PACCAR Inc
Q4 2007 Earnings Call Transcript

Published: 30 Jan 2008

[Operator:]

Good morning, and welcome to PACCAR's fourth quarter 2007 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. Ken Gangl, PACCAR's Vice President and Treasurer. Mr. Gangl, please go ahead.

[Kenneth Gangl:]

Good morning. We'd like to welcome those listening by phone and those on the webcast. My name is Ken Gangl, Vice President and Treasurer of PACCAR and joining me this morning are Mark Pigott, Chairman and Chief Executive Officer and Michael Barclay, Vice President and Controller. As with prior conference calls, if there are members of the media participating, we request 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.

[Mark C. Pigott:]

Good morning. PACCAR today announced the second highest level of revenues and net income in its 102-year history and a 69th consecutive year of earning a net profit. PACCAR's excellent performance reflects the company's global diversification, world-class technology, industry environmental leadership, and robust after-market parts and financial services business. During the year, PACCAR set the stage for further growth by investing record amounts in capital projects and research and development. For the quarter, net income was $261.1 million and for the full year net income was a little over $1.2 billion. Net sales and financial services revenue were $15.2 billion. What I’d like to note is this level of revenue was remarkable considering that the U.S. and Canadian class 8 industry retail sales were 46% lower than the previous year. Return on equity for the year was an outstanding 27.5% and return on revenue was 8.1% for the year. I'm very proud of our 21,000 employees, who've delivered these incredibly great results. In a second century, PACCAR is proactively investing in all aspects of the business in order to continue to deliver the highest quality products and services and grow revenues and profits at the same pace as the prior 10 years. PACCAR invested a record $92.1 million in research and development in the fourth quarter. Let's talk about what we're investing in. Three major growth initiatives are, number one, developing a new range of engines, as well as ramping up expenses to meet 2010 EPA and Euro 6 emission regulations. Number two, investing in a comprehensive multi-year program to design and launch new vehicle platforms worldwide These products will update our light, medium and heavy duty vehicles in Europe, North America and Asia. And three, we're working on many projects to enhance our manufacturing quality and efficiency, leadership, as well as developing new business programs for our after-market customer support and financial services. To highlight our increased levels of R&D and provide more transparency in our financial statements, R&D expense is now being shown as a separate line item in the income statement. Now a number of you have asked an excellent question, what are the benefits of these increased investments. Well, as most manufacturers in every industry in the world recognize, there are several. First, typically achieve a lower unit cost. Two, the after-market parts profit is usually greater than the manufacturing unit profit. Three, it enables you to improve assembly and service costs due to streamline material and engineering focus. And fourth, it enhances the performance of the products delivered to our customers due to integrated systems. Finally, one of the real benefits and key advantages for PACCAR is we have an excellent benchmarking process, and comparing our European versus North American production platforms we have found that the European model is more efficient. And as a note, about half the vehicles we produced last year already used PACCAR engines. Switching gears, one of the key enhancements in PACCAR's business over the last decade is its geographic diversity. DAF delivered a record 60,300 commercial vehicles and achieved record net profits. Mexico and Australia also experienced record demand for their outstanding products. PACCAR Financial Europe expanded its portfolio by 13%, $2.9 billion, and PacLease Europe was established with the acquisition of Truck Center houser, a number one independent truck leasing company in Germany. PACCAR also opened its sales and sourcing office in Shanghai, China. As a direct result of the strong global markets and our investments around the world, 64% of PACCAR's revenues last year were generated outside the U.S. Now, continuing on the investment theme, last year PACCAR increased its capital investments to a record level of $427 million. As you're aware, we're beginning construction of the $400 million state-of-the-art engine manufacturing and assembly facility in Columbus, Mississippi and that's on schedule. It will be planned to be open in late 2009 and will produce a 9.2 liter and 12.9 liter PACCAR diesel engines. These engines will be available to our customers in North America, as well as the engine supplied by our excellent suppliers. In addition, these engines will be available to be shift to DAF to meet their growing demand. PACCAR Parts opened its 12th parts distribution center in Oklahoma City and we began construction on our 13th center in Budapest, Hungary. Kenworth Truck Company completed a 30% capacity expansion of his Chillicothe plant and DAF completed a capacity improvements at its assembly plat and opened a $60 million 76,000 square foot engine test facility Eindhoven. These investments will enable PACCAR to meet future market demand and deliver excellent net profits to our shareholders. Turning to technology and environmental leadership, PACCAR became the first commercial vehicle OEM to implement chassis paint robotics first in the U.K. in 2006 and again at our Peterbilt Denton plant last year. Other innovative technologies include enhanced material logistics infrastructure at our PACCAR plants and 20 new world-class engine test cells. One of areas that's nears and dears to my heart and many of our employees is PACCAR's leadership in the environmental world. Peterbilt and Kenworth introduced the industry's first no-idle climate control and hotel power load solutions that reduce emissions by 12% and improve fuel economy by up to 8%. PACCAR was awarded the EPA's SmartWay designation in recognition of the fuel saving aerodynamic enhancements of many of the Kenworth models and Peterbilt models. And as you have seen in the last few press releases, PACCAR's medium duty hybrid vehicles will be in production mid year and are expected to deliver up to 30% better fuel economy. Finally, PACCAR and Eaton have teamed up to develop proprietary class-8 hybrid technology and that will be introduced in late 2009. And as a final note, probably what I most proud off is that every PACCAR manufacturing facility worldwide earned the prestigious ISO 14001 environmental certification. I am not sure of any other manufacturer has every one of their facilities meeting that strict regulation, very proud of our teams. Moving to the business, two of PACCAR's fastest growing businesses are Aftermarket Parts and Financial Services. Parts' record revenues of $2.3 billion last year surged almost 18% as PACCAR vehicles in use around the world grew to 1.5 million units. That's a lot of trucks. PACCAR Financial Services earned a record $284.1 million last year on record assets of $10.7 billion and with PacLease, now in Europe we expect to see continued Financial Services growth in Europe. Looking at the global marketplaces for 2008, we expect the Western and Central European 15 ton vehicle sector to have another excellent year, to be in the range of 330,000 to 350,000 units. Registrations last year were 340,000. And as a note this is Western and Central Europe and Central and including Eastern Europe is almost comparable to India and their growth of 6% to 8% GDP growth. So a very exciting marketplace where DAF is doing very well. The U.S. and Canadian market should be in the range of 175,000 to 215,000 units, reflecting continued economic softness through the first half of this year. PACCAR's other key markets including Australia, Mexico and our export business should experience favorable operating environments this year. Now as you know, PACCAR is all about quality, quality, quality. And even though the class 8 industry retail sales softened in the U.S. and Canada last year, Kenworth and Peterbilt achieved a record retail market share of 26.4%, up from the previous record of 25.3% as well as a record 12.6% in the Class 6,7. Kenworth became the first truck OEM to sweep all three major product segments in the 2007 J.D. Power Customer Satisfaction Study and Peterbilt was ranked the highest for the second consecutive year in the J.D. Power Medium-Duty Customer Study. And there was a J.D. Power Light-Duty and we were in it we would be hoping for a win there also. As we shared previously, PACCAR is the quality leader in all markets and we're increasing our investment to extend our quality advantage. PACCAR's focus on its shareholders and return to shareholders is legendary. 2007 was another exceptional year for PACCAR shareholders. Including dividends and share price appreciation, PACCAR shareholder return was 29.8% and again exceeded the Standard and Poor's 500 return for 1,3,5 and 10-year time periods. In 2007, PACCAR declared a 50% stock dividend; we increased the regular dividend by 35% and declared a special dividend of a $1 per share. Now I have been around a long time and I am pleased to say that PACCAR dividends have grown over 300% over the last 10 years. In addition, during 2007 the company repurchased a split adjusted 6.9 million of its common shares for an investment of $360 million. As PACCAR enters its 103rd year it has a very bright future. Thank you. I look forward to your questions. Question and Answer

