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PACCAR Inc. (NASDAQ:PCAR)

Q3 2009 Earnings Call

October 27, 2009; 12:00 pm ET

Executives

Robin Easton - Treasurer

Mark Pigott - Chairman & Chief Executive Officer

Ron Armstrong - Senior Vice President

Michael Barkley - Vice President & Controller

Analysts

Meredith Taylor - Barclays Capital

Jamie Cook - Credit Suisse

Andy Casey - Wells Fargo

Joel Tiss - Buckingham Research

J.B. Groh - D.A. Davidson

Henry Kirn - UBS

Adam Uhlman - Cleveland Research

Steve Volkmann - Jeffries

Andrew Obin - Banc of America/Merrill Lynch

Kristine Kubacki - Avondale Partners

Jerry Revich - Goldman Sachs

Patrick Nolan - Deutsche Bank

Ann Duignan - JP Morgan

David Leiker - Robert W. Baird

Operator

Good morning and welcome to PACCAR’s third 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 anyone has an objection, they should disconnect at this time.

I’d now like to introduce Mr. Robin Easton, PACCAR’s Treasurer. Mr. Easton, please go ahead.

Robin Easton

Good morning. We’d like to welcome those listening by phone and those on the webcast. My name is Robin Easton, Treasurer of PACCAR. Joining me this morning are Mark Pigott, Chairman and Chief Executive Officer; Ron Armstrong, Senior Vice President; and Michael Barclay, Vice President and 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 involves risk and uncertainties, including general economic and competitive conditions that may affect expected results.

I would now like to introduce Mark Pigott.

Mark Pigott

Good morning. PACCAR today announced improved third quarter revenues of $2 billion and net income of $13 million. These encouraging results reflect the continued impact of a recessionary economy on freight shipments and truck purchases. I’m very proud of our 15,000 employees who have delivered positive net income to our shareholders and customers in very challenging business conditions.

As you know, PACCAR is dedicated to delivering exceptional quality products and services, outstanding shareholder returns and environmental leadership. PACCAR is proactively addressed the cyclical nature of the business by aligning operating expenses, capital expenditures and research and development with current market conditions. SG&A expenses for the first nine months of 2009 have been reduced by $117 million or 32% from 2008 levels.

Turning to the market, the U.S. and Canadian truck markets have been in a recession for three years, but now seem to be improving slightly. Industry new orders of Class 8 trucks have increased in each of the last four months. Industry retail sales this year are expected to be 100,000 to 110,000 units. Looking ahead to 2010, we estimate that industry retail sales in the U.S. and Canada will be 110,000 to 140,000 units, which could be a 10% to 40% improvement on this year.

European truck markets will be up 170,000 to 180,000 units this year. The economic recovery in Europe is lagging behind North America in most industries. In the truck industry, we see truck sales in Europe for 2010 are estimated to be 150,000 to 180,000 units, comparable to 1992. The good news DAF achieved record market share of 14.9% in the first nine months of this year. That’s the highest market share they have had in their over 75 year history.

Overall, I am pleased to report that PACCAR’s one of the few global companies in the automotive sector to earn a profit this year. While profits have been lower than we would have liked, net income is positive. We have achieved excellent operating cash flow of $1.2 billion over the last four quarters and we have a strong balance sheet reflected in our AA minus credit rating, PACCAR’s excellent liquidity of the healthy cash balance of $2 billion and syndicated bank lines of $3 billion.

During the year, PACCAR raised over $1 billion in medium term notes and is well position for the remainder of this year and 2010. Importantly, shareholder equity has increased and we continue to invest in new products, facilities, and efficiency enhancements. PACCAR financial services pre-tax income was $18 million in the third quarter of 2009 compared to $45.5 million earned in the third quarter last year.

