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PACCAR Inc. (NASDAQ:PCAR)

Q1 FY09 Earnings Call

April 28, 2009 11:00 AM ET

Executives

Robin Easton - Treasurer

Mark C. Pigott - Chairman and Chief Executive Officer

Ronald E. Armstrong - Senior Vice President and Executive Operations Officer

Analysts

Jamie Cook - Credit Suisse

Andrew Casey - Wachovia Capital Markets

Joel Tiss - Buckingham Research

J.B. Groh - D. A. Davidson & Co.

Ann Duignan - J.P. Morgan

Henry Kirn - UBS

Adam Uhlman - Cleveland Research Company

Kristine Kubacki - Avondale Partners

Andrew Obin - Banc of America, Merrill Lynch

Meredith Taylor - Barclays Capital

Peter Jacobs - Ragen Mackenzie

Jerry Revich - Goldman Sachs

Operator

Good morning and welcome to PACCAR's First Quarter 2009 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 any one has an objection they should disconnect at this time.

I would now like to introduce Mr. Robin Easton, PACCAR'S Treasurer. Mr. Eastern, please go ahead.

Robin Easton

Good morning. We would like to welcome those listening by phone and those on the webcast. My name is Robin Eastern, Treasurer of PACCAR, and joining me this morning are Mark Pigott, Chairman and Chief Executive Officer; Ron Armstrong, Senior Vice President and Michael Barkley, Vice President, Controller.

As with prior conference calls, if there are members of the media participating, we request that they participate in a listen-only mode.

Certain information presented today will be forward-looking and involve risks and uncertainties, including general, economic and competitive conditions that may affect expected results.

I would now like to introduce Mark Pigott.

Mark C. Pigott

Good morning. I am pleased to report PACCAR's results for the first quarter 2009. Revenue of $2 billion and net income of 26.3 million reflect very challenging recession affecting all industries worldwide. The second quarter production rates and margins will be similar to the first quarter.

The good news is that PACCAR continues to be a leader by generating profits while so many industrial and automotive companies are struggling.

In addition, the company had positive operating cash flow and strengthened its excellent balance sheet with the issuance of $928 million of medium term notes during the quarter, resulting in a liquidity ratio of over 110%.

PACCAR made a cash contribution of $150 million to its pension plans, which is reflected in our manufacturing debt balance.

Obviously, the commercial vehicle markets are lower, as indicated by industry orders in North America and Europe. PACCAR has proactively addressed the cyclical nature of the business by reducing overhead costs and trimming combined spending on R&D and capital by 60%.

We are maintaining investments in important new product updates as well as delivering productivity and efficiency gains of 5 to 7% per year in our manufacturing, distribution and engineering facilities.

PACCAR products, as many of you know, are setting the quality, reliability and low cost of operations standard for the industry. Our customers appreciate the recognition that the company has earned by being honored with the JD Power Founder's Award and Leyland earning the Queen's Enterprise Award for International Trade.

Reviewing the truck markets, industry estimates have been revised to 100 to 130,000 units for the U.S. and Canadian market which is the lowest since 1992. The European retail truck market is estimated to be 180 to 220,000 units comparable to 1998.

Since it is spring time and many companies are looking for the green shoots of recovery, let me share a few positive economic signs. Number one, many of our customers are earning good profits as they right size their fleets and take advantage of low diesel prices and the abundance of drivers in the market. Number two, even though freight is down 15% from a year ago, there is a reasonable equilibrium between freight tonnage and industry fleet size.

Number three, used truck pricing, especially for premium Kenworth, Peterbilt, and DAF trucks is stabilizing. And PACCAR financial services credit losses have decreased every quarter since last summer.

PACCAR financial pre-tax income was 15.3 million in the first quarter compared to 67.3 million a year ago. A smaller portfolio, higher borrowing costs and credit losses impacted the profit results. The first quarter profits were influenced by improved credit losses in the U.S. and Canada, offset by a more challenging finance business in Europe.

But I think it's important to remember, our industry has been in recession for almost two years in North America. So many of the difficult decisions and industry realignments have already occurred.

Number four, our Kenworth and Peterbilt dealers are in excellent position with low new vehicle inventory, complemented by good parts and service business, driven by the highest average fleet age in the last 15 years.

The increasing industry fleet age means that there's plenty of pent-up demand for new trucks when the economy recovers. DAF dealers, new vehicle inventory also continue to improve declining by 25% during the first quarter.

Number five, suppliers that are exposed to the automotive industry have certainly been in the news. But 90% of our truck suppliers are focused on commercial vehicles and industrial applications. A tough market but manageable.

And finally, number six, the improved pricing in commodities will be beneficial for the global industrial marketplace. It certainly will impact the extraordinary profits generated by commodity companies in the last several years.

PACCAR is in excellent shape, due to the most experienced management team in the business and excellent balance sheet, market leading products and services and quality leadership throughout our operations.

Our balanced approach in all phases of the business cycle, position us to generate good results when the green shoots begin to flower. I am proud of our employees' exceptional performance and thank them for their support as we continue to progress through the very difficult challenges of the global recession.

Thank you, we look forward to your questions.

Unidentified Company Representative

We'll take questions operator.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Jamie Cook with Credit Suisse.

Jamie Cook - Credit Suisse

Hi. Good morning. And congratulations.

Unidentified Company Speaker

Good morning, Jamie.