[Operator:]

[Operator instructions] Our first question comes from J.B. Groh with D.A. Davidson.

[J.B. Groh:]

Morning guys.

[Chairman and Chief Executive Officer:]

Good morning.

[J.B. Groh:]

I appreciate you singling out the R&D cost for the year and I assume that the '07 numbers are going to show up in a filing on a quarterly basis, but could you… when I look at it year-over-year, pretty significant increase, do you attribute that to the new facility and is that sort of the level of spending kind of what we should expect understanding that you don't give guidance?

[Chairman and Chief Executive Officer:]

You’ve been around.

[J.B. Groh:]

Yes.

[Chairman and Chief Executive Officer:]

The R&D, well I think we’ve gotten to a size and scale and sophistication that it made sense to break it out, so I do appreciate your comment on that. The facility, I am assuming you are talking about Columbus, really is not even a factor in the… let's call it the capital in R&D that we shared with you. I think as I outline sort of the three major and of course there are many, many projects underway, but the three major areas is the one that we have been working on and certainly investing in is brand new product ranges around the world and that’s been the driver and over time other projects will come in and take their share of the investment.

[J.B. Groh:]

So when I look at the hybrid, your hotel power stuff and new engine, these are sort of things that safe to assume that this level of spending is probably par for the course?

[Chairman and Chief Executive Officer:]

Yes, I think that's a great question, I think the R&D will be comparable to the last few quarters of '07 going through '08, we got a lot of exciting projects, and some of its timing... we're working on all new products at all of our major divisions at the same time and over the last 20 years, you are able to sequence those slightly differently but it just came up that at this time all of them are working on brand new products, so very exciting, it can be great for the customer.

[J.B. Groh:]

Okay, thank you.

[Chairman and Chief Executive Officer:]

Thank you.

[Operator:]

Our next question comes from the line of Jonathan Steinmetz with Morgan Stanley.

[Jonathan Steinmetz:]

Great, thanks. Good morning everyone.

[Mark C. Pigott:]

Good morning Jonathan.

[Jonathan Steinmetz:]

Just a few follow-ups on the R&D, just I hopefully have this clear, what was it specifically that I guess kicked up between fourth quarter and third quarter, because it looks like you're spending in the range... if I average the first three quarters it’s about $55 million or so, give or take a quarter and it kicked up to over $90 million and I'm just trying to understand when you say this range do you mean $90 million type quarters on when I average out for the year sort of $250 million for a year?

[Mark C. Pigott:]

I think sort of the last, the third and fourth quarter that range.

[Jonathan Steinmetz:]

And what was the third-quarter number?

[Mark C. Pigott:]

It was a little bit less than the fourth.

[Jonathan Steinmetz:]

Okay.

[Mark C. Pigott:]

Yes. And I think to the first part of your question about what sort of accelerated... just taking on a lot of talented people, we got 2010 emissions are just two years away or less than two years away and DAF has a tremendous track record of being one of the first manufacturers to introduce to the marketplace very new emission regulations and so even though year '06 is really 2012 we would like to get it up perhaps a little bit sooner. And then just having a lot of new product development, a lot of factory enhancement, a lot of parts distribution centers being invested in and adding people there so that's... its really across-the-board very exciting and of course with a great balance sheet, we are able to do that.

