterbilt's Denton, Texas, factory and at PACCAR Leasing.

During the year, PACCAR continued investing in premium quality products and services in our core markets and expanding our presence in emerging markets to provide the foundation for future growth. PACCAR's quarter sales and financial services revenues were $4.4 billion and quarterly net income was $347 million, a strong 8.8% after-tax return on revenues. During the quarter European truck deliveries increased, partially offsetting reduced North American truck deliveries. The strong contribution of all Company segments enables PACCAR to attain the highest operating margins in our industry.

PACCAR declared cash dividends of $2.30 per share last year, a 25% increase compared to 2014, and the highest total dividend in Company history. The regular quarterly dividend was raised by 9% during the year. PACCAR's total dividends in 2015 provided a yield of over 4%, which is in the top 100 companies in the S&P 500. During 2015, PACCAR repurchased 3.8 million shares of its stock for $202 million.

PACCAR delivered 35,400 trucks during the fourth quarter, in line with expectations. Vehicle deliveries and truck and other margins in the first quarter this year are projected to be comparable to the fourth quarter. Peterbilt and Kenworth achieved a good market share of 27.4% in the US and Canada heavy-duty truck market in 2015. Class 8 truck industry retail sales totaled 278,000 units for the year. Peterbilt and Kenworth also achieved a record 17.4% share of the US and Canadian medium-duty truck market last year, resulting in a record 27,300 medium-duty truck deliveries for PACCAR. 2016 will be another good year for the US and Canadian Class 8 industry truck market, with retail sales estimated to be in a range of 230,000 to 260,000 units. Additional good news is that Peterbilt and Kenworth dealer inventories are in great shape entering this year.

DAF increased its market share to 14.6% in the European above-16-ton truck market last year, compared to 13.8% in 2014. The market was a strong 269,000 units in 2015. Looking at this year, we anticipate that the European above-16-ton truck market has the potential to expand further and be in the range of 260,000 to 290,000 vehicles. Economic growth in Europe is expected to increase this year to 1.7%, with more than 2% growth anticipated in the UK, DAF's largest market.

PACCAR parts generated record pretax profit of $556 million and strong revenues of $3.1 billion in 2015. The excellent results were driven by strong freight tonnage, high fleet utilization, and the many innovative products and services offered by PACCAR parts. During the year, PACCAR parts set records for parts deliveries to fleets, online part sales, and TRP part sales for all makes of trucks and trailers. For the fourth quarter, PACCAR parts achieved revenues of $750 million and pretax income of $126 million. Our expectation for 2016 is that parts revenues, excluding the effects of currency movements, could increase 3% to 5%.

PACCAR financial services revenues were $293 million in the fourth quarter and pretax income was $90 million. The good results benefited from continuing strong portfolio performance. PACCAR leasing ended the year with a record 39,000 units in its full-service lease portfolio. For the full year, PACCAR financial services earned pretax income of $363 million.

At this point, I'm going to have Michael Barkley address the effects of currency movements on our segment operations.

For the truck segment, the quarter-over-quarter comparison has us -- the impact of currency was $200 million on revenue and for the full year, the impact was $940 million on revenue. The profit impact was minimal, given that we have a large amount of material coming for our engines into our Columbus engine factory from the Eurozone. For parts, the quarterly impact on revenue was $38 million and for the full year was $193 million. Impact on profit was $4 million for the quarter and $34 million for the full year. For financial services, the impact on revenue was $17 million and the impact for the full year was $79 million. The impact on profit for financial services was $5 million for the quarter and for the full year was $22 million.

Thank you, Michael.

As we look at next year, PACCAR's projected research and development spending of $240 million to $270 million and capital expenditures of $325 million to $375 million will expand Kenworth, Peterbilt, and DAF product offerings, enhance the PACCAR engine range, and increase the capacity and operating efficiency of our factories and distribution centers. As the Company begins its 111th year, we are in an excellent position to lead the industry with the highest quality products and services.

Thank you and I would be pleased to answer your questions.

(Operator Instructions)

Your first question comes from the line of Tim Thein with Citi.

Great. Thanks. Good morning, Ron.

Good morning.

Thanks. Just on the first one, maybe you could extend -- I think you mentioned the margins 1Q being comparable to 4Q. Based on the way things look today, can you extend that to your expectations for the year?