Jamie Cook - Credit Suisse

My first question if I think about your R&D in the quarter at about 52 or 53 million. It was little lower than I had expected and I thought you guys were so to think about R&D on a quarterly basis relative to more comparable to the fourth quarter run rate.

So I guess I just I'm trying to get a better understanding of how I should think about R&D for 2009 and if it's at a lower base where are we making the cuts? And then my follow-up question is if I look at both your inventory turns and your receivable turns, they're both down dramatically and I guess the inventory what is troubling me the most, if you could give any commentary on that and how we should think about that going-forward?

Unidentified Company Speaker

On the R&D, I think the general guideline would be the run rate would probably be similar to the first quarter.

Jamie Cook - Credit Suisse

Okay. And where are we seeing cuts relative to where we were last year in particular with an emission change coming ahead, I mean yeah?

Unidentified Company Speaker

Well, we just review all of the many projects we have companywide and determine which ones have different time factors such as the emissions sort of January 1, 2010 that's right on schedule, we're in great shape. Others that are medium and long-term projects, we review and perhaps reschedule.

So, we have many, many hundreds of projects as most companies do around the world and take a look at them, one at a time and see what impact they're going to have in terms of reducing our expenses but also more importantly how do we get these great products to our customers to keep our leadership.

Jamie Cook - Credit Suisse

Is it fair to say then that the fact that you're lowering your R&D in 2009, that you are making better headway on the development of the U.S. engine for the U.S. -- 9 and 13 meter engine for 2010? Are we cutting --

Unidentified Company Speaker

I think we're right on schedule, I won't read too much into the R&D changes, in terms of the PACCAR engine coming inn next year. I think that's right on schedule, we've been working on it for quite a few years as you're aware. And it's looking good. A lot of customers are excited about it.

Jamie Cook - Credit Suisse

Great. And then if you could just follow-up on the inventory turns in the quarter?

Unidentified Company Speaker

I think we're doing a good job, and I think the production and engineering and material people are doing fantastic in terms of lowering our inventory, which is obviously reflective at lower build rates and lower incoming orders. So I think inventories, we're making good progress and receivables also good progress.

Unidentified Company Speaker

Yeah, year end receivables are influenced by the amount of holiday shutdown days at year end. So that's just a consistent annual impact.

Jamie Cook - Credit Suisse

And then last, how should we think about production in the second quarter relative to the first quarter?

Unidentified Company Speaker

I think as I mentioned Jamie, its going to be comparable.

Jamie Cook - Credit Suisse

Okay.

Unidentified Company Speaker

Good questions.

Jamie Cook - Credit Suisse

Thank you.

Unidentified Company Speaker

Thank you.

Operator

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

Unidentified Company Speaker

Good morning Andy.

Andrew Casey - Wachovia Capital Markets

Good morning, Mark. Good morning, everybody. With the industry sales revision to your forecast to levels that we haven't seen for better part of ten years or more, are you seeing any loss of competitive pricing discipline in either of the two major markets you serve?

Unidentified Company Speaker

Well the first point is because we've been in this business a long time, a lot of us have seen it. We were here in 92. So I think that's a real advantage of PACCAR's very experienced management team.

When things are reacting to a market that's in a recession and it's a tough market around the world, pricing is under pressure for all competitors and certainly we're no exception to that.

Andrew Casey - Wachovia Capital Markets

Okay. Thank you. And then, if could revisit the inventory question that Jamie was asking and look at the first quarter level relative to sales, sales were down kind of mid double-digits, inventory was down year-over-year about 15% or so.

If I'm trying to understand a little bit better than moving pieces in there. Was there any reduction year-over-year due to currency?

Unidentified Company Speaker

There was a bit of a reduction of currency. Most of it was reduction in real terms.

Andrew Casey - Wachovia Capital Markets

Okay.

Unidentified Company Speaker

And we need a certain baseline of inventory just to operate the business and certainly we are continuing to bring down the inventory at all our production facilities and I think the team is very focused on that and its been certainly one of the hallmarks of PACCAR's proactive business approaches to reduce that inventory when times are more challenging.

Andrew Casey - Wachovia Capital Markets

Okay. Thanks on that. And then lastly, in terms of input costs, pretty clearly some of the commodity prices have come under pressure. Have you seen any of that, well I guess did you see any of that in Q1, or is that still to benefit you in the future potentially?

Unidentified Company Speaker

That's a great, great question. I know there's probably a number of different answers that depending on what your company does you can get to. I think in terms of the industrial world and the people who make things these last few years have been as I say extraordinary in terms of how high the commodity prices have got unrealistic. So when you say they're under pressure, the way most companies look at it, is that there still other ways to go to get back to a normalized range and certainly, we're having some benefit but you know we have a lot of our agreements with suppliers, they are long term agreements and that's beneficial for us and our suppliers.

Steel, aluminum, obviously oil products are all coming down and -- but I think -- I think if you ask most people who are making something, they say they still have ways to go, and that's kind of what we're looking at.

Andrew Casey - Wachovia Capital Markets

Sure. Thank you very much.

Unidentified Company Speaker

You bet.

Operator

Your next question comes from the line of Joel Tiss with Buckingham Research.

Mark Pigott

Good morning, Joel.

Joel Tiss - Buckingham Research

How is it going?

Mark Pigott

Good.