[Jonathan Steinmetz:]

And if you add the 10 point sort of when, do you think you start to get a payback from some of this investment, what years would you highlight as sort of the timetable, what you really think a lot of it gets a return?

[Mark C. Pigott:]

Well I think a lot of this story is happening in the next couple of quarters. I mean we look at the investment in parts distribution centers, those start returning almost immediately. The new products take a number of years to develop but it's ongoing. As the markets... that the markets are very strong in Europe so we're getting the efficiency investments right a way and as the markets in North America return, those improvements will drop to the bottom line in short order. So, it's sort of near-term, medium-term and long-term, it's just over a number of different cycles.

[Jonathan Steinmetz:]

Okay. And last question is on the financial services side. The provision look like they kicked up here of course your book has gotten bigger but anything you are able to share with us in terms of either charge off rate or delinquencies, we sort of read a lot and hear a lot about truckers having some problem even freight environment any statistics you could share with us?

[Mark C. Pigott:]

Sure. First of all obviously even though freight is down, it's still one of the highest years in history and many of our customers are still generating very good profits but the financing environment is uneven to be kind. And we have seen a slight tick in some of the losses but on a very low level. Ken?

[Kenneth Gangl:]

Yes. Our finance company portfolio continues to do well and we've seen some modest increase in past due and credit losses in the United States and Canada particularly in the housing sector. But overall portfolio performance is good. Now our write-offs net of recoveries globally moved from $14 million in 2006 to slightly over $26 million in 2007, on an asset base, in excess $10.7 billion.

[Jonathan Steinmetz:]

Terrific. Thank you very much.

[Mark C. Pigott:]

Thank you. Good questions.

[Operator:]

Our next question comes from the line of Joel Tiss with Lehman Brothers.

[Mark C. Pigott:]

Hi, Joel.

[Joel Tiss:]

How are you?

[Mark C. Pigott:]

I'm good. How are you doing?

[Joel Tiss:]

All right. Happy Birthday, almost.

[Mark C. Pigott:]

You are very kind. I appreciate it. Everything is on the Internet, isn't it?

[Joel Tiss:]

Yes, exactly. I wonder if you could just give us as much color as you can on maybe factors causing the easing of your North American industry forecast a little bit and maybe or another way to ask the same thing, what would be some of the factors that would drive us towards the bottom end or towards top end of what people are looking for?

[Mark C. Pigott:]

Sure, I mean that's a great question obviously something that is discussed a great length in many companies, in many industries. But, Ken briefly mentioned that you have got the housing impact and I think we are all aware of the many industries that's affecting. So, President Bush outlined some stimuli of package and that hopefully those who will work that will be good. As certain segments of our customers are directly affected by the housing industry, whether it is for concrete or carrying lumber or light goods going to furnish homes. So when that starts to recover, it will be positive. Car production, pretty much all the big three, is going to have a lower year and most things that get brought into a car manufacturing facility are brought by truck. So that will have some impact and then just, I'd say consumer confidence and let's call it the retail mall sales, what effects that is going to have. So if one of those gets better, then there should be some benefit. As you know, Joel you have been following us for quite a while, we try to be conservative and every month that goes by you get a little bit smarter on what's happening in the marketplace. I would just point out and we've talked that North America is an important market but due to the growth around the world, Europe and of course the benefit of the euro versus the dollar, 64% of our business is now outside the U.S. which is probably a record. Does that help you out?

[Joel Tiss:]

Yes, that helps. Are you be able to give us any sort of even just very ballparky on the profitability of those revenues, 50/50 North America versus not or just any help there?

[Mark C. Pigott:]

Well, I would say that because of the volume and production levels in Europe, which you know is our DAF group as you know, versus the lower level that Kenwood and Peterbilt as in Canada that on a unit basis, Europe will be more profitable because of the efficiency but also more importantly just because of the volume going through the factories.

[Joel Tiss:]

Okay. And then last question, do you think you're going to be able to help your customers ease into higher prices before 2010 to just to help them cope with what our changes might be coming, so they don't have to absorb it all at once?

[Mark C. Pigott:]

Well, I think we always worked very closely with our customers. I think what we've learnt as an industry from 2007 and many of our customers, obviously we spent a lot of time with our customers is that 2007 went probably better than almost anybody expected. You know, if you really look at the adoption by the customers of the new engines and after the, let us call it the initial break-in period, the engines are performing well. Many customers would say, you know probably should not have bought so heavily in the "prebuy" and just add more of an even several year purchasing cycle. I think that will play into 9 and 10. So, I think that is actually good for customers, because they don't have money tied up in vehicles that may just be sitting in their yard. It's certainly good for the OEMs and the suppliers, because you don't get into sort of the ramp-up, ramp down scenario. And the cost... I think the industry is very efficient in terms of being able to parcel the cost out ultimately to the end consumer, which is pretty much how the industry works, and so I think it's... I think we've learned a lot and people are taking a much more pragmatic, balanced view.

[Joel Tiss:]

Okay, thank you very much.

[Mark C. Pigott:]

Thank you. I appreciate it.

[Operator:]

Our next question comes from Peter Nesvold with Bear Stearns.

[Mark C. Pigott:]

Good morning Peter.