I think that, as we think about margins for the year, I think that we see the full year being fairly comparable to 2015.

Okay. Got it.

And then, just on the market share trend in Europe -- obviously, how the individual countries play out can influence that quite a bit. Just in terms of some of your key markets, what are you thinking in terms of how you're planning for that expectation just overall share? I know that's not easy to forecast this time of year, but if you can continue to gain further share for DAF across Western Europe?

DAF has really a long history of continuing to grow their share progressively over the long term. That would continue to be our target with the investments that we made and the great new Euro 6 products that they have in the marketplace, the continuing enhancements that we make to the PACCAR engines. We've got a great product lineup. We have great service capability with PACCAR parts and PACCAR financial. So our anticipation is that we will continue to increment that market share on our way to our medium-term target of 20%.

All right; thanks a lot.

Thank you.

Your next question comes from the line of Alex Potter with Piper Jaffray.

I was wondering if you could comment a bit on inventory, I guess, broadly in the channel. You mentioned there in your prepared remarks that you think that Peterbilt and Kenworth are in good shape when it comes to retail inventory. I was just wondering if you think that PACCAR was maybe more nimble than some of your competitors when it comes to responding to the recent downturn in orders? Obviously, a lot of folks have been talking about the buildup of inventory out there in the channel, so if you guys have low inventory, that would imply that most of the inventory concerns are being felt by other truck companies? Is that accurate?

I can't really comment on the nimbleness of our competitors, but I know that we monitor our business very closely and manage to balance the delivery of trucks with the demand that is in the market. I would say that, based on what we know, we have 45, 50 days' worth of inventory in the channel. I think the industry is closer to a 90-day measure. So, as I said, we are in great shape in terms of where we are at starting the 2016 year.

Okay. Very good. That's good to hear.

I was wondering also if you could maybe make a couple of comments here on pricing? Obviously, if you look at just pure truck revenue and divided it by the number of units sold, it looks like there is a pretty material degradation in sequential terms. But obviously you've got some ForEx in there. You've got presumably some mix, maybe toward medium duty. I was just wondering if you could maybe help us interpret that sequential decline and how much is, quote unquote, real pricing?

Obviously, the margin performance for the quarter and the year were excellent. We expect, as we mentioned, margins in the first quarter to be comparable to what we saw in the fourth quarter. Almost all of the per-unit degradation is exchange-related. So that's just the effects of translating currencies around the world into the US dollar.

Okay. Very good. Thanks a lot, guys.

Sure.

Your next question comes from the line of Steven Fisher with UBS.

Thanks. Good morning.

Good morning, Steven.

I'm wondering what you're seeing in terms of used truck pricing? And how that is influencing your forecast of demand for 2016 on new sales at this point? I think last quarter it did not sound like it was much of an issue, but I'm wondering if anything has really changed there?

I think what we're seeing is, there are more use trucks coming into the market. That's dampening used truck prices a bit, but the great news is that the Kenworth and Peterbilt products continue to earn a premium relative to the competition. And so we are very involved with selling used trucks. Last year as a Company we sold about 9,000 trucks globally, and will do that again this year. So we use that as a tool to be able to support new truck business and our finance operations.

Okay. And I think the margins have favored North America over Europe based on volumes and Euro 6 program over the last year. So do you anticipate in 2016 the margin be imbalance again between the two regions at this point?

We think the margin, you know as we said, we expect it to be comparable to last year. And I think on a market basis I think that would be true as well.

So still, in other words, favoring North America over Europe, it sounds like then?

Yes.

Okay. Thanks a lot.

Thank you.

Your next question comes from the line of Nicole DeBlase with Morgan Stanley.

Good morning.

So, Ron, my first question is around your 1Q production outlook. I know you guys had flattish Q on Q, but what are the thoughts on US and Canada versus Europe? Do you also expect a flattish outcome for both of the regions?

I think North America is going to be up in the 10% to 15% range, and Europe will be down in that kind of range, just because of work days and production levels in each of the markets.

Okay, that's really helpful. Thanks, Ron. And my second question is what have you guys seen or heard from US customers with respect to the MX-11 launch so far?

We're just getting those into the field. The customers who have had the test trucks that have been running in the market -- we have hundreds of thousands of test miles on those trucks, and the feedback from those customers has been excellent. So, the MX-11 has been in the European market now for two years with great response. It is now 25% of the production in our European operation, so we are excited to offer that, and think it will be a nice enhancement to meet customer needs both in the vocational and regional applications.