Joel Tiss - Buckingham Research

That's good. First, I have a clarification. What's the typical lag time between when green shoots first show up and when they turn into flowers?

Mark Pigott

Well, depends. If you still got snow in your garden, it could be a while or get a little sunshine out here.

Joel Tiss - Buckingham Research

That's good. I just wonder if you could talk a little bit about the performance of the aftermarket business and any idea of -- all the parked trucks, will we see that aftermarket business start to pickup before the OEM business starts to pickup?

Mark Pigott

Well, that's certainly has been the normal flow in terms of the business aftermarket is a pretty steady performer and we're still seeing good performance. The aftermark, we've got 1.5 million vehicles running that have a Kenworth, Peterbilt or DAF named on it. So that's positive.

Many of our customers are really working through any part vehicles they might have and we know it's a tough recession out there and people are postponing purchases they might normally make which is usually a good benefit for the parts and service business.

I think in North America as I mentioned we've been in a recession for two years. So the customers and the dealers are in good shape. In Europe, the recession came on much more suddenly really starting last September-October time. So I think they're just now coming in to grips with it and many companies, not just our industry, in Europe are very cash sensitive. So they're probably postponing some of the normal maintenance. But I think that will return over the next medium term, parts business, generally, pretty steady.

Joel Tiss - Buckingham Research

Okay. And just to keep it brief, I'll try to glue two questions together here. Do you think that the overall price increase announcements are going to stick as we go into 2009? And then also do you have pre-buy built into your 2009 industry forecast in North America? Thank you.

Mark Pigott

Yeah. Well I can't really comment on any of our competitors in terms of their pricing. But when we'll go into 2010, there will be a price increase and I think we talk about it externally, we are just at the ATD meeting with all the truck dealers. Anywhere from 8 to $10,000 is certainly a range that everybody is aware of. There's certainly no secret about that.

In terms of a pre-buy, it's possible. I think typically we have some element of a pre-buy. But we usually don't have a global recession that we're working our way through. So that, that has a bit of a dampening effect. So let's talk in the second or third quarter, it'll be that much more smart.

Joel Tiss - Buckingham Research

Thank you.

Mark Pigott

Thank you.

Operator

Your next question comes from the line of J.B. Groh with D.A. Davidson.

Unidentified Company Speaker

Good morning, J.B.

J.B. Groh - D. A. Davidson & Co.

Good morning guys. Just a couple of quickies. I was wondering if you could address sort of, what you see as a quality of the financial services portfolio now versus how it would be in prior downturns?

Unidentified Company Speaker

I think -- I think the portfolio quality is excellent. We made conscious efforts to raise that quality as we came out of our last recession. We adjusted our underwriting standards and we adhere to those very strictly. So I think we're confident how the portfolio will perform during this downturn.

J.B. Groh - D. A. Davidson & Co.

And part of that maybe just a little bit shift in the customer base or is that the stayed relatively constant? I know you guys have made an effort to do more fleet type stuff?

Unidentified Company Speaker

Yeah, a little bit in that regard but -- just looking at all of our categories and making sure that we're comfortable with the quality of all categories of our credits.

J.B. Groh - D. A. Davidson & Co.

Okay. And then sort of a philosophical question, I hear this statistic about fleet age a lot and my impression is that while the fleet age is pretty old, a lot of these trucks have kind have been I guess you could say under utilized.

Does that mean the best way to measure, is there a better way to think of it, I mean I kind of liking it to buying a catalog from a grandmother, that's eight years old but it's got two years worth of miles on it, sort of the same thing going on in the used truck market?

Unidentified Company Speaker

Well, that goes back to an earlier question, you probably want to change out some of that upholstery and get old snap (ph) here if you're going to drive it.

J.B. Groh - D. A. Davidson & Co.

I like weather, yeah.

Unidentified Company Speaker

Yeah I mean it has an impact. But as I say, you can certainly track the number of fleets when we say fleets that might be a company that has five or more trucks that have gone out of business and that information is readily available on a monthly basis.

And we're actually in better shape for this recession than we were in 2001-2002 and there have been fewer fleets to go out of business, but still a good number. Even the freight's down, you've got the vast majority of customers are out running, or getting freight. The fuel cost is down. There's plenty of drivers, a very little turnover.

They're probably getting some pretty good pricing on new trucks, if they are purchasing new trucks. So the customers have -- really using most of their vehicles now and they're doing okay. I mean I know they like to do better but they're -- you can see the profits that they're delivering and lot of that reasonable quarters considering a global recession going on.

J.B. Groh - D. A. Davidson & Co.

So, I don't want to put words in your mouth. But -- I think what I'm hearing you say is that when there is some sort of upturn, it would be a fairly a quick snap because of the average age of the trucks?

Unidentified Company Speaker

Well certainly that sentiment has been discussed I think more in the press and maybe in the analyst comments. I think for the industry we always like a gradual but steady improvement because quick reactions either up or down are always a little more challenging. But there are lot of factors that are indicating when the economy improves and that's a difficult one to predict that we're a leading indicator, we should see some good demand. So I think we might be saying the same thing.

J.B. Groh - D. A. Davidson & Co.

Okay. Great, thanks a lot for your time.

Unidentified Company Speaker

You bet. Thank you.

Operator

Your next question that comes from the line of Ann Duignan with J.P. Morgan.

Unidentified Company Speaker

Good morning, Ann.