These smaller portfolio higher borrowing costs and credit losses impacted the profitability. The good news is that the provision for credit losses in the third quarter was $26.6 million compared to $29.1 million in the second quarter. Pre-tax profit in the third quarter was $2.5 million higher than the second quarter. Additionally, accounts 30 plus days past due represented 4% of the portfolio at the end of the third quarter compared to 4.7% at the end of the second quarter.

We have been encouraged by the continued stabilization of used truck prices in the U.S. and Canada, as well as used truck pricing in some European markets. Kenworth, Peterbilt and DAF trucks are extending the retail resale leadership position due to their clearly defined quality advantages. Speaking of quality, PACCAR’s intense focus on customer satisfaction has resulted in Kenworth trucks earning the J.D. Power customer satisfaction awards in all segment of the Class 8 industry this year.

PACCAR’s earned 30 J.D. Power awards in the last 11 years, five times that of our closes competitor, a remarkable achievement. In addition, Peterbilt has earned them medium duty J.D. Power award in 2009. As you know, our customers worldwide are the real winners. While conditions remain challenging in the industry, our customers are benefiting from stable diesel prices, low driver turnover and a slight increase in freight tonnage during the third quarter.

Our 1900 Kenworth, Peterbilt, and DAF dealer locations are leading the commercial vehicle industry in customer service. They’ve invested in their facilities, operating efficiency and have prudently managed their balance sheets to profitably grow business when the markets recover. Inventories of new trucks at PACCAR dealers are low, which is good and as I’ve shared with you earlier this year DAF dealer, new truck inventory continues to improve, declining another 15% in the third quarter, which equates to approximately 100 million euro lower wholesale receivables.

In summary, PACCAR’s invested $3.5 billion in the last decade to enhance its operating efficiency, develop new products, strengthen its dealer network, and become an industry leader and information technology. Our manufacturing facilities and distribution centers are achieving record quality and productivity, which positions the company for strong performance as the industry returns to a normal vehicle replacement cycle. Thank you.

I look forward to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Meredith Taylor - Barclays Capital.

Meredith Taylor - Barclays Capital

I’m hoping you can talk a little bit about your expectations for how gross margins can trend over the next several quarters and maybe, just to set the stage, if you can talk about the modest decline you saw in gross margins sequentially in the truck business. I realize that aftermarket was a lower percentage of total sales.

If I proud the same parts gross margin that we saw in the second quarter, it doesn’t account for all the difference. Where there some factors with respect to regional mix, factory utilization or pricing that impacted the second quarter to third quarter move in gross margins and then if you could talk about how that rolls forward, that’s great. Thank you.

Mark Pigott

Gross margins, are made up of many different groups within the company, Europe, between the third and second quarter continue to have a challenging time and throughout the entire industry. In fact, I would say throughout most industries in Europe, so that definitely had an impact. Going forward as the economy improves, while we would expect that our gross margins would improve also and I think nothing unusual in any aspect of the business except our team doing a good job of working through a very difficult recession.

Meredith Taylor - Barclays Capital

Then, maybe if you can talk a little bit more about the outlook for 2010 in Europe, specifically if you can give us some color around the scenario that would define the low end of the 150 to 180 range and we seem to be hearing from some of your peers that the end market demand at least feels like things are bouncing alone the bottom, although a recovery may be sometime off. So, how should we be thinking about the low end of your scenario and maybe some, some likelihood that you assign to the low end versus the high end?

Mark Pigott

We look at it as a range. We tend to be more on the conservative side than some of our competitors and we certainly would like it to be at the top end of that range. Europe is working through its own recession and has its own challenges versus the North American economies, similar, but different and kind of a split now between Northern European recoveries maybe a little bit sooner than a Southern European.

I think we’re just, as we look out for the next 14 to 15 months. We’re just trying to get at a realistic, conservative range, but as you pointed out, we would always like to be at the upper end of that range and that’s the way the economies bear out.

Operator

Your next question comes from Jamie Cook - Credit Suisse.