Okay. Thanks, Ron. I'll pass it on.

Thank you.

Your next question comes from the line of Jerry Revich with Goldman Sachs.

Good morning and good afternoon, everyone.

Thanks, Jerry.

Ron, I'm wondering if you could talk about your bookings in Europe in the quarter. Did your lead times widen out? It sounds like you are taking the build rate higher, if I'm not mistaken, the first quarter, given the number of working days. Is that right? Can you just flesh out for us what you're seeing in that market, please?

Can you rephrase your question, Jerry?

Sure. So can you talk about whether your lead times extended in the fourth quarter? In Europe, it looks like your build rates are moving higher, so I would guess your book-to-bill in the fourth quarter was greater than 1, but I'd appreciate any color there.

Order intake during the course of last year really outpaced the build rate in the first parts of the year. And so we're ramping up build rate, and build rates as we start 2016 are comparable to where we ended up last year -- fewer workdays and just a slight reduction in the average daily count for the first quarter. So lead times are in excellent shape, really, in all of our markets as we begin 2016.

Okay. And then obviously we will get the details when the K comes out, but I am wondering if you could just help us bridge the year-over-year gross margin performance fourth quarter 2015 versus fourth quarter 2014 in terms of the contribution of pricing net of material cost? Any pieces that you could help us with would be helpful.

There's a lot of moving pieces in there, Jerry, with pricing, cost movement, customer mix, model mix, et cetera. We really don't have that level of granularity here. So --

Okay. And then, in terms of the 2016 outlook -- for the full year, you mentioned you're looking for comparable gross margins even though shipments, I think, are expected to be down based on your outlook for North America and European truck markets. Can you talk about what is favorable at the gross margin line that is providing that tailwind despite lower volumes?

Well, our teams did a great job of rigorously managing the cost structure. We obviously work very closely with our suppliers to make sure that we are getting our fair share of commodity cost movements. We have great products. The Kenworth, Peterbilt, and DAF products are the highest quality and demand a premium price in the market. So as we look at this year we feel that 2016 will be comparable to our 2015 levels.

All right, thank you.

Thank you.

Your next question comes from the line of Ann Duignan with JPMorgan.

Good afternoon, here.

Good morning, Ann.

Can we talk about your parts business a little bit? It came in weaker on revenues and significantly weaker on EBIT margins than I was forecasting. I don't know if I was just setting too high an expectation, but can we talk about parts in Q4, and what went on went there? Did I miss something from a seasonality perspective?

No, I think it's as we look at -- Michael talked about the exchange rate effects, and so when you compare the fourth quarter results with the fourth quarter in the prior year they are essentially the same as last year's -- very strong fourth quarter last year. There were fewer new trucks being delivered, as well as, I think, a little bit of rebalancing of inventories in the market. But as we commented, we think parts will continue to grow as we enter into 2016. Our parts team has done a great job with some of the many programs that they have put in place, and we continue to see, obviously, growth in the engine parts business as we go forward. So we think we will continue to see positive momentum as we go into 2016.

Okay; that's helpful on the color.

On your outlook for North America -- US and Canada down 12%. Most of the industry's forecasting a significantly greater decline back to replacement levels of somewhere around 20. What are you seeing out there? What are your customers telling you? What are your teams telling you? Where do you think the strength is coming from, versus where others are forecasting?

Well, obviously the on-highway business is supported by strong freight tonnage metrics. They've been pretty flat but at a very high level. I think the last numbers that came out were like the second-highest level on record. So freight activities look good. The estimation for growth for next year for North America is 2% to 3% growth. So consumer demand is strong, and so we see a lot of positives that are going to support a good market.

If you look at the 230,000 to 260,000 trucks, it could be the second, third best in the last decade. So it's a good market for next year. So we are optimistic about how things will develop as we talk to customers. I think we commented last quarter, customers are ordering, that have ordered are ordering levels comparable to what they ordered in 2015. I would tell you a little bit of the difference is, their expectations last year, the expectations for delivery were, they needed them as soon as they could get them and now they're spreading those deliveries out a little further across the year. So we are seeing positive things overall.