Ann Duignan - J.P. Morgan

Hi, good morning guys, how are you doing?

Unidentified Company Speaker

Good.

Ann Duignan - J.P. Morgan

I suppose my first question starts out with you commented in your press release that you're currently up 17,000 employees. You had 18,000 at the end of last quarter which is only a reduction of 1,000 and at the end of '07 you had 22,000.

So we're looking at headcount reductions of about 23% versus revenues down year-over-year 52%. Mark, how comfortable are you that you really have right sized the business efficiently for the kinds of volumes you're seeing out there. I mean it kind ties into the inventory question I guess?

Mark Pigott

No, I'm not sure I'd equate people with inventory. So we'll put that one on the side. We're very confident. Many companies value who (ph) the number of layoffs, I'm not sure what the benefit is for either the company or the employees.

Our employees make this company a great company and if we do have to let somebody go, it's a very sad process, and but we do make those difficult decisions. We've got a couple of factories as you know that are essentially closed, they're not making any product and we've down sized many of our facilities to let's call it, equate to the current market demands.

So PACCAR has always been a leader on reducing cost. And I guess I would just say let's see who's making any money nowadays, and you certainly have access to the world tables as well as we do in terms of the automotive industrial sectors. So our employees are very important to us, and they're doing a great job, and we're still making money.

Ann Duignan - J.P. Morgan

And you think that current headcount is appropriate, particularly I guess I am thinking about in Europe and how it can take reducing headcount in your --

Unidentified Company Speaker

I'm not sure what the question is really asking here?

Ann Duignan - J.P. Morgan

Well I'm just curious if you think you've taken sufficient headcounts out of Europe given the significant deep time (ph) that you've seen over there. And just giving how long it takes to take headcounts out in Europe?

Unidentified Company Speaker

Well, I lived in Europe for many, many years. I probably know Europe as well as anybody. And the team there is doing a fantastic job working with political leaders in different countries and being part of the industrial federations and associations and everybody is taking the appropriate actions.

So, I would just say that we're in excellent shape and not sure what other companies are saying but our employees make this company a great one. We welcome you out here and we can share that with you in person.

Ann Duignan - J.P. Morgan

Okay and switching subject a little bit. Your leverage in the financial services side has increased and asset equities are about 7.1 times at the end of the quarter. Can you explain what's going on there?

Ronald Armstrong

I'm not sure what exactly measure that it's looking at. But it just has to do with the level of our assets and our funding levels. I'm not sure. Little more color on that question please?

Ann Duignan - J.P. Morgan

Well, has there been any delays in paying off commercial paper borrowing from the Fed. I'm just curious why your leverage would increase in this environment?

Unidentified Company Speaker

We've had good access to the credit markets and we continue to fund with the balance of short term and medium term funding. As Mark said we got 900 million of medium term notes issued in the first quarter. So our funding position is quite good.

Ann Duignan - J.P. Morgan

Okay. I'll get back in queue.

Unidentified Company Speaker

Thank you.

Operator

Your next question comes from the line of Henry Kirn with UBS.

Henry Kirn - UBS

Hey good morning guys.

Mark Pigott

Good morning Henry.

Henry Kirn - UBS

Question about the finance portfolio. Is it possible to talk a little bit about how the delinquencies are trending in Europe and North America, especially given the higher repossessions in Europe?

Ronald Armstrong

I think that the delinquencies in North America are pretty steady. In Europe, they are trending upward and that we're seeing some trend upward in Mexico.

Henry Kirn - UBS

Okay. And you mentioned that used prices had stabilized in North America. Is it possible to give a little color around where they are today versus where they might have been a year ago and maybe a little color around what might be a receptive market or who is buying the used trucks at this point?

Ronald Armstrong

Yeah, I think used prices from a year ago are probably down 10%-15%. The great news as Mark said is that the Kenworth, Peterbilt and DAF quality products continue to demand a premium relative to the competition. So that's a big plus for us.

Mark Pigott

And for our dealers.

Ronald Armstrong

And for our customers

Henry Kirn - UBS

Okay. And if I can squeeze one more in?

Ronald Armstrong

Please do.

Henry Kirn - UBS

Could you talk a little about how many of the 2010 units are already in the field and maybe the customer response to your engine so far?

Mark Pigott

Well, it's a good question, sort of a two parter. The response to the engine has been excellent. And I think number of the analysts need to recognize that this is an engine that has been running in Europe and we've been building engines for 50 years. That's 50. And have won sort of awards including I was pleased to see that we have just won the Asian Bus-Engine of The Year for the third year in a row with the PACCAR engines. So that could be good over time. And so the engine is doing very well.

In terms of the number of units, I think comparables of many of our competitors as the number out running being tested, being evaluated and that's all seem to be making very good progress and right on schedule.

Henry Kirn - UBS

Okay. Thanks a lot.

Mark Pigott

Thank you.

Operator

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

Ronald Armstrong

Good morning Adam.

Adam Uhlman - Cleveland Research Company

Hi, good morning. I guess just a clarification Mark. Will PACCAR be bringing over both the 9 and 13 liter diesels from Europe or you keep saying engines. I'm wondering if it's only the 13 liter diesel now.

Mark Pigott

The 13 liter is certainly the primary focus. I'm probably saying engines because I'm so proud of the whole team.

Adam Uhlman - Cleveland Research Company

Okay, great. Thanks.

Mark Pigott

Thank you.