Jamie Cook - Credit Suisse

Couple of questions; one, on PACCAR finance, I guess I was encouraged by, again this quarter we saw some sequential improvement. It seems like the U.S. and Canada has made the most progress. Can you just talk about Europe and sort of when you see that market bottoming?

Then I guess my follow-up question would be, you gave an outlook for the U.S., you gave it for Western and Central Europe, but what are you seeing in the rest of world, which are probably driven more by emerging markets, we’re hearing signs emerging markets, so economies continues to improve. So I’m just wondering, how we should think about that in 2010 or what your customers are telling you?

Mark Pigott

Are you talking about Asia?

Jamie Cook - Credit Suisse

Just in anything that would be in your rest of world bucket?

Mark Pigott

Ron, why don’t we talk about on the finance company?

Ron Armstrong

On the finance company, we have seen, as Mark mentioned, some add grail improvement in our past dues, which I think is reflective of our overall portfolio performance. Losses in our European portfolio peaked in the second quarter with a slight improvement in the third quarter. So still very challenging, but the trends you gave.

Mark Pigott

Picking up on the second part of your question, we look at South America, seems to be doing reasonably well. I think a number of the competitors have commented on that. Australia is strong. We’re increasing build rates there. Asia, the strongest economies in the world, particularly China and to some extent, India, those markets are good. We don’t have that much interface. We do sell some and to some of the companies, but like all of our competitors, it’s a limited market, but certainly the Asian markets are by far the strongest.

Jamie Cook - Credit Suisse

Then quick follow-up questions, I don’t think you mentioned in prepared remarks, production in Q4 versus Q3 and then you said dealer inventories were down 15% sequentially. How should we think about that in the fourth quarter?

Mark Pigott

In the fourth quarter for DAF inventory?

Jamie Cook - Credit Suisse

For DAF dealers, I mean you said…?

Mark Pigott

The progress on reducing the inventory, I mean they’re down now several year low or comparable a couple years ago. So that’s very healthy, very encouraging for our dealers and because as you go forward instead of selling out of dealer stock, they’ll be placing orders on the factory, that will take sometime, little over next year. We see a positive step that way.

Jamie Cook - Credit Suisse

Then the last production for the total company?

Mark Pigott

We’re in very good shape.

Jamie Cook - Credit Suisse

Production for Q4 versus Q3?

Mark Pigott

North America, it should be some improvement, orders are coming in. As I mentioned, throughout the industry, we’re seeing sort of month-on-month increase for the last several months. Some of that maybe slightly impacted because of the 2010 emissions, but I think just generally the economy is, I think a little bit better. In Europe, I think the production will be comparable to down versus the third quarter. So Europe’s about six to 12 months behind North America throughout many industries in terms of recovery.

Jamie Cook - Credit Suisse

Do you think North America and Europe offset one another so we’re about flat or still lightly down?

Mark Pigott

I think at this time to be conservative, let’s say they are comparable in terms of offsetting, but we’ll obviously know more as time goes on.

Operator

Your next question comes from Andy Casey - Wells Fargo.

Andy Casey - Wells Fargo

Quick question, on detail point, $4.2 million restructuring, what line item does that get attributed to?

Ron Armstrong

That’s been in the cost of sales line.

Andy Casey - Wells Fargo

Then on a broader level, kind of you talked about the used truck pricing stabilizing in North America and then most of Europe. Can you talk about what you’re seeing in terms of new truck pricing trends, just not an industry level? Are those coming down, or are they still fairly aggressive?

Mark Pigott

Our new truck pricing in the U.S. and Canada is improving slightly. In Europe, I would say it’s probably pretty steady what it’s been for the last three to six months.

Andy Casey - Wells Fargo

Then when we look at some of the profitability metrics for you guys in the quarter and then some of your loose peers, it seems like there’s been a benefit related to input costs. I know volumes are depressed, but did notice any of that during the quarter?