[Peter Nesvold:]

Hi Mark. So, you are proud of the results as usual, I look at the stock chart when you are at 52 week low, stock is down 4.5% today or so. So, there is a bit of a disconnect I think with how people externally looking at the results these days versus how you guys are looking at them internally. And I think one thing that jumps off the page is this truck gross margins being the worst this quarter in six years. And what I want to understand just a little bit better and I know it has been touched on just a couple of times that the R&D… elevated R&D spend, I don't want to put words in your mouth, I just want to clarify it sounds like this runs through perhaps the end of '08, coincident with several new product introductions, bringing the new engine over to North America, investing in order to hit, 2012 in Europe. Would that perhaps, as we exit '08 or thereabout, we start going back to what the R&D looked like before. I just want to make sure that... perhaps we haven't hit some kind of structural inflection point where your gross margins are going to be lower in the intermediate term than what we have been accustomed to.

[Mark C. Pigott:]

Yes. It's an excellent question. PACCAR is doing well as I say, second best year in a 102-year history and most companies would be proud to have these results. And I am very proud of the team for delivering them. So thanks for your kind thoughts. In terms of the investment, this is a much more global, diverse company than it was 12, 10 years ago, 20 years ago. and we have many more projects going on. So, I think, one thought is the U.S. and Canadian truck marketplace is down 45% or more. That has an impact on the type of margins you are able to get in the marketplace. There is not a huge amount of demand. There is not a huge amount of business. So that has a definite impact. And I think we need to be aware of that. Good markets tend to lead to good margins. The investment we are making and have been, I mean we've invested a lot for 102 years. I think it's just at more of a little higher level, but looking to deliver higher profits. So, it's not an either or, the investments we are making throughout the company are first of all it's nice to be able to make these investments most companies cannot, but we are able to. So, we are investing it for really a couple of simple reasons. One to generate increased profitability and growth for our company and two to really deliver to our customers a very exciting range of products and processes, and services that will allow us to continue to grow and generate again more profit. So, it's a virtuous cycle.

[Peter Nesvold:]

Okay. On the engine strategy, I am not really surprised to hear you are going with SCR in North America, and that's what you are use in DAF as I understand it?

[Mark C. Pigott:]

Correct.

[Peter Nesvold:]

Doesn't it seem… I mean but one thing I've struggled with this aren't you going to encounter relatively complex engine strategy in 2010 with three different engine makers, we know the Cummins which I believe you continue to use although I guess it's a little unclear but…

[Mark C. Pigott:]

Excellent supplier partner.

[Peter Nesvold:]

Okay. So, you are going to have Cummins, which has the existing footprint of the engine, but no SCR you are going to have the DAF or... I'm sorry the PACCAR engine which you we use SCR and CAT technology we are not quite sure what it's going to look like just. Yes, but CAT has gone down its own proprietary path in the past. So, can you support that level of complexity now that you have three different engine families, I suppose two historically, is really do you get that pay back in 2010 from supporting three different engines. Is that sufficient to pay for the complexity that’ll probably be required to cover all three different families?

[Mark C. Pigott:]

Well, the good news is we've been supporting three different design packages for quite a few years.

[Peter Nesvold:]

North America, I expect DAF on its own… own path in North America.

[Mark C. Pigott:]

But, you can't really segregate them. So our engineering teams globally and there is quite a bit of benchmarking and sharing and collaborating have been supporting three, let's call it, platforms for over a decade and doing it very, very well. So for us, it's really not a change; in fact, I'd say, there's almost no change.

[Peter Nesvold:]

[inaudible] a lot of detail in an earnings call but just physically, the pipes and everything is so different it would seem…

[Mark C. Pigott:]

I know but we've been doing it for over a decade.

[Peter Nesvold:]

Okay, okay.

[Mark C. Pigott:]

So... and as far as the cost, typically the suppliers bear the cost of preparing their engines for installation into whatever vehicles they happen to sell them to.

[Peter Nesvold:]

Okay. And if I may last... slip one last, final question. There was swing on the stock today is the outlook for no growth in Europe and granted, it was the same thing you were seeing last quarter, so it's not really a surprise but I'd say that your outlook for Europe is perhaps more muted than what we are seeing out of the European OEMs. Anything you could help me understand there? Why you are expecting taking the midpoint of your earlier range for flattish production in Europe, '07 versus '08?

[Mark C. Pigott:]

Well, of course, we didn't say we're having flattish production, we are just saying the market will be... we are saying the market could be another record which is always a good thing but we are increasing our production in Europe and as well as continuing to invest to increase our capacity and as I mentioned also, Central, Eastern European and DAF is the market share leader in Poland, the Czech Republic, Hungary and now moving into Turkey and another countries as well as being the leader in many Western European. So we're conservative always have been but what we have said in the press release and the comment is that, DAF is increasing capacity and we're looking for 20% share we are at 14% right now and we're putting in that capacity and capability and efficiency to deliver that over time. So we're very excited about it.

[Peter Nesvold:]

And book-to-bill north of one in fourth quarter in Europe, so booking still growing faster than production?

[Mark C. Pigott:]

In Europe?

[Peter Nesvold:]

Yes.

[Mark C. Pigott:]

Yes in fact we are quoting a year out.

[Peter Nesvold:]

Okay. Thank you Mark.

[Mark C. Pigott:]

Good thanks, good questions.

[Operator:]

Our next question is from Jamie Cook with Credit Suisse.

[Mark C. Pigott:]

Hi, Jamie.

[Jamie Cook:]

Hi, Good morning. I guess my question just to follow-up on what everyone else is asking, you talked about the investments you're making and how that should lead to improved levels of profitability. And I guess what I am just to trying to figure out, you said we had the near term, medium and long-term bucket, and I guess I’m just trying to figure out which one is biggest, because the thing I am struggling with over the next three years, it seems like your costs are going to be up, your R&D costs are going to up for some period of time and it also seems like as we look at this cycle or we look at the pre-buy leading into 2010, that that's going to be lower versus where we thought. So I am looking at this and saying you know the Street's too high, so I am just trying to figure out, if you could help me, how to identify those three different buckets to see what I am missing?