And I would add that Kenworth and Peterbilt are very strong at the vocational segment, and construction activity continues to be strong, forecasted to grow once again for residential housing in 2016. And so the vocational segment for us is performing very well, especially with the new products that we are introducing into both Kenworth and Peterbilt.

And is that what gives you confidence then, guiding to flattish or comparable margins year over year despite a decline in revenue?

Yes, as we look at the expectations for the year.

Our parts mix will grow a little bit and the parts margins are obviously good. We will continue to operate at a very high level in the parts business and that should be a net positive for margins as well.

Okay. Very good. I appreciate the color. Great. Thank you.

Your next question comes from the line of Jamie Cook with Credit Suisse.

Hello.

Good morning Jamie.

A couple questions. One -- it sounds like you guys are obviously more constructive relative to your peers. But if you look at the industry numbers, cancellation rates have picked up over the past several months. Have you seen any of that? Or have you been immune to that? And then I guess a broader cycle question. Do you view this as sort of -- obviously, the level of decline you're expecting this year is less than the industry, but do you view this as sort of a one-year mid-cycle pause? Or would you look at this more as a normal downturn? Thank you.

Cancellation activity in our operations are very normal. There is nothing unusual that is happening in that arena, and in terms of where we are at in this cycle, I think that is to be determined. The economic fundamentals are positive. We see that we are going to track what the demand is and we think the demand is going to be a good market for 2016.

All right. Thanks; I'll get back in queue.

Thank you.

Your next question comes from the line of Andy Casey with Wells Fargo.

Hello, everybody.

Good morning, Andy.

First question on the parts business revenue in the quarter. Ron, you mentioned inventory rebalancing in the channel. Was that broad-based? Or was it concentrated in some of the regions?

No, I think that was general across the body.

Okay, thanks.

And then, on the margin question somebody asked earlier -- if you compare the margin in the quarter with the run rate of the first three quarters, which was very strong, the margin in the quarter went down roughly 200 basis points. Is that all seasonality? Or was there an impact from this rebalancing?

I think there's obviously some operating leverage effects in there. It probably reflects more the mix of parts that were being distributed during the quarter.

Okay. Thanks.

And then in truck, I was just hoping a little bit more clarity to one of Jerry's questions. Could you talk about what you saw in European truck in terms of the order activity in Q4? Was it as strong a growth as you saw in the first few quarters? Or is it moderating in line with your outlook there?

I think it is steady and I'd say in line with our outlook. That's a good way to say it.

Okay. And then in the US and Canada you had some order volatility toward the end of the year: November weak, December better. Did you see that December better continuing into January? Or are we into a little bit of the seasonal doldrums there?

I think most of the ups and downs are just timing of when some of the larger fleet orders appear in the order board. So, as I said, I think large fleets are planning buys and their buys are generally pretty consistent with what we saw for deliveries in 2015.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Joel Tiss with Bank of Montreal.

Hey, guys. How's it going?

Good. Good morning.

Anyway, we keep dancing around this question. I just wondered if you could spend a couple of minutes giving us a little more of a comprehensive list of underneath the volume numbers, which you obviously give us for the industry, can you give us a couple of the bigger factors? You talked about mix in parts being better, but some of the bigger factors that are going to drive profitability -- pricing, underabsorption, any manufacturing, efficiency improvements, people reductions, mix between US in Europe -- just a couple of the bigger ones to help us get a feel for what some of the levers are you have inside to control the margins.

Well, I think if you just go down the list, pricing reflects good markets. And so we have great products to offer the market, so we feel good that our products demand a fair price in the marketplace. Costs -- I think there is probably a little bit of downward momentum on prices with commodity cost reductions. So that's a bit of a benefit, but everybody is getting that same benefit in the industry. Our factories and businesses around the world do a great job of managing their cost structure, and our purchasing groups around the world do a great job of procuring and working closely with our suppliers. We have a great supply base that provides us timely deliveries, quality parts, and so we work closely with them to make sure that we can support our business and our factories can operate efficiently.

All the factors as we talked about are [indeed] for next year. We are projecting a little bit of an uptick. R&D spending will occur pretty ratably during the course of the year. We manage our SG&A closely. We are thinking SG&A for next year will be comparable to our 2015 levels, and that those amounts will be pretty comparable quarter to quarter. So as we look at next year we feel good about the prospects and being able to continue to manage in a very prudent, cost effective way.

That's great.