Mark Pigott

When you say input costs, what are you thinking about?

Ron Armstrong

As an example, the material used to make your trucks. Not so much.

Andy Casey - Wells Fargo

What you’re saying is we seem to be doing a little bit better than the competitors outweigh, is that we’re kind of getting at here?

Ron Armstrong

No it’s just been a trend you always do better than your competitors. There’s been a trend through this earnings season where input costs have benefited as people work through higher cost inventory and…

Mark Pigott

Lower commodity pricing?

Andy Casey - Wells Fargo

Yes.

Mark Pigott

Certainly the commodities have come down from their bubble of a year or so ago, which was probably unrealistic and it’s certainly benefited the commodity companies, but the rest of any industry that view that commodity saw their cost o goods go up. So, that’s been some benefit.

It certainly has not recaptured where we think it should be compared to four or five years ago, whether it’s petroleum or aluminum or copper or precious metals. We may not ever see those days, but there’s been some improvement, but I just to like to kind of take one point in terms of the pricing and used truck values.

I think it really comes down to quality and that’s really where we’re focused on and as, we always have been and whether it’s the J.D. Powers or just the market price on used trucks and the used truck lot, that’s the main differentiator, is PACCAR’s focus on quality so and that has an impacted.

Operator

Your next question comes from Joel Tiss - Buckingham Research.

Joel Tiss - Buckingham Research

Can you talk at all about what’s happening to the rates on your leasing book? Are they rising, flat, falling, just a sense?

Michael Barkley

I think overall market rates are down, so the rate that we charge our customers are down somewhat over the year, but our margins, we continue to get good competitive margins. We’re there for our customers and our dealers.

Joel Tiss - Buckingham Research

That the big swing in the wholesale receivables, is that you just shrinking your finance book inline with changes in the industry?

Ron Armstrong

It’s primarily, as Mark mentioned, the 15% reduction in dealer inventories in Europe that we saw and we’ve seen that kind, but we going to each of the prior quarters this year.

Joel Tiss - Buckingham Research

Do you have a number on how many used trucks are parked out there, or something that can point us maybe to the relative change in the last two quarters?

Mark Pigott

The used trucks?

Joel Tiss - Buckingham Research

Yes, the idle trucks?

Mark Pigott

I think it’s going down. We don’t have that number. We obviously talk with our customers about that on a regular basis and there’s many, of course you’ve seen many of our customers have reported reasonable earnings over the last month or so and as we talk to them, there are just fewer and fewer new trucks parked and the used trucks with the price stabilizing are coming into service. So I think that’s actually in pretty good shape.

Joel Tiss - Buckingham Research

Yes, okay, because I heard it was as high as 150 to 170 and it sounds like it’s down more close to that 120….

Mark Pigott

I think it is down and obviously, used truck pricing is a function of how much inventory is available and as you reduce the inventory, the pricing tends to stabilize and then of course you have the factor of new truck pricing that bears into it. So I think used trucks are in reasonable position.

Operator

Your next question comes from J.B. Groh - D.A. Davidson.

J.B. Groh - D.A. Davidson

I was a little off on my model and SG&A and I had to hop on a little late. Maybe you could give me a little color as to why that went up sequentially? Is there something that I’m missing? I heard that the restructuring was in cost of sales. So, what was the swing factors they are relative to Q2?

Mark Pigott

The SG&A?

J.B. Groh - D.A. Davidson

Yes, selling and administrative expenses of $87.4 million versus $79.2 million, last quarter?

Mark Pigott

There’s a couple factors, one: our second quarter benefited from kind of accrual throughout that remained and the third quarter also benefited that of while exchange rates are down when compared to prior year, they’re up sequentially from the second quarter. So it’s a quarter of exchange rate little bit as loss

J.B. Groh - D.A. Davidson

So it’s a little bit of a Q2 impact and a little bit of Q3 impact, okay.

Mark Pigott

Pretty comparable, really.

