Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

PACCAR (NASDAQ:PCAR)

Q3 2010 Earnings Call

October 26, 2010 12:00 pm ET

Executives

Robin Easton - CFO

Mark Pigott - Chairman, Chief Executive Officer and Chairman of Executive Committee

Thomas Plimpton - Vice Chairman and Principal Financial Officer

Analysts

Tim Denoyer - Wolf Trahan

Ann Duignan - JP Morgan Chase & Co

Jerry Revich - Goldman Sachs Group Inc.

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

Keith Schicker - Robert W. Baird

Henry Kirn - UBS Investment Bank

Andrew Casey - Wells Fargo Securities, LLC

Daniel Johansson

Seth Weber - RBC Capital Markets Corporation

Robert Wertheimer - Morgan Stanley

Ben Elias - Sterne Agee & Leach Inc.

Patrick Nolan - Deutsche Bank AG

Meredith Taylor - Barclays Capital

Adam Uhlman - Cleveland Research

Jamie Cook - Crédit Suisse AG

Operator

Good morning, and welcome to PACCAR's Third Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to introduce Mr. Robin Easton, PACCAR's Treasurer. Mr. Easton, 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 Easton, Treasurer of PACCAR. And joining me this morning are: Mark Pigott, Chairman and Chief Executive Officer; Ron Armstrong, Executive 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 Pigott

Good morning. PACCAR today reported improved revenues and net income for the third quarter 2010. PACCAR's third quarter sales and Financial Services revenues were $2.5 billion, which is 26% higher than the $2 billion in the third quarter last year. Net income improved to $120 million, compared to $13 million a year ago. I'm very proud of our 16,500 employees who have delivered outstanding performance to our shareholders and customers in an uneven and unsettled global economy.

In the U.S. and Canada, our customers are starting to adjust to the higher-priced vehicles that have resulted from the EPA 2010 emission change. The U.S. and Canadian retail truck sales are estimated to improve to a range of 120,000 to 130,000 units this, year compared to 108,000 last year.

European truck registrations for the third quarter improved 16% compared to the second quarter. As a result, we expect the 15-ton plus market registrations in Europe to be between 160,000 and 170,000 units this year, comparable to the 168,000 units last year.

The global economic outlook is improving, which is benefiting the truck market. PACCAR delivered 5% more trucks in the third quarter than the second quarter this year. And looking ahead, we think that truck production for PACCAR could be up 20% in the fourth quarter compared to the third quarter.

We discussed in our analyst call in April the three-step process that the truck industry usually progresses as it recovers from a recession. First is improvement in parts and service. Second is used truck values increasing. And third is more new truck orders. For PACCAR in the U.S. and Canada, the good news is that parts sales are up 15% to 20% compared to last year, and used truck pricing has increased 10% to 15%.

More good news is that the U.S. and Canadian industry Class 8 truck orders for the first nine months are up 23% compared to a year ago although they may be slowing now in the industry.

In Europe, PACCAR Parts business and used truck pricing have both improved by 10% to 15%. And DAF's new truck production for the first nine months is 25% higher than last year.

As we look at the European truck market, we're pleased that DAF is now the leader in the On-highway Tractor segment and has achieved a record overall market share of 15.8%. DAF is steadily progressing toward its medium-term goal of 20% share in Europe.

Talking about our customers. They're benefiting from improved freight volumes, higher freight rates and some stable diesel prices. They continue to increase the utilization of their fleets, which in turn is driving increased aftermarket parts and service business for our dealers.

PACCAR's quarterly aftermarket parts sales increased to $554 million, the highest level since the third quarter of 2008.

PACCAR's strong balance sheet and positive cash flow of $1.1 billion this year have enabled the company to continuously reinvest in the business, enhance our operating efficiency and develop innovative new products such as the PACCAR MX diesel engine. Assembly of the PACCAR MX engine began in June at our new manufacturing facility in Columbus, Mississippi. And in September, the engine plant was officially dedicated in a ceremony that was attended by state and local officials, including Mississippi Governor Haley Barbour. We are now installing the MX engine in over 20% of Kenworth and Peterbilt vehicles. This is the highest level of 13-liter engine installations in our Kenworth and Peterbilt and reflects customer recognition of the PACCAR MX engine's excellent power-to-weight ratio, fuel economy and reliability.