Adam Uhlman - Cleveland Research Company

Another clarification. In the release it was called out there was an expense of $22 million-$23 million from hedges. Could you talk about what exactly that was and how should we think about that expense going forward?

Ronald Armstrong

We called that out. We have certain economic hedges in Europe with respect to currencies and we have some hedges in finance companies with respect to interest rate swaps that have some change in value during the quarter that were significant enough that we wanted to call attention to it. But it should be viewed as more of a one-off deal.

Adam Uhlman - Cleveland Research Company

Okay. Got it. Thanks. That's helpful. And then the profitability within the truck operations was pretty strong in the quarter, considering that sales were off so much. Obviously you did a good job in picking down R&D expense and SG&A.

But can you talk about one, whether any one-time items that helped margin in the quarter that would not be repeated. And then also could you talk about maybe just directionally were you profitable in the truck operations in Europe, were you profitable in truck ops in North America?

Mark Pigott

Well, we typically don't break that out as you know. It's always a good question and certainly that something that we track religiously. As far as one-off impacts in the first quarter to positively benefit margins, I think it was pretty much normal business. We certainly would like to have been building more trucks around the world but that's just the nature of the business we're in right now.

Adam Uhlman - Cleveland Research Company

Okay, great. Thanks.

Mark Pigott

Thank you.

Operator

: Your next question comes from the line of Kristine Kubacki with Avondale Partners.

Mark Pigott

Good morning Kristine.

Kristine Kubacki - Avondale Partners

Good morning. I just have one question on... to drill down a little bit more on the repossessions in Europe. Can you give us a little color on the geography? Was it Central Europe, Western Europe, and what size the fleets were? Were they full fleets, larger fleets?

Ronald Armstrong

Well I think mostly the small and medium sized operators and I would say the higher percentage was in the Southern markets. That's been the most challenged and so that's been the trend that we've seen.

Kristine Kubacki - Avondale Partners

Smaller and mid fleets under 100 trucks or so?

Ronald Armstrong

Yes

Kristine Kubacki - Avondale Partners

Any guidance on the trends for Europe? Do you see it stabilizing or getting worse as we move through the year?

Ronald Armstrong

We have a good portfolio. We'll continue to manage and work with our customers to find a way to from them to pay their bills, continuing business and us to get paid at the end of the contract.

Kristine Kubacki - Avondale Partners

Okay. Thank you very much.

Ronald Armstrong

Thank you.

Operator

Your next question is from the line of Andrew Obin with Banc of America, Merrill Lynch.

Mark Pigott

Good morning Andrew.

Andrew Obin - Banc of America, Merrill Lynch

Good morning. Great quarter given the environment.

Mark Pigott

We appreciate it. Thank you very much. We got a great team.

Andrew Obin - Banc of America, Merrill Lynch

Just a question on used equipment values. Could you comment what you're seeing in terms of the trends in North America and Europe and given a sudden sort of collapse in production in Europe and sort of drop in demand for used trucks in Eastern Europe, are you seeing something unusual going on in Western Europe in terms of used equipment values vis-à-vis North America?

Mark Pigott

Okay. So, North America used equipment, we kind of talked about that, mentioned that in the press release. It's stabilizing and so that's healthy. Europe as you indicated has certainly seen a much faster decline. I don't think its any steeper. Well, its steeper because it's been a shorter duration, but used trucks probably are still declining in value there as people work through a recession. And Europe is really I think six or seven months old versus two years old in North America that over time will stabilize.

And once again as Ron has mentioned in Europe the DAF trucks are the premium quality leaders, the resale leader and that's all very healthy once again for our customers and for our dealers.

Andrew Obin - Banc of America, Merrill Lynch

Well I guess what I was wondering what kind of order magnitude declines we're seeing in Europe and are they in line with your expectations and what does it mean for in a sort of residual value risk in your portfolio going to the second half of the year?

Ronald Armstrong

Well we've been through cycles before. We always establish our residual values on a conservative long-term approach. And so, we continue to monitor that and we make adjustments every quarter if there are challenges with our residual values. So we continue to monitor that very closely.

Mark Pigott

Adding a little bit to Ron's comments. PACCAR, 104 years, always conservative and so on the residual value, which effects the leasing and finance business, we've always had a conservative approach and after the last recession, we even made it more conservative. Quite a few of our competitors used that as a sales tool and they all give unrealistic residuals and I'm sure they are being impacted. But we try to approach it on a very conservative basis because the market is cyclical and you have got a couple of good years and you got a couple of tough years and that's the business we are in.

Andrew Obin - Banc of America, Merrill Lynch

I appreciate it, Thank you very much

Mark Pigott

Thank you

Operator

Your next question comes from the line of Meredith Taylor with Barclays Capital.

Mark Pigott

Good morning, Meredith.

Meredith Taylor - Barclays Capital

Hi good morning. I'd like to fill a question on PACCAR finance. First in the U.S., there seems to be an expectation among fleets that given the current pricing pressures, there is another wave of bankruptcy that's likely to come. So can you address how you might be thinking about your provision for losses in the context to that perspective.

Ronald Armstrong

Well we monitor our portfolio and adjust our reserves and provisions every quarter based on what we expect... how we expect our portfolio to perform and we continue to make those adjustments each quarter as we move through the year.