[Mark C. Pigott:]

Well, first of all, let’s talk about the pre-buy. It'd be great if 2009 did not duplicate 2006, because it meant 2010 would be better than 2007, and that's a win for everybody in terms of a more moderate demand and increased profitability over the cycle. I mean it'd be great for our customers, it'd be great for our suppliers and it'd be great for the OEMs, and that's really what you want. We want the profitability over the cycle, and I think that's probably what you’re looking for also, that more consistent profitability. In terms of the benefits, when we bring on parts distribution centers, there's a benefit almost right away because we are able to stock and ship and satisfy our customers’ demands sort of right away. Capacity enhancements at the factory can once again benefit you right away, there's even more benefit as the bill rates improve and that's a function of typically the general economy. So, we'll see how the US and Canada... Canadian economy recovers. And then adding capacity in Europe, there's so much demand there, everybody is just trying to build as many vehicles we can. So, as we bring on more capacity that benefit is going to happen right away. So that... I would say that's sort of shot, medium term. Longer term, anybody that manufacturers anything in any industry in the world is always working on new products. We've always done it and we've set many, many standards and keep winning the quality awards, so we are working on brand new products as to say light, medium, heavy-duty, North America, Europe, and even products that we can sell into Asia. So, we got a lot of product development. As those come out, those take a number of years as you are aware. We look for great benefit there, so, I think it's actually each sequential bucket, if you will, pull this on late [ph] and we'll make a positive profit enhancement.

[Jamie Cook:]

And then I just -- next back to Peter's question on your European forecast, while it's still pretty good in PACCAR, we’ll do better than the industry, is any of your guidance, sort of the flattish year-over-year growth, reflect above increased concerns about sort of the Western European economies?

[Mark C. Pigott:]

No. I think Central and Eastern will pick up anything that Western doesn't have, but right now in the truck world, there is the... well the GDP growth in Western Europe is still good. It might have slowed somewhat, but the trucks are not being impacted, and Central and Eastern Europe will more than pick that up.

[Jamie Cook:]

Okay. And then just to actually... I am off that. Thank you.

[Mark C. Pigott:]

Okay, thank you. I appreciate it.

[Operator:]

Our next question is from Andrew Casey with Wachovia Securities.

[Mark C. Pigott:]

Good morning, Andrew.

[Andrew Casey:]

Good morning, Mark. How are you doing?

[Mark C. Pigott:]

Good. Thanks.

[Andrew Casey:]

Good. I've got a couple of questions about top line and then a margin related question. First on the top line, just mainly in terms of growth rate, in Europe you reported all in growth rate was 38% in the quarter. That's down a little bit from Q3's 46%, but up Q2's 28%. I'm trying to understand the very instant quarterly growth rate. Was it Q3 performance really was due to easier comps in the '06 time period that then became more difficult again in Q4 and can you help me with that?

[Mark C. Pigott:]

Okay. Now, I think what you're getting at is the European growth being slightly lower in the fourth quarter and that's reflective of factory shutdowns that occurred over the holiday period that were used to improve our capacity going forward.

[Andrew Casey:]

Okay. So, there were actually fewer production days in Q4 in Europe?

[Mark C. Pigott:]

Correct.

[Andrew Casey:]

Okay.

[Kenneth Gangl:]

And the good thing is we increased our efficiency and capacity so we can make more and generate improved margins and more total units. You have to invest in order to grow, that's the key.

[Andrew Casey:]

Completely understand. Thank you.

[Kenneth Gangl:]

Excellent. Good question. Thank you.

[Andrew Casey:]

And if I could for a few more?

[Kenneth Gangl:]

Go ahead.

[Andrew Casey:]

On the other region, same type of question Q4, 3%; Q3 was 7%, is that a function of Canadian, Mexican earlier comps or did it take some shutdowns there as well?

[Mark C. Pigott:]

Well, the other would have Mexico and a same sort of scenario as we saw in Europe. Mexico introduced some new tax legislation, which impacted, well the entire country, not just our industry. And so there were fewer production days fourth quarter '07 versus fourth quarter '06 and I think that's really what you are seeing.

[Andrew Casey:]

That persists in Q1?

[Mark C. Pigott:]

Well the tax legislation is now in effect and this is sort of an inventory valuation tax that is affecting well anybody that has inventory in any industry. So that's now being worked through the system and I think people are starting to get more comfortable with it.

[Andrew Casey:]

Okay. And then lastly on the margin in Q4 was a down a little bit from the Q3, part of that has to do I am sure with this lower unit production days in Europe and unit volume declines North America, higher R&D expense.

[Mark C. Pigott:]

Correct.

[Andrew Casey:]

Were there any other factors in Q4 that you would like to talk about?

[Mark C. Pigott:]

Well, I think you got it. Some factory expenses to keep enhancing them but I think you pretty much encapsulated it there.

[Andrew Casey:]

Okay.

[Mark C. Pigott:]

And the good news is second best year in our history.

[Andrew Casey:]

Congratulations.

[Mark C. Pigott:]

Yes. Thank you very much.

[Andrew Casey:]

Thanks.

[Operator:]

Our next question is from Andrew Obin with Merrill Lynch.

[Mark C. Pigott:]

Good morning Andrew.

[Andrew Obin:]

Yes, good morning. Just a clarification on your engine. You said that you are going to be using both SCR and EGR, so does that mean that there will be a PACCAR front engine that will not utilize SCR technology in 2010?

[Mark C. Pigott:]

No, the PACCAR engine will use a combination.