Feedback from our customers of the PACCAR MX engine is excellent with over 2,000 MX engines now installed in Peterbilt and Kenworth trucks.

Speaking of engines, the EPA issued its proposed Greenhouse Gas Regulations yesterday. And as you know, PACCAR is an environmental leader worldwide. We are reviewing the proposed regulations, which is 673 pages long, and we're analyzing the details and look forward to working with the EPA in this during the 60-day comment period to fully understand all the aspects of the proposed regulations.

I also like to point out, speaking of environment, that DAF will launch their hybrid LF truck this year, which will join the Kenworth and Peterbilt hybrid medium-duty vehicles.

Switching topics. PACCAR Financial Services revenues were $238 million in the third quarter compared to $253 million a year ago, reflecting lower level of assets. PACCAR financial's third quarter pretax income improved to $42 million, more than double the $18 million earned last year. This was achieved due to better finance margins and a reduction in the provision for credit losses. The credit loss provision for the third quarter 2010 was $13.7 million compared to $26.6 million in 2009.

Looking at the global market. PACCAR's investment of $3.8 billion in the last decade has enabled the company to enhance its operating efficiency, develop innovative new products, launch the PACCAR MX engine in North America and in Europe, strengthen its dealer network and become an industry leader in information technology. 2010, while very tough economically, was an excellent year for new product introductions, as Kenworth, Peterbilt and DAF launched more new vehicles and major options than at any time in our history.

The success of the Kenworth T700, the Peterbilt 587 and the complete line of vocational bodies for DAF as shown at the recent truck show in Hannover, Germany, have our customers excited about the future.

We've indicated in the third quarter press release that PACCAR will be doubling its capital expenditures next year. I know a number of you are interested in that. And the funding will be focused on accelerating new vehicle development, customer service initiatives, meeting the Euro 6 engine emission requirements, which come into play in 2013, and of course our global expansion. These investments will complement our industry-leading powertrain and manufacturing investments over the last decade.

In summary, the global economic environment is still very unsettled. However, PACCAR's balanced approach in all phases of the business cycle positions us to generate improved results for our shareholders as the global economy recovers.

We look forward to welcoming many of you to the investor conference tomorrow, and thank you. Appreciate your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from the line of J.B. Groh of D.A. Davidson.

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

One, the provision that was down -- what do you guys see in terms of credits and those kinds of things that caused that to come down?

Mark Pigott

As we've commented before, we've seen a progressive improvement in the portfolio, the truck utilization, freight rates are improving and so the customer cash flows are able to make and support their truck payments on a more timely basis.

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

So it's basically just driven by good customer margins and better balance sheets of the customers, that sort of thing?

Mark Pigott

Yes.

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

And then I'm guessing you're probably not through all 673 pages, and I really hope it's double spaced, but I was wondering if you could maybe comment on R&D spend as a percentage of sales in 2011 and how those new provisions will impact R&D?

Mark Pigott

Well, we have indicated in the press release that we'll be increasing R&D. And certainly, a portion of that will be focused on greenhouse gas and emission regulations.

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

So I look back over time, I mean, it's kind of peaked at maybe 3%, 3.25% of sales something like that? Is that probably the area we're going back to from the 2.5% that we're close to now?

Mark Pigott

Right. We really look at it on a dollar or euro basis rather than percent. We know what our products plans are. We know the regulations we have to meet. We know the new factories we have to build, the new IT programs we're launching and that's the way we look at it.

Operator

Your next question is from the line of Robert Wertheimer of Morgan Stanley.

Robert Wertheimer - Morgan Stanley

My first question is on credit availability broadly in the industry. It seems as though if used equipment pricing coming up, you get a little bit more of a safety cushion. I wonder if you're seeing constrained credit in North America, in particular, and whether you see your financial arm as a tool to take market share?

Mark Pigott

Yes, I think that the credit availability has improved during the course of this year as we progress through the year. And we certainly are looking to finance good credits and support the sale of PACCAR product around the world.

Unidentified Analyst

Is it tight for the stuff you're not financing? Are you seeing people coming up short on the ability to buy because they can't find financing?

Mark Pigott

I don't think there's too much of that in the marketplace currently.