Meredith Taylor - Barclays Capital

Well and I guess the question would be is your expectations that you are going to see an increase in bankruptcies as we move through the back half of the year. I mean, I realized that you talked about the relative health of the fleets in the context the current environment. But how you're expecting that to trend as we move through the year?

Mark Pigott

As I mentioned earlier that we saw probably about a third more bankruptcies in the 2001-2002 recession which was people that didn't have the global context, but certainly had a very negative impact on North America. So we're encouraged that way. A lot of people that were impacted by 2001-2002 have not reentered the business because they realized it's a tough business. Many of our customers are doing reasonably well. In any year, good years or tough years, there is always some companies are going out of business whether they've lost a major customer or lost a contract or didn't manage their business well. That tends to strengthen the survivors and I think this year will be no different than any previous years. So I don't know about a next wave probably typically the people that are doing well might hope for a next wave and get more fleet business but certainly we haven't heard that.

Meredith Taylor - Barclays Capital

Okay. That's helpful perspective. And then I'm wondering if you can talk about your production levels in Europe compared with yourself during the quarter. We certainly have talked somewhat about the inventory issues but I'm just wondering if the rise in inventory days might have been a function of you producing ahead of an anticipated pickup in your sell-through to dealers as in Europe they work through excess inventory?

Mark Pigott

That's a great question. Of course we built two orders, so we don't ever build ahead or build to stock or build to some projected demand. We build if we have an order; someone orders the truck we'll build it for them. And that's a very healthy business approach which is certainly put back or in good stand for as I say over a hundred years.

With the sudden slowdown of the general economy in Europe, number of our dealers had more inventory as customers cancelled their orders. And they are working through that. In fact I mentioned in my opening comments that inventory is down 25% which is healthy. And I think it's just like any business, you can put the dealers on a normal curve, most of them are doing okay, some are doing well and others are certainly struggling and the build rate that we have in any of our factories reflects the incoming order rates. So that's adjusted on a very real time basis. So Europe is probably a year behind U.S. and Canada in terms of where they are on the recessionary cycle, if you graph it or plot it and that's the way that the recession have rolled out around the world.

Meredith Taylor - Barclays Capital

Okay. And then one last follow-up from me and then I'll pass it along. Can you talk about your inventory of CAT engine at this point?

Mark Pigott

That continues to decline and we've got some good customers that love the CAT engine and keep working with them and that business as usual.

Meredith Taylor - Barclays Capital

But any specifics in terms of how much it might be down quarter-over-quarter or year-over-year?

Mark Pigott

No, just a general steady decline as we anticipated.

Meredith Taylor - Barclays Capital

Okay. That's helpful. Thanks very much.

Mark Pigott

Thank you. Good questions.

Operator

Your next question comes from the line of Peter Jacobs with Ragen Mackenzie.

Mark Pigott

Good morning Peter.

Peter Jacobs - Ragen Mackenzie

Good morning Mark. Good morning gentlemen. Mark, could you update us on the loss reserves in the financing business and I believe at the end of the fourth quarter and I don't know if you gave this number on the conference call, or its just from my discussions with Rob and I deduced (ph) this from the 10-K. I don't have my notes in front of me. But I'm showing that the loss reserves are about 2.1% of assets at the end of the fourth quarter and losses are running at about 1.2 assets. Can you give us a sense of, if those loss reserves are building or are you comfortable with where they are now and I'm not even sure if I am reciting the right numbers?

Mark Pigott

Yes, as we mentioned earlier, we did take a look at those every quarter. The loss reserve in terms of absolute dollars was down slightly, but the percentage was up in the quarter from 2.1% to roughly 2.3% at the end of the quarter.

Peter Jacobs - Ragen Mackenzie

Okay, great. And I'm going to just obviously deduce that the loss reserves for the European portfolio build...

Mark Pigott

No, let me take a look at each one and adjust each of your geography accordingly.

Peter Jacobs - Ragen Mackenzie

Do you think you are comfortable that where you are in North America if the credit losses have stabilized with that could try to deduce that the loss reserves then for the North American portfolio are not building anymore as a percentage of assets?

Mark Pigott

I said we review accordingly and we maintain them. We're a very conservative approach to our reserves and we'll continue to maintain that position.

Peter Jacobs - Ragen Mackenzie

Okay, terrific. Thanks. That's all I have.

Mark Pigott

Good. Thank you.

Peter Jacobs - Ragen Mackenzie

Good quarter. Thank you.

Mark Pigott

Thank you very much.

Operator

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

Unidentified Company Speaker

Good morning Jerry.

Jerry Revich - Goldman Sachs

Good morning. Congratulations on the strong cost control. Its really lot better than your Europeans peers.

Mark Pigott

Thank you very much. We appreciate it. New job and new company.

Jerry Revich - Goldman Sachs

I'm wondering Mark we can start the discussion on the European business where we've seen pretty weak order numbers from your competitors in the quarter with book-to-bill below 0.5. Are still seeing some more order trends in your business?

Mark Pigott

Yeah in Europe it's... we're at the first half of a very difficult recession and that's when the adjustments are most dramatic and certainly I think orders across the board for the whole industry are down. We're maintaining our market share at 14.5% in Europe which I think the team is doing a good job and obviously balancing that with margins.

So just off but to say it's about a year behind the U.S. and Canadian in terms of plotting them on the recessionary cycle, if you will.