J.B. Groh - D.A. Davidson

Maybe, Mark, you could talk about maybe the timing isn’t perfect for this kind of thing, but sort of your acquisition thoughts that are currently in and thoughts about cash deployment.

Mark Pigott

Obviously, we spent a lot of time reviewing the PACCAR, as you are intimating, is in very good financial shape and we are strategically reviewing opportunities, had nothing to report, but are in good position to see if there are some business opportunities we should take advantage of. In addition to continuing to invest in our current divisions, which continue to improve their efficiency and quality. So we’re in good shape and are reviewing opportunities.

Operator

Your next question comes from Henry Kirn - UBS.

Henry Kirn - UBS

Hey, question on the 2010 engine, is it possible to give a little color around the incremental pricing there and maybe any preliminary thoughts on the demand for it?

Mark Pigott

I think the pricing has been out in the public for at least half a year and that’s $8,000 to $10,000 increase in pricing for 2010 engines. 2010 engines are ready to go. They are in a good shape and obviously our customers and our industry work through a mission enhancement about every three years.

I think it was our fourth or fifth one in the last dozen years. I think as the history’s shown us, the engines perform well, they deliver good performance, if customers get used to it, and it really becomes a non-factor after a while. So I’m sure this one will play out along a similar vain.

Henry Kirn - UBS

I guess the question was is this customers’ in North America first chance to buy one of your engines, so have you…?

Mark Pigott

Well, that would be a special treat. Our engines are performing well and 50 year history, and we’ve got tens of millions of miles of evaluation and testing and we’re looking forward to having those engines in Kenworth and Peterbilts next year.

Henry Kirn - UBS

Are there, are there any more benefits from the plant closures in the next few quarters, or is that sort of now behind us?

Mark Pigott

When you say benefits from the closures?

Ron Armstrong

Financial benefits?

Henry Kirn - UBS

Right, the onetime benefit from the healthcare program at the one plant in the quarter?

Ron Armstrong

Yes, that’s a one off.

Operator

Your next question comes from Adam Uhlman - Cleveland Research.

Adam Uhlman - Cleveland Research

I was wondering if we could give just a follow-up on that last question, if we could talk a little bit about the Madison quote. What was the capacity there or maybe another way to look at it, what percent of your total domestic volume did that represent? Then could you put that into context into what your view is of the long term market, doesn’t look like you changed your forecast of replacement demand of 2.25 to 250,000 units, I mean that implies that you think you can make up the volume at your other Peterbilt plants or something else is unfolding there, so could you talk through that?

Mark Pigott

I think the answer is in your question and that is we will make it up at our other facilities, which through the last, well, decade or more. We continue to invest in, as we invest in all of our facilities and without really increasing the footprint, we have enhanced the capacity by between 50% and 100% and so it’s very difficult decision obviously to close any factory, has a real impact on our business colleagues and that’s a very sad time.

It was a necessary decision, but in terms of capacity and our customers and our dealers, actually I think there will be some benefits. So if we have sufficient capacity to meet a strong in a boom market and of course there’s always a benefit of running more product through one or two factories versus two or three factories. I think we’re in very good shape.

Adam Uhlman - Cleveland Research

What do you think your capacity is at the other facility today, is it 50% to 100% increase that prior investments helped you get, helped you meet next cycled peak?

Mark Pigott

Absolutely, yes, it does. Yes.

Adam Uhlman - Cleveland Research

Then just a second question here. Could you talk about how you’re planning your inventories for the remainder of the year, and as we go into next year, because it sounds as if one of your competitors is stockpiling some engines to build a cost advantage for next year.

Wondering how you’re positioning the company for that and then also, PACCAR’s going to need some of the 13 liter engines over from Europe and there’s some longer lead times with that product. So I wonder if you have to take on more engine inventory to support demand for next year.