Robert Wertheimer - Morgan Stanley

And then the second question will be on your outlook. Is it constrained by supply chain or by credit? Or is it more of a market forecast again for North America?

Mark Pigott

It's really a market forecast. I know a number of people have asked a similar question about supply chain, and I would just sort of reinforce that PACCAR has perhaps slightly different approach to the supply chain than many competitors. We invest in a lot of our suppliers in terms of capital equipment. We train them in Six Sigma. We work with them on their IT and business software program, so there's a real strong partnership. And the result is that the suppliers are very eager to work with PACCAR and also appreciate that we probably pay their bills faster than any other OEM they work with.

Operator

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

Jerry Revich - Goldman Sachs Group Inc.

Mark, can you talk about how much commonality your engines between North America and Europe will have once your 6 [Euro 6] is rolled out? What are the economies of scale we should be thinking about there? And is it right to assume you'll use a diesel particulate filter as an add-on to deliver on Euro 6?

Mark Pigott

Yes. As we get to 2013, there will be some increased commonality, particularly on the top end of the engine, so that will certainly be a benefit just on the manufacturing and even in the engineering side of it. So we're looking forward to that. I think even on a broader scale, as we probably get beyond 2013, 2015, there's going to be a lot more commonality for emission regulations worldwide, which will certainly help us, and I'm sure, a number of our competitors.

Jerry Revich - Goldman Sachs Group Inc.

And Mark, can you give us an update on your backlog trends in Europe over the course of the quarter? Where was backlog at quarter end versus start?

Mark Pigott

For our DAF trucks, we're looking to increase production. Backlogs have improved. So it's pretty steady growth.

Jerry Revich - Goldman Sachs Group Inc.

And Mark, as you take a look at your global R&D plan over the next couple of years, which regions should we be thinking about as seeing the most the highest level of new product introduction. Sounds like it's South America, one, North America, two, but let me stop there and get your thoughts.

Mark Pigott

Well, obviously, the two biggest markets for us at this time are Europe and North America. And you're going to have most of the new products introduced there. But as we've indicated publicly, South America where we've been for 40, 50 years, we'll get more of our new products and that will be primarily the DAF product range. And then looking out at even more than a few years, of course, there's opportunities throughout Asia. So we're going to keep our customers happy with leading-edge products and that'll be North America, Europe, increasingly South America and then in Asia.

Operator

Your next question is from the line of Jamie Cook of Crédit Suisse.

Jamie Cook - Crédit Suisse AG

Your outlook for 2011 in the U.S. and Western Europe, can you just talk about how you think the Europe plays out? Is it a gradual quarterly improvement? Or is it more back end loaded for both segments? And then, did we sell any trucks with the Cat engine in the third quarter ?and is there any assumed for Q4?

Mark Pigott

In Europe, I think, it will be perhaps more even from terms of quarterly production and sales. They seem to be ramping up a little faster. The European governments have had a slightly different approach in trying to get their economies recover. They have the employment programs, which are now fading out. But also they're taking some dramatic steps to reduce taxation at all levels throughout the countries, which are certainly benefiting many companies. In North America, U.S. and Canada because Mexico is actually quite strong now. U.S. and Canada, I think, will be ramping up. So we can say that as we go through the year, each quarter will be successively stronger. In terms of Cat, we have finalized and put our final Cats into our vehicles and moved on.

Jamie Cook - Crédit Suisse AG

So none expected in Q4?

Mark Pigott

I don't think there's really anything there anymore.

Operator

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

Meredith Taylor - Barclays Capital

I'm hoping you could talk a little bit more about your plans in Brazil. I'm sure we'll hear a lot about this over the next two todays, but can you just talk a little bit about the timing of product launches? And also, how you see the long-term average industry sales in Brazil, in particular, going forward? I know you talked about the 110, 120 for 2010, but where do you see that over the longer term?