Jerry Revich - Goldman Sachs

Yes. And Mark, what kind of order pick up would the industry need to see to get through your guidance for the year relative to the first quarter orders?

Mark Pigott

Well the first quarter -- you're talking about Europe or North America?

Jerry Revich - Goldman Sachs

Europe, just Europe.

Mark Pigott

There have to be some pick up or increase in market share, which you have sort of two different elements working there. And as we've stated many times as we progress through and each quarter moves on, we continue to evaluate what the size of that market is. But I think most of the competitors probably are around the low end of our range, if you want to put it that way. And so I think we're in the ballpark.

Jerry Revich - Goldman Sachs

Okay. And Mark in the annual report you highlighted lack of competitor pricing discipline. I'm wondering if you're seeing more disciplined action in the market now that hopefully inventory levels are bit lower. But I'm wondering if you could provide an update there?

Mark Pigott

Well, I compliment you on reading the annual report. We always have some good looking pictures in there. And every company has their own approach to the marketplace. Certainly the one that we've taken for 104 years has been the quality leader and conservative business practice, served us well.

And others have taken approach that cheaper is better and they certainly don't generate the return to shareholders and to their employees. So it's a difficult recessionary world out there and I think every company is trying to do whatever they think works best for them.

Jerry Revich - Goldman Sachs

Okay. And on the financial services business, Ron, I'm wondering if you could share with us the delinquency rate at the end of the quarter?

Ronald Armstrong

As we said that Europe and Mexico has trended upward, up from where we were at the year end in the U.S. and Canada is roughly equal to where at the end of last year.

Jerry Revich - Goldman Sachs

So at the end last year for a consolidated basis, you were at 3.3 %. So if we assume that's roughly 3.5 % at the end of the quarter, that's not going to be too far?

Ronald Armstrong

Yes. It's upward from there.

Jerry Revich - Goldman Sachs

Okay. Thank you very much.

Mark Pigott

Thank you. Good questions.

Operator

Your next question is from the line of Patrick Noven (ph) with Deutsche Bank.

Mark Pigott

Good morning Patrick

Unidentified Analyst

Good morning. Most of my questions have been answered, but I have just two quick questions.

Mark Pigott

Sure

Unidentified Analyst

First on the financial services business. There is a lot of moving parts, if you look at this business versus the previous downturn. Can you give us an idea where you actually see your receivables balance actually bottoming in this down turn -- it would just help us, we can all make our assumptions for provisioning as a percentage of receivables but just where do you see that balance actually bottoming out through this?

And then my other question is, just on you did a very good job of really dialing back CapEx in the quarter. Where do you see that actually coming out for -- on a year basis now?

Unidentified Company Speaker

Okay. On CapEx?

Mark Pigott

No, I'll take that CapEx. Our previous estimate was 150 to $200 million. So it's likely to be at the lower end of that range for the full year.

Unidentified Analyst

Got it. Thank you.

Unidentified Company Speaker

And on the financial services question, I mean it's obviously a function of the level of truck sales that occur in any given market we expect as long as truck sales are at this level that we'll continue to see some reduction in the portfolio balances.

But we expect, we're there to support the sale of trucks and if truck sales improve, we'll see return to higher new business volumes in our finance operations.

Unidentified Analyst

So you wouldn't anticipate the receivables falling much below like 6 -- 6.5 billion, right?

Unidentified Company Speaker

I don't see that in the short term for sure.

Unidentified Analyst

Alright, okay.

Unidentified Company Speaker

Good question.

Unidentified Analyst

Thank you.

Operator

Your next question is a follow-up from the line of Andy Casey with Wachovia.

Unidentified Company Speaker

Good morning.

Andrew Casey - Wachovia Capital Markets

Hello again. If I could go back to the commentary on the similar production in Q2 versus Q1, if the markets really don't show any demand improvement. Do you expect Q3 to be similar to Q2 or is there any consideration of some summer shutdowns?

Unidentified Company Speaker

Well, even in normal times we probably could give you a little bit of color on Q3. But obviously with the lower market, the -- we're really dealing in a little shorter timeframe probably weeks instead of months. So it's a little hard to assess what's going to happen in Q3.

And something we haven't talked about for any the questions is that there's the over arching economic stimulus packages that are being unveiled around the world by different countries and some of them are taking different approaches.

I'm not sure what effect that's going to have. Hopefully it'll be positive, whether its infrastructure or construction projects or just general pickup in the economy and it's a little hard to tell. I think probably it'll have more impact next year than it will this year but it could have some impact in the second half of this year. So we'll continue to monitor that.

Andrew Casey - Wachovia Capital Markets

Okay. And then just on tax rate, it was by my calculations slightly above 28 in Q1. Is that about what you expect now for the year?

Unidentified Company Speaker

Yeah, the first quarter rate is pretty good indicator at this point given our mix of earnings in the company.

Andrew Casey - Wachovia Capital Markets

Okay. Thank you very much.

Unidentified Company Speaker

Thank you.

Operator

Your next question is a follow-up from the line of Ann Duignan with J. P. Morgan.

Unidentified Company Speaker

Good morning again, Ann.

Ann Duignan - J.P. Morgan

Hi guys. Could you just clarify, was pricing a net headwind or a net tailwind in the quarter?

Unidentified Company Speaker

Yeah, you ask the best question, I'm not sure I understand; someone help me out on that one.