Mark Pigott

In terms of the way the industry typically approaches these emission changes, there’s a transition time of about one quarter or perhaps slightly more. I think PACCAR has shown through almost every one of these transitions that we typically are the first company to transition completely to the new EPA emission regulations.

We think that’s what excellent companies do and we obviously are an excellent company. So I can’t really comment on what the competitors do. Sometimes they’re looking for any advantage they can get, but we’re taking on some inventory, but I think like the rest of the industry, we’ll transition through the first quarter.

Operator

Your next question comes from Steve Volkmann - Jeffries.

Steve Volkmann - Jeffries

Just a quick question on the finished good inventory that you and your dealers have, would you expect the reduction in that to be kind of running its course through this year and then big sort of done as we get into next year or would you be expecting further reductions next year?

Mark Pigott

I think North America and Europe a little bit different, but in North America, our Kenworth and Peterbilt dealers are on an excellent position and their inventory is quite low. So we would expect that as the economy improves, they would increase their inventory inline with strong markets that we’ve experienced many, many times.

In Europe, which is six to 12 months behind North America, as we indicated, we expect the inventory to continue to decrease, but as it stabilizes middle of next year, we would think that inventory would actually increase at our dealers. They would be in very good position there in Europe.

Steve Volkmann - Jeffries

So it sounds like for the full 2010, you could actually be producing a little bit of both retail demand as some of this restocking occurs. Is that the right read?

Mark Pigott

We’ve seen some of that in the past. Looks really, this is a difficult, challenging recession, which we’ve managed through very well. That would be an optimistic scenario. So I would say let’s see how that unfolds.

Steve Volkmann - Jeffries

Do you have orders yet for your 2010 engine driven trucks, or is it else still sort of for year end?

Mark Pigott

It’s primarily year end. We have many customers who are looking forward to the PACCAR engine.

Steve Volkmann - Jeffries

But no orders yet.

Mark Pigott

Not at this time. It’s just transitioning through. I mean, people are, some are starting to put a few in for the first quarter. I mean it’s a normal transition.

Operator

Your next question comes from Andrew Obin - Banc of America/Merrill Lynch.

Andrew Obin - Banc of America/Merrill Lynch

Just a follow-up on question on engines, given what’s happening in the economy, and I understand that you forecast unchanged. Are you in any way adjusting your thinking as to when the North American engine plant is coming online and how long you are going to source engines from Europe? Also how does FX sort of figure in your considerations?

Mark Pigott

I think it’s pretty much in line with what we’ve been discussing over the last couple of years. The factory itself, the building is all complete and we’ve got a very good team there and we will start bringing those engines in from Europe, as always was our plan, next year, and transitioning to machining and assembling them as time progresses.

I think we’re in very, very good shape and as the factory gets going, we’d certainly enjoy having you and your colleagues come down for a tour. We can show you the kind of investments that PACCAR is making.

Andrew Obin - Banc of America/Merrill Lynch

No changing in your thinking on the time line?

Mark Pigott

No, I think it’s in line with what we’ve talked from last year from the last year or two.

Operator

Your next question comes from Kristine Kubacki - Avondale Partners.

Kristine Kubacki - Avondale Partners

I saw a surprise on comments about new about new truck pricing and at least that maybe some that comments that you made last quarter and then what we’ve been hearing out of some of the bigger phase recently, can you talk a little bit about the mix in the U.S. and the trend toward fleets obviously, what the owner/operator and the smaller suite having access to credit and less capitalized? How do you see your target end market in 2010? Is it more focused on the fleet? Kind of what does that do to margins and how do you think about that going forward?

Mark Pigott

I think its 10, 20 years ago, the owner/operator and the smaller companies were certainly a major portion of our business, but I’d say for the last decade, they have been a very small part as owner/operators tend to align themselves with larger fleets. Many benefit whether, its fuel price or healthcare or the availability of getting freight loads. So I think in terms of our customers, there’s been really not that much of a change for quite a few years.