[Andrew Obin:]

Okay.

[Mark C. Pigott:]

Of SCR and EGR, so no, we will only have a unitary a single approach to emission regulations.

[Andrew Obin:]

So all PACCAR brand engines will require urea is that a fair statement.

[Mark C. Pigott:]

That is a correct statement and if you would like to talk in much more technical detail, we would be happy to take it offline and we've got a lot of incredible engine designers that would love to share their thoughts with you.

[Andrew Obin:]

Sure, the other part of the question. You highlighted significant investments in capacity expansion particularly in North America, and the question I have for you just theoretically how high do you think PACCAR's market share can go in North America, while maintaining its premium brand?

[Mark C. Pigott:]

Our number one focus is quality and return to shareholders and that's guided as for a 102 years and what is very satisfying and rewarding to our customers, our shareholders and employees is by adhering to that strategy market share increases because more and more people recognize the value of quality in terms of lowering their operating costs, higher resale values and just ease of attracting and retaining their drivers. So, I don't have an answer for you because it's all about quality and return to shareholders.

[Andrew Obin:]

But in the calculation that you make about better throughput through your factories and all the efficiencies that you gain from that, do you think that the price gap between Peterbilt and Kenworth and the rest of the industry will have to narrow somewhat over the next several years for you to utilize this capacity? Where do you think you can gain this market share with current pricing structure?

[Mark C. Pigott:]

We are investing to continue... we are the low cost manufacturer and the high quality deliverer of product, and that's where we keep investing in new products, higher quality, lower costs. So, certainly our teams are very focused on extending their advantage versus our competitors. In meaning, higher quality products continuing to be recognized by J.D. Powers, lower cost, more efficient, faster time to market place for new designs. That's where our energy and investments are really focused.

[Andrew Obin:]

So, you think you can close the gap on just being the most efficient manufacturer in the industry?

[Mark C. Pigott:]

Pardon me.

[Andrew Obin:]

You intend to stay ahead just by being... having the lowest cost and you can always… you will be competitive against anybody, because your cost will be better than anybody else's?

[Mark C. Pigott:]

That is certainly one element of it and the highest quality. It's all about quality for us. Quality, quality, quality.

[Andrew Obin:]

Thank you very much Mark.

[Mark C. Pigott:]

Thank you, I appreciate it.

[Operator:]

Our next question is from Stephen Volkmann with J.P. Morgan.

[Mark C. Pigott:]

Good morning Stephen.

[Stephen Volkmann:]

Hi, good morning. Just a couple of details here I guess, since a lot of this has been asked. But can you… you commented in your release about the area distribution system. Can you just comment a little more on what you are doing to get that in place?

[Mark C. Pigott:]

Absolutely, it's a great question. Surely we are working with organizations such as the American Trucking Association, Manufacturers Association, other Industry Associations and also recognize that most of our competitors will also be introducing area. So, this is very much an industry driven initiative. So, then we're working with the chemical companies, we are working with oil companies, we are working with the independent trucks stop operators, we are working with a wide range of different OEM dealer networks to present a comprehensive and coordinated supply platform of area to people driving on the highways of North America.

[Stephen Volkmann:]

Okay. Would you anticipate that that would take any investment on your part, on PACCAR'S part?

[Mark C. Pigott:]

I think our investment is producing the highest quality product. Typically, say the chemical, oil and independent distributors truck stop operators, they look at this as another customer service and profit opportunity. So, I think they are the ones that are going to be investing.

[Stephen Volkmann:]

Okay. Great, and then just with 2007 now kind of in the rearview mirror, do you think that your customers saw any performance difference amongst the engine from your various suppliers?

[Mark C. Pigott:]

I think when you boil it all down and there was… as we say in England, swings at around [ph] about the performance was better than anticipated. And coming back to an earlier response to another good question, I think many of the customers we talk to, would say I probably should not have purchased so many new vehicles in the pre-buy and just had a more of a moderated approach. I think the technology is performing and people are happy and customers are making excellent profits, so I think we've all learnt from that.

[Stephen Volkmann:]

Okay. But just to push that one perhaps that further, there's no major difference amongst your suppliers in terms of performance and so forth from your customer’s viewpoint?

[Mark C. Pigott:]

Not that we can see. It very much comes down to local support and typically what dealers and customers are used to in terms of selling to the marketplace.

[Stephen Volkmann:]

Great, and then DAF in Europe, do you think DAF's market share in Eastern Europe is roughly sort of similar to Western Europe or is there either an opportunity or perhaps some outperformance in eastern Europe?

[Mark C. Pigott:]

Well, you know it varies by country, in some countries we have in Western Europe... I'll just kind of answer in two parts. In Western Europe we are one of the fastest growing, probably the fastest growing OEM and our shares will vary from over 30% in the UK, Holland, Belgium, to 15% Germany, France, and then maybe 10% Italy, Spain. If you look at Central Europe, we are at 20% share in Czech Republic, Poland, Hungary and probably less than that in Turkey and some of the stans and going into Russia. So, there is so much opportunity, it's very exciting. Of course we got the highest rated product keep winning these Truck of the year awards, it's just a great, great product range.

[Stephen Volkmann:]

Okay great. And then just one quick one on this whole sort of R&D and CAPEX outlook. I guess my assumption was that both R&D and CAPEX were likely to be elevated through the end of the decade as we work on the new engine and product platforms and so forth, and then sort of at least on the technology payback comes post-2010, when you start getting your vertical integration out there, you get to start to play in the parts business from the new engine and so forth, but that is clearly going to be a little future out there. Any comment on that observation?