Mark Pigott

Well, I think in Brazil -- of course, they have a very strong GDP right now. Country has had eight relatively good, stable years. All of our competitors are there and make, in some cases, all of their profit out of South America compared to the rest of the world. So it's an exciting market. It's a market that we know. We've had a 10 year partnership with Volkswagen do Brasil that expired in the '90s, so we know Brazil. We're encouraged to see its strong growth. And over time, if you look at a 5% to 6% GDP growth, the truck population and the truck production should expand and get up to maybe 200,000 units a year. They have the Olympics coming up. They have the World Cup coming up. So there's going to be a lot of infrastructure investment. And they're growing as a nation. In terms of our particularly plans, as I say, we've been in South America for decades, not so much in Brazil. I'm sure our competitors are not overjoyed at the prospect of us being involved there, but we will. And we're evaluating different business scenarios. We're testing our vehicles, and the preliminary response from suppliers and customers and financial institutions are the market's growing. We'd love to have you here. You're a quality company with world-class products, so let's work together.

Meredith Taylor - Barclays Capital

And then just a follow-up on the 13 versus 15 liter. You called out the percentage of installations that you have 13 as opposed to 15 liter, but can you talk about orders? What you're seeing in the next there? And then maybe a little bit around -- for the customers that are ordering the 13, how many of these customers is that, are they ordering all 13 liter? How many are just a few 13 mixed into a larger order that's predominantly 15 liter?

Mark Pigott

Well, as I indicated, we've installed over 2,000 now. And we continue to receive good orders in the 20% to 25% share of our total production, which if you look out over the next few months, orders would be in the 5,000-units range. People are enjoying the benefits. I mean this is a proven engine that has won many awards, including being the top engine in China. It's a great engine throughout all of Europe. It's a great engine anywhere in the world. So I think the Kenworth and Peterbilt customers are just enjoying the benefits of it. And we continue to look forward to grow over time.

Operator

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

Adam Uhlman - Cleveland Research

Mark, I was wondering if we could start with the clarification, first, on the Brazil statement earlier. Is any of the increase in capital spending forecast for next year targeted to put production in place in Brazil?

Mark Pigott

There's a portion of it, but to put a new facility in, it's a couple-of-year project as you're aware.

Adam Uhlman - Cleveland Research

And then you were talking about the new fuel efficiency standards that are going to be coming out, and I guess Kenworth was talking about, that's likely the end of the long and tall trucks. And I'm just wondering conceptually, how much of an impact is that going to have on the business as we transition to these more aerodynamic fuel-efficient trucks from PACCAR's perspective? How meaningful to the business is that today? How meaningful to the margin profile of the company in North America?

Mark Pigott

Well, you know PACCAR is the leader in aerodynamic trucks. We pioneered it over 20 years ago. The Kenworth T600, the famous anteater. I guess I'm old enough to actually remember I was at the launch of that thing, and it was quite a wonderful event. So T700 that was just launched, the 587, of course, the DAF, the XF105 and others, these are all aerodynamic leaders. And we're a premium vehicle and get the highest residual for our products because we deliver the best fuel economy. So this is perfect for us. We have great engineers who are leaders in terms of developing innovative solutions to meet the new regulation, but the long and tall is something that I knew early in my career and there's always a few that are out there. But for well over a decade, we've been the environmental and aerodynamic leader in terms of our vehicles. So it's just, it's playing into our cards perfectly.

Adam Uhlman - Cleveland Research

And then just lastly, a clarification. You were saying that North America and Europe builds were going to be up 20% from the third quarter levels. Could you break that down into the difference between the North America and Europe?

Mark Pigott

This time, I think there probably a slightly greater emphasis in Europe. But overall, we're just looking at 20% worldwide because you got Australia. You got Mexico. You got export markets. But overall, we're looking at about 20% global increase.

Operator

Your next question is from the line of Henry Kirn of UBS.

Henry Kirn - UBS Investment Bank

Could you talk a little bit about how your customer mix may be shifting? Are you seeing more fleets coming back into the market relative to your historical mix and how does that impact the margins?

Mark Pigott

Well, the vast majority of our customers sort of have over 10 to 15 trucks sold. The fleets are always a very big part of our customer component. And there certainly has been a consolidation over the last decade because of a couple of turbulent recessions. But I think our mix is pretty stable in terms of just most of the people that buy our products are medium to large companies, and the owner-operators, the ones that are still exist have usually aligned themselves with different companies for economic benefits. So very stable.

Henry Kirn - UBS Investment Bank

On the pricing side, how disciplined is your competition? Are there any pockets where pricing is shakier than you'd prefer?