I think your question’s a good one and I think it’s a little bit of a, let’s call it older take that some people still take PACCAR, but our customers are, run the gamut from one truck to many thousands of trucks, and the certainly the majority of the customers are mid and large size suites nowadays and that’s who we sell to.

Kristine Kubacki - Avondale Partners

I was wondering, if did comment. Can you talk a little bit about where you are in the certification in the EPA process for your 2010 engine?

Mark Pigott

We’re right in line. We’re in great shape.

Kristine Kubacki - Avondale Partners

So you don’t expect any delays?

Mark Pigott

Nope, we don’t.

Operator

Your next question comes from Jerry Revich - Goldman Sachs.

Jerry Revich - Goldman Sachs

Mark, I’m wondering, if we can discuss bookings in Europe, where we’re book-to-bill recover north of one for your competitors, I guess based on share gain comments that you made and we’re seeing in the industry data. Is it fair to say that your bookings are better than that?

Mark Pigott

Kind of explain your terminology. I want to make sure, it sounds kind of bad. What do you actually mean?

Jerry Revich - Goldman Sachs

So orders provided by shipments, just total units. So total unit orders divided by total unit shipments?

Mark Pigott

No, our orders and shipments are very much inline and have been for probably a few quarters. If you’re kind of thinking a year or two ago, probably working through a backlog, as many people were, that backlog has aligned itself with the order intake. So it’s a pretty stable. I think, we’re gaining share because people love DAF products in Europe and we got a strong dealer network and that’s all a good thing.

Jerry Revich - Goldman Sachs

From a production standpoint, we’re seeing your competitors increasing production. Obviously, they have had a bigger inventory overhang than you have had, but are you increasing production as well now that you’ve got the inventory situation, closer to being ironed out, talking sequentially obviously and not year-over-year?

Mark Pigott

Right, I’m not sure our competitors are increasing their build. I mean we know our competitors pretty well, but whatever they say we’ll go with. I think almost everybody in the industry is keeping build pretty constant.

Jerry Revich - Goldman Sachs

Yes, I guess I was referring to it, but maybe some of the others are moving in different direction. On the orders for the North America market, sounds like you’re seeing a bit of a recovery there. We have one of your competitors looking at, in the third quarter orders being literally up three times what they were in the second quarter. Is that the magnitude of recovery that you’re seeing as well?

Mark Pigott

We’re seeing improved orders, as we mentioned for Kenworth and Peterbilt, which is good. It’s been recession for three years. The team has done a fantastic job and hopefully, we’re starting to see the economy improving and we’ll benefit from that and I think Kenworth and Peterbilt share has increased in the last quarter or so. I don’t know what the competitors are talking about. It sounds like we’re trying to catch some kind of good news going.

Operator

Your next question comes from Patrick Nolan - Deutsche Bank.

Patrick Nolan - Deutsche Bank

Most of my questions have been answered, so I have just a rather quick follow-up. So if the volumes payout like you was thinking next year. You’ve done a really good job of controlling the R&D this year, as well as the CapEx. If the volumes payout the way you’re thinking next year, where do you see both of those items going?

Mark Pigott

In our press release, we just got a very simple one line note saying we would look to increase CapEx and R&D as the economy recovers. Obviously, our industry has spent a lot of investment on getting ready for 2010 engines and so that tends to decrease and as it decreases, we would look at increasing the amount of debt we’re investing on new product development and continuing to enhance our factory productivity. So the economy improves certainly many wonderful projects that we’ll deliver results throughout our company and to our shareholders that we are eager to embark on.

Patrick Nolan - Deutsche Bank

Is the CapEx for a new engine plant in North America is all the tooling employees as well or they’re going to be CapEx associated with that to gain production as well?

Mark Pigott

There will be some CapEx associated with that as well for the tooling.

Patrick Nolan - Deutsche Bank

What should I think about in the tax rate for the fourth quarter? It seems to be pretty volatile lately.