[Mark C. Pigott:]

Well, we are looking for excellent profit return in all these investments and have a great track record of achieving excellent profit return. And as I mentioned to one of the earlier questions, there are different sequences and cycles depending on which capital investments or which expenses associated with different projects. Parts return almost immediately, you build something and you go out and work with the customers and sell more parts. Factory capacity and efficiency enhancements are short-term, medium-term, and long-term, they don't go away. New product development is more medium long-term. So, I think you are right in the assumption that we are growing, we were 16,15,17 billion in that range. We are looking to grow, that certainly has always been our focus. We want to grow our profits even faster than revenues. We have been able to achieve that for many decades. And you have to invest in order to grow. I know that some people were interested in let's call it breaking out of the R&D, but we've always had strong R&D, strong capital investment forever. I guess we are just maybe making it a little more transparent and that's what's maybe causing a little more interest.

[Stephen Volkmann:]

Transparency. I appreciate it and thank you.

[Mark C. Pigott:]

Right, good question. Thanks a lot.

[Operator:]

Our next question is from John Kohler with Oppenheimer & Co.

[Mark C. Pigott:]

Good morning John.

[John Kohler:]

Good morning. How are you?

[Mark C. Pigott:]

Good. Thanks.

[John Kohler:]

Good. Quick question. Can you give a figure on 30-day delinquencies for the on balance sheet credit?

[Mark C. Pigott:]

We typically don't break that out for public consumption.

[John Kohler:]

Okay. Is it comparable to PACCAR Financials credit performance? Is there a material difference between the two?

[Mark C. Pigott:]

I'm a little bit confused on the question then.

[John Kohler:]

Well, if you don't break out the 30-day delinquencies...

[Mark C. Pigott:]

We break it out internally.

[John Kohler:]

No, but if you don't allow for public consumption, is it... can I draw an inference from how PACCAR Financials credit performance is filed in the Qs with the SEC?

[Mark C. Pigott:]

Okay. Good question.

[John Kohler:]

Is that comparable?

[Mark C. Pigott:]

As Ken mentioned, we are experiencing somewhat higher past dues in North America and very strong performance and lower past dues in the rest of the world. So, on balance our past dues on the overall portfolio are up compared to last year, but not a significant amount.

[John Kohler:]

Okay, because the September figure showed 30-day delinquencies at 1.34%, which is up from 0.84% in a year-ago period in September. I imagine those got a little worse.

[Mark C. Pigott:]

Yes, well I think as we had mentioned, we've doubled the size of our portfolio in the last five, six years and we are very conservative in terms of the funding requirement that we're looking at from our customers, but were in excellent position and very proud that PACCAR Financial delivered another record year.

[John Kohler:]

Okay. So is it safe to assume then the overall portfolio is running about 1% or so, 30-day delinquency?

[Mark C. Pigott:]

No, no, not at all. I'm not sure where you are getting that figure from. No, I mean, our portfolio is in fantastic shape.

[John Kohler:]

Okay. Thanks.

[Mark C. Pigott:]

All right. Thanks.

[Operator:]

Our next question is from [inaudible].

[Mark C. Pigott:]

Good morning.

[Unidentified Analyst:]

Good morning Mark. Thanks for your time. I had a question on the financing side. I was wondering if you could tell us what proportion of your US sales you have actually in Finance?

[Mark C. Pigott:]

Typically 20%, 25%, 30%.

[Unidentified Analyst:]

Thank you. That's helpful. And then, of the one that you don't finance, do you know is that because people don't want the financing or is it more because you have turned them down as being kind of full credit quality?

[Mark C. Pigott:]

It's a whole range of answers. There is no one; I bet there is ten different scenarios on the finance selection by the customer.

[Unidentified Analyst:]

I mean, if you have to pick kind of the largest explanation, is it more coming down more or…

[Mark C. Pigott:]

It is basically a relationship with a home bank.

[Unidentified Analyst:]

Do you think there is a lower credit quality people… the question is that you finance yourselves and you are worried about potential source of buyers exiting the market as credit standards tighten?

[Mark C. Pigott:]

Not really. No, no, we got great customers, we love our customers and we are working hard to provide a full service to them, and that would be financing, leasing, will even manage their inventory for them.

[Unidentified Analyst:]

And the last thing I had was on your own standards and we keep telling that banks and mortgage providers on consumer credit, the bill that the standards are all being tightened across the US, have you guys implemented a tightening of standards yourself or is that something you'll only like to do this year if need be?

[Mark C. Pigott:]

I think we pride ourselves in probably having the most conservative standards in the financial industry and have for decades and decades. When you get into a turbulent financial market as we have seen around the world, certainly we review it and make some enhancements to our programs, that… they are very conservative. They are probably the most conservative in the industry. So, we will make enhancements, but as Ken indicated a very strong portfolio and we are moving forward.

[Unidentified Analyst:]

Excellent, thanks for the time.

[Mark C. Pigott:]

Thank you, appreciate it, good questions.

[Operator:]

Our next question is from David Bleustein with UBS Warburg.

[Mark C. Pigott:]

Good morning David.

[David Bleustein:]

Good morning. Quick question for you. How do you sketch out PACCAR's growth path or do you have any designs on getting bigger in the military business and/or in Asia?

[Mark C. Pigott:]

Well, excellent question. Asia of course we have been there over a 100 years. We are a steady supplier in Asia, particularly in the more rigorous off road applications but also component sales. We opened an office in Shanghai to complement the one we have in Beijing. We are taking a strong look at India and with the world-class power train that we have, we are getting ongoing inquiries from people saying, like to purchase it and so we are selling some to bus manufacturers and other end customers. We are also starting to sell some of our, let's call it on highway product into Asia. So, that's an exciting growth market where I think everybody is aware that Asia is strong, but particularly China is still dominated by state-owned companies. So, over time that will evolve. In the military, we've had a strong presence in military, particularly in the 30s, 40s, 50s, we do some military in Europe, but don't really have any plans to do military in North America at this time.