Mark Pigott

I think the wonderful thing about being in this business, I'm in my fourth decade now, is that there is one constant. And that is there's always a lot of interesting times with our competitors and their pricing. And that's all I can say.

Operator

Your next question is from the line of Andy Casey of Wells Fargo Securities.

Andrew Casey - Wells Fargo Securities, LLC

The fleet preference shift to 13 from 15 liter that you talked about in the industry. Is that something that's more affected by the type of fleets that are buying today? Or is it really conquest versus the 15 liter?

Mark Pigott

The 15 liter is an excellent engine. So I think it's important that we recognize that. And it's certainly been a mainstay for many years and will continue to have a very important presence in the North American market. So I think that's -- let's just kind of put that out there. The 13 liter worldwide is the preferred large engine for a number of reasons: One being a little bit lighter weight, typically better fuel economy and that's kind of the standard. So I don't think it's anything unusual or even a surprise that the U.S., Canadian and let's call it Mexican markets are just becoming a little bit more aligned with the rest of the world in terms of engine preference. And so I would say, if you could cascade that down, all different types of customers are interested in the 13 liter from the small operator to the largest fleets. They're saying we have similar operating characteristics to companies that operate in South America or Australia or Europe or even into Asia as the infrastructure gets built there. So the 15 liter is a very important contributor in engine in North America. I see that it will continue to be. But you can't really be surprised that the U.S. and Canadian truck markets are becoming more aligned with the global preference for 13 liter.

Andrew Casey - Wells Fargo Securities, LLC

And then on the alignment, if you will, U.S. and Canada, I'm wondering if there's a contradiction between the chatter that has been going on about increasing weight limits for freight across highways and the 600-plus page energy efficiency?

Mark Pigott

Well, that's a complicated topic. It's probably going to take a little bit more time that we have this morning. But whatever is the regulations are, obviously, PACCAR and its fellow competitors have input into it. And once we have our input and the rules are made, then we work with those rules and design the highest quality, most efficient products for our customers. We've been doing it that way for 105 years.

Andrew Casey - Wells Fargo Securities, LLC

Kind of building off your response to that question. Some other companies through this year, not necessarily you folks have kind of been upset about the uncertainty on a macro government policy, everything-type level. Are you seeing that ease as we go forward?

Mark Pigott

I can't really comment for our competitors. We know what we do. We work with the regulations that are in place. And as I've indicated, our goal is to design and provide the highest quality products in the industry in every market. And that's what we do everyday.

Operator

Your next question is from the line of Ann Duignan of JPMorgan.

Ann Duignan - JP Morgan Chase & Co

Just first, I know there's been a lot of talk about yesterday's announcement from EPA and DOT, but can you talk about a little bit more immediate policy change in that CSA [Comprehensive Safety Analysis] safety regulations for truck drivers. We've heard a lot from fleets around the fact that this ruling could result in a much smaller pool of drivers and that driver retention is going to become a much bigger issue earlier in the recovery cycle this time around. Can you talk about whether that might position PACCAR better or worse? Or does this give you any kind of an advantage going into 2011 and beyond?

Mark Pigott

Well, it's a good question. I think one of the interesting outtakes of this particular recession, which is very challenging one for everybody is typically in a recession, you have a lot of drivers sort of re-entering the transport industry because the housing industry is down. Certainly, the housing industry is at many decades low right now, but we haven't seen the corresponding increase in the pool of drivers because I think people are saying driving a truck is a challenging profession. It's rewarding, but I want to stay closer to home. So that's been an interesting sort of outtake of this recession. In terms of a smaller pool of drivers, I think there is a benefit for PACCAR because many fleets want to attract drivers and the premium reputation, premium quality and the ease of operation of our products makes it very attractive for fleets to purchase our vehicles and attract drivers. So there is an advantage.

Ann Duignan - JP Morgan Chase & Co

And would you anticipate providing options like automatic transmission or anything like that to improve ease-of-driver ability?

Mark Pigott

We have many automatic transmissions. It's a popular option that we install in our vehicles.