And then have you shared at all a medium- or longer-term view on medium-duty market share? I know you've had a big new product push for the last couple of years and it seems to be working.

We have great medium-duty products, and more and more of our dealers are becoming engaged in the medium-duty business. And I think we're seeing the benefits of that over time in North America. We have great products in Europe. As I mentioned, with the increase in share, we did get to a record level of medium-duty deliveries last year. And we will continue to invest in our product and continue to make enhancements and look forward to continuing to have opportunity to grow that business going forward.

All right. So there's no number on where you can be five years or ten years from now?

No. Obviously, we continue to push the number. We're 27% share of the heavy-duty market and 17% of the medium-duty market in North America, so there's lots of upside for us.

Thank you so much.

Thank you.

Your next question comes from the line of Tim Robinson with Susquehanna Financial.

Good morning, guys. Thanks for taking my call.

I know you guys have managed your inventories well in the US and Canada, but just looking at retail sales and builds at your peers, one of them has grown substantially. The industry is up substantially. I was just wondering whether you think you can hold pricing, given the dynamics in the US and Canada?

We are seeing prices pretty stable in the US/Canadian market as we progress through the first parts of the year. So we expect that, that will continue.

That's great. And then just a clarification on the parts outlook. Could you just go through that by region?

I think that's our expectation, really, in both regions. Some level of growth in the 3% to 5% range for both North America and Europe, and obviously we're starting to grow our business in Brazil. And so -- that's our overall perspective.

Okay. When we think about your parts margin outlook going into 2016, should we expect the mix that impacted 4Q to continue to be a headwind? Or is that something that largely corrects itself with inventory rebalancing, and we sort of go back to the levels of the first nine months of 2016?

I think our margin expectations for next year will be comparable to 2015.

Okay. And are you getting a benefit from the MX-13 in your parts business yet in the US?

Sure. Absolutely. We've got 105,000 engines that we have produced out of our Columbus factory. And we're seeing that engine business -- it's still early days from a parts perspective, but that will continue to be a positive factor in our parts business for years to come.

Got it. That's it for me. Thanks for taking my call.

Sure, absolutely. Thank you.

Your next question comes from the line of David Raso with ISI.

Thank you. Maybe I missed it -- the production for the full year of 2016, North America and Europe? I know you gave us the first quarter sequentially, but what's the full-year assumption?

We don't provide that level of detail. You can look at the market size estimates and I think get a pretty good number.

So your production versus those industry forecasts, you'd say are very much in line?

Yes.

So again, I know we're asking the same question again, but over the last 30 years you have 8 years of revenue declines and 7 of them gross margins go down. Is there something about the currency benefit, North America, buying from Europe? Obviously North America is down more than Europe is in 2016, so that won't fully explain it. Can you help us more on price cost? Obviously, as history would tell you, for you to be forecasting flat gross margins is abnormal. So with a little more specificity, can you help us understand where is the difference between your history, that down volume equals flat gross margins? The parts is helpful, but it is 17% of the business. It's not that large. Again, it's an important issue for all of us, so we appreciate the detail.

Sure. It's all the factors that we talked about. It is the cost-management aspects, the favorable potential movement from commodity cost movements -- so all the elements of our total margin picture play into that, and there's no one individual item that I can point to and say, that's the difference.

A counter-argument of parts being bigger is, today you're more vertically integrated in North America. So thus volume decline will be more painful than prior down cycles. I know it is not a big number, but is there something about heavy expenditures, building out Brazil, now with the market that week there is some easy retrenchment or recouping of levels of losses in Brazil? I'm just trying to flush out why you're comfortable guiding flat gross margins.

Do you have anything else to add, David? Thank you.

No. I appreciate it. Just a key issue for everybody. So thank you

Thank you.

Your next question comes from the line of Neil Frohnapple with Longbow Research.

Good morning.

As a follow up to Joel's question -- you talked about medium-duty market share. Can you just provide any granularity on what you're seeing in the underlying medium-duty market in North America? And your outlook for that market this year?

I would think the medium-duty market last year was 80,000 units or so, and I think we are thinking in the 65,000 to 75,000 range for 2016.

Okay. What would be driving that decline that you guys are looking for?