Mark Pigott

It’s always pretty volatile because it reflects. There are country like here is able profitability and changes. You could expect the full year rate to be 24% to 25%, so we would expect the four quarter rate to be up a bit.

Operator

Your next question comes from Ann Duignan - JP Morgan.

Ann Duignan - JP Morgan

I want to take a step back to the topic you discussed a little bit earlier, and that is your mix of business hasn’t really changed that much. However, you have lost a pretty significant amount of market share, if I look at September ‘09 year-to-date, your market share is about 24.3% and a year ago September year-to-date ‘08 of about 25.7%...

Ron Armstrong

I wouldn’t say that’s significant, almost less than one point.

Ann Duignan - JP Morgan

Three decimal points?

Mark Pigott

We measure net income and quality performance, Ann. That’s what we measure.

Ann Duignan - JP Morgan

How can you explain the difference between no change in mix and, your competitor and has gained significant market share, just curious how you reconcile both upon.

Mark Pigott

Well, I can’t really comment. I know that many of our competitors sell at losses and drive for market share. That’s not our focus, never has been in 105 years. We pride ourselves on best return to our shareholders, quality products, quality people, great dealers and that’s our focus and I say, our market share is essentially flat with last year and as I mentioned in Europe, its up, has been going up over the last 10 years. So, that’s all we can say.

Ann Duignan - JP Morgan

Just back to the 13 liter engine coming over from Europe, truck with that engine ship?

Mark Pigott

We’re looking middle of next year.

Operator

Your final question comes from David Leiker - Robert W. Baird.

David Leiker - Robert W. Baird

I just want a clarification here. As we look all the way back to I think it was the first question, sequentially revenues are up pretty meaningfully with the profits our gross profit numbers about the same. I think your comment was just the European, want the performance in the European market is that correct, just clarification on that?

Mark Pigott

I think we were talking about margins early on now you’re indicating?

David Leiker - Robert W. Baird

Yes, your gross profit is up the sequentially, while your revenues up the $150 million. Q3 versus Q2 and I think you’re comment that was due to or is there something else there? At work there?

Mark Pigott

I think that’s fair. Europe had an in put.

David Leiker - Robert W. Baird

Then looking forward on the Q2 versus Q3, is there anything on the cost side or the profit side that you would think would be different excluding volume? Are there any pluses or minuses we should be aware of take you for.

Mark Pigott

I think there are probably pluses and minuses as we look at Q4, as we’ve indicated with some of the questions. There’s an increase in volume in the U.S. and Canada. As the economy recovers a little bit and typically that has some benefit on the margin side. Europe, 6 months to 12 months behind North America continues to, end through the market, probably comparable to where the U.S. and Canada was a year ago.

David Leiker - Robert W. Baird

On the US go to used truck pricing is it your sense that’s starting to drive some better capacity utilization that these up ticks relay quarters we’re seeing our end market demand do better as opposed to more pre buy. Do really what’s your sense on that?

Ron Armstrong

Are you talking about general freight for the industry?

David Leiker - Robert W. Baird

There’s up tick we see in orders of Q4, if that’s really end market demand driving it, more than pre buy on the 2010 engines.

Ron Armstrong

Well, it’s probably a bit of both. I think the general economy; we’re still in a recession. I mean unemployment continues to grow throughout our country. Car productions at a 20 year low, housing starts are at a 50 year low. So, that’s the real world. I know we get excited about what politicians, economists and TV people say, but in the real world, it’s, there are plenty of challenges out there.

So there’s some freight, maybe a little bit more freight moving and the freight companies, our customers have done an excellent job of managing through it. They are getting probably a little bit better utilization of their fleets, which is healthy, but it’s still plenty of challenges out there.

Operator

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

Robin Easton

I’d just like to thank everyone 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.

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Source: PACCAR Inc. Q3 2009 Earnings Call Transcript
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