Ann Duignan - JP Morgan Chase & Co

My follow-up question is just on Brazil. I guess, I'm having a little bit of a hard time understanding why a greenfield would be the best option for investors given how entrenched. We were just down Brazil towards Scania, MAN and Volvo facilities and one big way they get from them is that they've been there a long time. Why greenfield? Why wouldn't you make an acquisition? And then what are you going to do about distribution if your beginning from zero?

Mark Pigott

Are any of them for sale?

Ann Duignan - JP Morgan Chase & Co

Well, there's also Iveco.

Mark Pigott

Certainly, we've seen the pros and cons of doing it both ways. Obviously, the DAF success story is one of the great business stories over the last 10 years, and that was an acquisition. We continue to evaluate all opportunities. A greenfield site, as you indicate, is completely in your control and completely on your timeline. And we know exactly what the cost of that is, so there are many advantages to that. Distribution is an equally important aspect of entering a new market. And the good news is that with our independent dealer network, which is the most profitable dealer network in the world, there are a lot of businesses saying, wow, can I get an opportunity to represent DAF and PACCAR in this market, and that will allow me to make a lot of money? I'm interested. So I would just say Ann, watch this space.

Operator

Your next question is from the line of Patrick Nolan of Deutsche Bank. On the quarter, I think I might have missed it, the change in production by region, Europe and North America, in the third quarter?

Mark Pigott

No, I don't think that's been outlined. We just said it's about 5% increase in production from second to third quarter. Not at this time.

Patrick Nolan - Deutsche Bank AG

Do you have any preliminary view in how the breakdown of parts and truck profitability broke out in the quarter?

Mark Pigott

No, we did share with you that we had a strong parts sales of $554 million. And of course you've got total sales of parts is increasing at a steady rate, primarily being driven by very old truck population in North America and of course also a record number of Kenworth, Peterbilt and DAF trucks worldwide over $1.5 million. So that looks good as the economy's improved. And freight companies now are pulling their trucks off the backlog and utilization is going up. They're finding they're needing to invest in their vehicles to get them ready to work again.

Patrick Nolan - Deutsche Bank AG

And from a bigger picture's perspective, are you capacity constrained right now in the MX engine? So it's 20% of your fleet or 20% of your volume right now, but you're just ramping up the U.S. plant. Is capacity constraint an issue? Or is the 20% kind of where the natural demand is falling out for you?

Mark Pigott

It's just where the demand is, and we're very happy with it. It's fantastic. We've got plenty of capacity and the ability to increase that capacity. So in fact, that's a good point. I'm glad you raised it. As we look back over the last decade, it was in PACCAR because of a lot investment in our factories, Six Sigma and efficiency gains. We are actually having more capacity worldwide than we had five years ago, even though we have closed a facility and reduced the production at other facilities. So we're in excellent shape.

Patrick Nolan - Deutsche Bank AG

When you approach the customers of the MX engine, what is the fuel economy benefit if you look at a comparable truck and I know it's a little difficult because there's always different spec, but an average MX engine versus your standard traditional 15-liter engines, what's fuel economy benefit for customer?

Mark Pigott

Well, it varies, but I would say that the vast majority of our customers are enjoying a healthy improvement in fuel economy. That's all I can really say at this time.

Operator

Your next question is from Tim Denoyer of Wolfe Trahan.

Tim Denoyer - Wolf Trahan

Quick question for you on just the health of the North American trucking industry. Clearly, with the reduction and loss provisions, it seems to be getting better and with used truck prices getting better. But I would guess there's still a pretty significant proportion of the industry that's in the negative equity position, and that's probably, potentially one of the factors constraining your sales outlook. Can you talk about how that's been progressing? And potentially the implications for loss receivables going forward?

Thomas Plimpton

I think we've seen progressive improvement in our portfolio over the last four or five quarters. We see the health of our customers continuing to improve. And there's still challenges out there, but we think that the improving trend will continue.

Mark Pigott

We're seeing many of our customers' profitability, the ones that are publicly traded and report their earnings, are now getting back to sort of 2005 levels. So good profitability. Freight rates are going up. I think the health of the industry is certainly better than it has been for several years. It's had a couple of difficult recessionary shocks this decade. And obviously, we've also have to work through some substantial cost and price increases because of the emission regulations. But the companies that are out operating, unless they're intimately linked with, say, housing construction, those are going to be struggling. But they seemed to be in good shape.