[David Bleustein:]

Terrific. Thanks.

[Mark C. Pigott:]

Good. Thanks a lot.

[Operator:]

Our next question is from Michael Regan with Janus Capital.

[Mark C. Pigott:]

Good morning Michael.

[Michael Regan:]

Hi Mark how are you?

[Mark C. Pigott:]

Good thanks. How are you doing?

[Michael Regan:]

I missed in your earliest comments. Did you actually give the R&D by quarter for the first three quarters of the year and can you give us any R&D numbers for the past few years?

[Mark C. Pigott:]

No, we did not give… and you're talking about 2008?

[Michael Regan:]

No, R&D by quarter, the first three quarters of ' 07.

[Mark C. Pigott:]

We did not give those out and of course you will get them in the quarterly comparisons of '08-'07.

[Michael Regan:]

Well, Mark in the spirit of disclosure, let's not wait till the first three quarters of ‘08 to get the last three quarters of ‘07. And in the spirit of disclosure it will be really helpful if we could get R&D broken out going back, I would ask for ten years just so we can get some perspective through the cycle of what R&Ds look like, that would be helpful.

[Mark C. Pigott:]

I appreciate your input.

[Michael Regan:]

Thank you.

[Mark C. Pigott:]

Thank you.

[Operator:]

Our next question is a follow-up question from Jonathan Steinmetz with Morgan Stanley.

[Mark C. Pigott:]

Hi Jonathan.

[Jonathan Steinmetz:]

Thanks Mark, just a few others here. In the other bucket of revenue, which is about $3.5 billion for the year, can you just talk a little bit about, you gave a forecast for Europe, forecast for the US and Canada markets. Can you talk just basically what you see in Mexico and Australia, which are pretty important markets for you in the other bucket.

[Mark C. Pigott:]

Of course Australia and Mexico both either have or have had their own emission regulations, and so last year Australia very strong, maybe a prebuy, but that continues to be strong down there. Mexico has the emissions coming up midyear of this year. They are working through the new tax capital inventory legislation that is really impacting every industry in Mexico, but over the next month or two that will work through. So, there will be I think another strong market in Mexico; of course Mexico continues to grow, so I think both good, solid markets.

[Jonathan Steinmetz:]

Okay. And did you give the impact of currency translations, specifically the euro on revenue and also EBIT in the quarter year-over-year?

[Mark C. Pigott:]

Okay. We've got those. The impact on revenues for the quarter was about $240 million and our net income was $25 million and for the year it was $630 million and income was about $70 million.

[Jonathan Steinmetz:]

Great. Thank you very much.

[Mark C. Pigott:]

Thank you. Good question.

[Operator:]

Our next question is from David Campbell with Owl Creek.

[Mark C. Pigott:]

Good morning, David.

[David Campbell:]

Good morning. Thanks. I have got a currency related question too. Could you discuss what effect on you over the long-term currency exchange rates like the dollar, euro has on and how you expect market share and cost competitiveness to change over time?

[Mark C. Pigott:]

Well I think that is a great question, one of the... PACCAR is in a very fortunate position, because first of all we are the low-cost manufacturer in every market in which we manufacture. So, that's Mexico, US, Canada, Holland, Belgium and England. And we are typically not really shipping too many parts or components back and fourth. So, we are not trying to arbitrage the currency change. Now one of the potential benefits is as we bring our Mississippi engine plant on stream, it could be, I will just say could be a source of engine for DAF if there is maybe the currency is... exchange rates the correct way.

[David Campbell:]

I guess in speaking with your North American competitors who are going to address 2010 engine emissions without FDR, they claim that FDR adds as much as $10,000 to the cost of making the truck. I wonder if you could...

[Mark C. Pigott:]

I don't know who that is, because Mercedes is using as well as Volvo, they are having a whole lot of competitors out there.

[David Campbell:]

Navistar, and again I am not an engine engineer, so I just...

[Mark C. Pigott:]

I can't really comment, because I don't think they publish financial results. I am not sure what they are doing.

[David Campbell:]

Can you tell me your opinion on difference in cost between an in-cylinder solution and an FDR solution in Class 8 for example?

[Mark C. Pigott:]

Well I think we have had great success with that strategy and as every other major competitor has also adopted it. So, I think it really stands that it seems to be the preferred solution going forward.

[David Campbell:]

Directly to my question...

[Mark C. Pigott:]

We don't have that cost broken out at this time.

[David Campbell:]

Can you... and maybe this is going to perhaps… people who followed your company more closely are going to know the answer. I apologize if this is kind of a one-on-one level question, but why did you decide on FCR considering it is more complex?

[Mark C. Pigott:]

Well, I am not sure it is more complex and also we of course we are standard with it in Europe and having great success.

[David Campbell:]

So, is it fair to say that the fact you are already using it in Europe made it kind of unfair playing field between the two technologies?

[Mark C. Pigott:]

No, I won't say that's fair. I would say it is a very proven engineering solution to a complex problem that we have done a great job of engineering and it is providing excellent benefits to our customers.

[Unidentified Company Representative:]

Are there any more questions?

[Mark C. Pigott:]

Not for me.

[Operator:]

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

[Mark C. Pigott:]

No. We thank the participants for their excellent questions and thank you operator.

[Operator:]

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