Neil, the medium-duty business at PACCAR is being influenced significantly by the level of construction activity. We put a lot of medium-duty trucks into the construction market, and so that's been strong. And, as a result, our deliveries into that market have been strong and we would expect that to continue at good, strong levels in 2016. We've also introduced some new products. The Cabover products at Kenworth and Peterbilt are both beginning to develop good traction. More and more of our dealers are stocking and selling those trucks, and that's a net contribution to our medium-duty production as well.

And then as a follow-up to used truck pricing in North America, what are you seeing with regard to used truck inventory levels in the channel currently? Are they a bit high? And would you expect them to normalize at some point this year?

I think used truck inventory levels for PACCAR are very normal. We have a pretty normal level of used trucks and we expect that to stay as we look at lease returns, et cetera. As we progress through the year we should be able to keep that at very normal levels throughout the year.

All right. Thanks. I will pass it on.

Thank you.

Your next question comes from the line of Joe O'Dea with Vertical Research.

Good morning.

Good morning.

Just on the Europe delivery volumes last quarter and what you're looking for in the first quarter -- seems like it would be at a higher rate for the market than where your 15% share is or so. Could you talk about whether there's an inventory build effort right now into the year? Or are there opportunities where you think there is an increase in market share in 2016?

Again, as we talked about earlier on market share, we have a long tradition of building that share and our teams have done a great job of getting the products in place -- great products in place with really industry-leading fuel efficiency. And so we continue to target growing our share in the various markets and there's inventory levels throughout the channel. Dealer inventories in Europe are in great shape and so there's no real inventory buildup or reduction. It's pretty steady.

Okay. Thank you.

And then the last one, I guess, on the share repurchase. It looks like a little bit faster-paced into the end of the year than where you had been previously. Any reason that, that was maybe abnormal? Or is that the level that you anticipated and you would only need another authorization to keep going at that level?

Yes. Obviously, as we said in our press release, we think the shares are an attractive option at the current pricing level and so we expect we will continue to do some share repurchases during the course of 2016 as we do in many years.

Okay. Thanks a lot.

Thank you.

Your next question comes from the line of Adam Uhlman with Cleveland Research.

Good morning, good afternoon.

I was wondering if we could dig into the finance business -- your aspirations for 2016; how you expect that business to unfold. And within there, the leasing business. Maybe you could talk about some of the key operating trends that you follow? What have you been seeing in the business? And how are you thinking about it for 2016?

I think, as we look at our portfolio and our asset base, I think the average earning assets that we will have for 2016 would be fairly comparable to our 2015 levels, which were really at record levels. And the leasing business has done very well over the long period of time -- celebrating their 35th anniversary in 2015. They continue to work very closely with our dealers and our customers to continue to grow that business at the end of the year with a record level of units in the fleet. And we continue to look for opportunities to expand our business in Europe. During 2015 we launched our PacLease business in Australia. So, continue to look for ways to have leasing make a valuable contribution to the overall Company results.

Okay. Thanks.

It's not a big expense for you, but could you talk to your pension expense expectations for 2016?

I think it will be very comparable; it's a pretty steady level. Obviously, it gets impacted by the level of employment, discount rates, et cetera. So I think we will see some benefit from a slightly higher discount rate that will benefit pension expense a little bit in 2016 for North America.

Okay. Thank you.

Thank you.

Your next question comes from the line of Sameer Rathod with Macquarie.

Good morning.

Good morning.

There seems to be a lot of press recently on autonomous vehicles from large tech companies. It seems like they're moving regulations forward in various states. If you look at it objectively, the technology is getting better. The miles driven autonomously is growing exponentially. How does PACCAR think about this? What steps are you guys taking today for a potential market in the future on the truck side? And generally how do you see this evolving?

All of our truck divisions and our engineering teams around the world are involved in evaluating all the technologies that can benefit our customers, including the technologies that will support autonomous driving. We've demonstrated autonomous vehicles at various exhibitions in North America. Our team in Europe has also demonstrated their autonomous capabilities with tuning activities, working with government and educational institutions. So a lot of work in that area, working closely with suppliers who have the technologies that can support that activity. So it is an ongoing activity. I think we're several years away from seeing that in the truck business, but we're right on the forefront of all the developments that are going on in that arena.

Okay. Thanks.

Thank you.

Your next question comes from the line of Jeff Kauffman with Buckingham Research.

Good morning, everyone. Thank you.