Ann Duignan - J.P. Morgan

Well, I thought if I asked you was pricing a net positive or a negative you might not answer it so --

Unidentified Company Speaker

You ask great questions. I think to be fair, obviously in a recession, generally pricing is coming down for everybody. I think it's the buyer's market. I'm sure it's true in your own industry.

So we're certainly in a buyer's market and the good thing is we've have got very smart motivated customers, and we love them and they're taking advantage of the economic cycle we're in right now.

So pricing has probably come down reflecting very few orders and a tough environmental and economic cycle. So, however, that fits into your incredible question, I hope that answers it.

Ann Duignan - J.P. Morgan

It doesn't answer it. It's close to it I would interpret it as a net negative?

Unidentified Company Speaker

Probably as a fair assessment.

Ann Duignan - J.P. Morgan

Okay and then a second follow-up, unless if I'm more philosophical, I mean, what we've seen in Europe the last couple of months have been, as you said, you've seen cycles before I don't think we've ever seen Europe sort (ph) of fall so quickly in any downturn, and the notion that I'm kind of wrestling with is the good news, the bad news is that it means that this year is a disaster but then perhaps we stabilize at towards the end of the year and next year is -- a more stable environment in Europe maybe not another step function down (ph).

How are you guys thinking about that, just as you talk internally and you look out a little bit longer term?

Unidentified Company Speaker

Because every year it's got opportunities. So we always look at it in a positive framework. And yes, there are challenges but that's what makes us stronger. This year will be down and as they say it's certainly at a ten, perhaps 15 year low, and that's the cards we've been dealt. So that's when we're going to work with.

Yes, the European recession cycle follows what we've seen in North America, next year could see some improvement. I can't tell you exactly when that's going to happen but we take the appropriate steps in terms of reducing our expenses and projects we're funding and our approach to the business, always keeping in mind it's all about great people. And that's just going to make you do well in a good market or a bad market.

So, yeah, it's going to be a challenging year this year for every industry and Europe has truly gone down faster than everybody thought it would or could. But I'm encouraged. I find that some people are really stepping up and being real leaders and that's what makes a company exciting.

Ann Duignan - J.P. Morgan

Okay. I appreciate those. I'll take my other questions offline.

Unidentified Company Speaker

Thank you. Good questions, great questions.

Operator

Your next question comes from a line of Stephen Volkmann with Jefferies.

Unidentified Company Speaker

Good morning, Steve.

Operator

Steve your line's open. Please go ahead. Okay we'll move on to the next. The next question is from the line of Peter Baits with Deero Price (ph).

Unidentified Company Speaker

Good morning, Peter.

Unidentified Analyst

Good morning guys. Thanks for the time.

Unidentified Company Speaker

You're welcome..

Unidentified Analyst

Couple of quick data of questions. What were finance receivables at PACCAR Financial at March 31?

Unidentified Company Speaker

Finance receivables. I think of the 9 billion roughly, 8 billion

Unidentified Company Speaker

Roughly the change on the cash flow statement there wasn't anything?

Unidentified Analyst

Yeah, there's a little bit of currency impact in addition to what was the change in the cash flow.

Unidentified Company Speaker

Okay. So fell like 300 million or so

Unidentified Analyst

Why don't we get back to you on that one?

Unidentified Company Speaker

Yeah.

Unidentified Analyst

That'll probably better one to take offline. We'll give you the -- a little more specific information.

Unidentified Company Speaker

And then what was finance debt, at PACCAR Financial?

Unidentified Analyst

Okay let's do that one

Unidentified Company Speaker

Offline.

Unidentified Analyst

Offline.

Unidentified Analyst

And then what were parts and service sales in the quarter?

Unidentified Company Speaker

We don't break that out. Can take that when offline.

Unidentified Analyst

Were they up year-over-year?

Unidentified Company Speaker

We don't break it up. I think we indicated steady.

Unidentified Analyst

Steady. And do you guys have a medium duty volume forecast for North America and Europe. And I guess with medium duty I would be focused on equivalent 6 and 7?

Unidentified Company Speaker

Yes, we do. Year bet.

Unidentified Company Speaker

Yeah its 50,000 units for the year.

Unidentified Company Speaker

50,000 units for the year, and is that North America or?

Unidentified Analyst

Sorry 50,000 for North America, correct.

Unidentified Company Speaker

Europe is also is about 50,000.

Unidentified Analyst

Alright, I appreciate it guys. Thanks.

Unidentified Analyst

Thank you.

Unidentified Analyst

Alright.

Operator

Your next question is from the line of David Campbell with Powell Creek (ph).

Unidentified Company Speaker

Good morning, David.

Unidentified Analyst

Good morning, Powell Creek. I just wanted to ask because I don't know if anyone else did directly. Could you please provide us with the specific delinquencies as a percent of finance assets again in Q1?

Unidentified Company Speaker

Well, we -- as we said the trend on the delinquencies is up relative to fourth quarter. And that'll be we'll have that disclosure in our 10-Q when we publish that.

Unidentified Analyst

Is there any reason not to give it to us now, we're obviously very curious?

Unidentified Company Speaker

Well, again, the percentage is going to be 4.9. I think 4.9% at March 31, relative versus 3.3% with that increase being in Europe and Mexico.

Unidentified Analyst

Alright. Thank you.

Operator

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

Unidentified Analyst

Thank you very much operator. Now no further questions. Thank you.

Operator

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

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