A lot of questions have been asked on the margins and the gross margins in your core markets. I'd like to go in a different direction and talk about some of the emerging and expanding markets. That was a big highlight of an analyst meeting you had just a little bit ago and you were talking about your plans in Russia and your plans and Brazil. These markets obviously are very weak right now. Wouldn't you think that this is a very good time strategically to be moving in and making investments in these markets?

I guess two questions: number one, how are you doing in the various emerging markets? And what are your forecasts for those areas? Of the CapEx that you're spending, how much of that is dedicated to emerging market investment right now?

Sure. Obviously, Brazil -- we've made a significant investment in our new plant operations, the products that we have launched and are launching. In the market. We're excited about the prospects for Brazil and the rest of South America as we go forward. Our teams are doing a great job. We have great dealer representation that is representing the DAF product in the Brazilian market. We had the opportunity to increase our production and increase our penetration. We had an excellent showing at the Fenatran truck show in November in Sao Paulo. So our team enters 2016 with a lot of positive momentum in a challenging market. In Russia, the DAF organization there has done a good job over the last years of increasing the number of locations representing the DAF product. And when the economy improves in Russia, we will be able to grow our deliveries in that particular region.

If you look at Asia -- still an area of opportunity for our company. We continue to evaluate ways that we can participate greater. We have great presence in India and China with our purchasing activities, our technical office in Pune, India, that supports our information technology and engineering activities. So we're very cognizant of what's going on in those markets and continue to look for opportunities to play a bigger part.

As we look forward, we just invested in Brazil with the launch of the CF -- DAF CF product -- so expanding the product offerings. We are now assembling the MX engine in our DAF Brazil factory. So we will continue to make investments and expanding the product offerings and improving the productivity and efficiency and the capacity of our operations in these markets.

Okay. And then just following up on that -- you did about 16,000 units of what I would call non-core markets last year. This number is small, but you gave a forecast for North America; you gave a forecast for Europe. How should we think about this non-core markets number?

Relatively flat 2016 compared to 2015. Certainly that would be the case in South America -- somewhere in the range of 70,000 to 80,000 units heavy-duty in the whole region.

I would agree. That's a good estimate for next year.

Okay. Thank you. Congratulations.

Thank you.

Your next question comes from the line of Mike Shlisky with Seaport Global.

Hello, guys.

Good morning.

Good morning.

On the MX-11, can you give us your thoughts of what kind of interest you expect now that it's launched for 2016? And more broadly, what should we expect to see PACCAR engine penetration rate in the overall Class A market in 2016?

The MX-11 -- we think that will be very well received. It's been very well received in Europe. We think that as customers get more exposed to it and accustomed to its capability that it will become a greater portion of our engine build in North America. We've continued to ratchet up our MX engine penetration in Kenworth and Peterbilt products, [bridging] about 40% for the year, 42% in the fourth quarter. The MX-11 will help move that further forward. We see in the near term next year or two getting that up closer to the 50% range. As we look at the capability of our engines currently and in the coming years, it will meet roughly 80% to 85% of what customers need to do their work. And we continue to get more and more of our customers starting to take some MXs to really test them in their fleet. And typically, after customers have had that chance to have that test and they see the great performance of those engines, the great fuel efficiency, more and more of those are converting their business to the MX engines. So it will continue to progress over the next years.

Great. I also want to ask about on the (inaudible) some of the larger moving parts here in the first quarter. Does not having a big presence at this year's [New York] truck show do anything material to support the first quarter margins here versus the prior year?

No. That's not a factor.

All right, great. Thanks, guys.

Your next question comes from the line of Mike Baudendistel with Stifel.

Thank you.

Just wanted to ask you about the next upcoming greenhouse gas standard. Is that something you're already meeting or expect to meet by the deadline?

When you say the next standard are you talking about 2017?

Yes, 2017.

We're in the midst of beginning the certification process with EPA in carb.

Okay. Great.

And I wanted to ask you under the new parts distribution facility in Renton. Is it possible to quantify how much you expect that to add to the parts revenue? And do you view that as being something that is more able to maintain the historical growth rate you've had of about 8% in parts revenue growth? Or is that something that can enable you to grow faster than that?

We've got a long history of incrementing our parts distribution capacity almost every year in some form or fashion, and so this is just the next step to continue to support that ongoing growth level for our parts operations.

Great. That's all I had. Thank you.

Thank you.

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

I would 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.