Tim Denoyer - Wolf Trahan

So would you say it's the price increases on the EPA 10 trucks that may be a bigger factor in keeping demand levels below replacements? Or do you think it's more the health of the smaller end of the industry?

Mark Pigott

Actually, I think it's a broader question and that is the overall economic vitality of the U.S. economy. And that is a very broad topic, but as we have burdened our country with increased legislation and taxation, that has made our recovery in the U.S. very weak. And there's not a strong outlook through any sector that I can see about the U.S.-based company really having a lot of growth. Now if you're selling into China or Asia, other markets, yes, you're seeing some real strong benefits. But if you are a trucking company operating in the U.S., it's still plenty of challenges. It's recessionary in many cities and as you travel around the country as we do, there are many states that are in very difficult shape. So being the trucking industry, obviously, but manufacturing and financial services, that's all. It's just an ongoing challenge. It's going to be tough for the next couple of years.

Tim Denoyer - Wolf Trahan

And then one more on the long-term product line in North America. It does seem like you're switching focus a little bit more to more medium-duty trucks. I suppose we can talk more about this tomorrow, but can you give me a sense of longer term how do you expect that mix to change?

Mark Pigott

I don't think there's actually that much of a change. The market is the traditional medium duty. Let's call that Class 6, 7 is really pretty stable. But at levels that are about half of what it was five years ago, we don't see that substantially increasing. So you're finding that people are going towards the medium heavy, if you will, or the greater than 15 ton, and then they might be shifting more to the six ton and below. And I think there's plenty of growth in all those markets.

Operator

Your next question is from the line of David Leiker of Robert W. Baird.

Keith Schicker - Robert W. Baird

It's Keith Schicker on the line for David. I was just wondering if you could comment on sort of the capital spending outlook beyond 2011 as the markets recover, hopefully recover. It looks like your guidance for 2011 already puts you right about where you were at the last cycle peak in terms of capital expenditures. I'm just wondering how I should think about how much money you're going to be investing during the course of the next cycle as we get up to higher volumes?

Mark Pigott

I think your analysis is accurate. It does get us towards the peak of the last cycle, and it's probably a fair comment. I think that's all we can really add to it right now.

Keith Schicker - Robert W. Baird

And then if I look at the Europe market or the European market, is DAF -- are you stronger in the north or the south? Are you benefiting from stronger recovery in the Northern European economies? Is that having any impact on the market share gains? Just elaborate a little bit on the regional exposure in Europe.

Mark Pigott

That's a very excellent question. Actually DAF is strong in almost every market in Europe. Market share leader in Belgium, Netherlands, U.K. We're number two in Italy. We're number two in France. We're number three in Germany. We're the market share leader in Hungary, Czech Republic, Poland. We have a growing presence in Spain and Portugal and moving into Russia. So obviously, Germany is the economic driver in the European Union. And DAF being number one overall in Europe in tractors has really benefited from the increase in freight. So our focus is to continue to grow in all markets and also have a particular emphasis on the vocational markets. So DAF did an outstanding job.

Operator

Your next question is from the line of Ben Elias of Sterne Agee.

Ben Elias - Sterne Agee & Leach Inc.

Do you think we're sort of underestimating demand levels in Europe? We had a transmission supply talking about your being strong, but a lot of that being exported out of Europe? Are we satisfying demand in Europe right now because a lot of that going up, so we're under counting?

Mark Pigott

That's a good question. No, our customers, our dealers are very happy in Europe. Our dealer's inventory levels are close to five-year lows. The dealers are doing well. They've been through a difficult time, but they've done a fantastic job working in partnership with DAF. Certainly, there's an increase in product going to other markets, but the European customers are getting all the products that they're requesting. So we're in good shape.

Ben Elias - Sterne Agee & Leach Inc.

Second, you had a competitor yesterday talk about supply bottlenecks and shortages, especially with the specialty steel, with microchips, truck frames, things like that. And they commend that as production rates rise, this is going to be an issue going forward. How do you address that?

Mark Pigott

I'm not sure what the competitors are doing, but I do know our approach is very much a collaborative partnership with our suppliers. First, we pride ourselves on paying our bills in a very timely basis. Many of our competitors seem to drag it out. Maybe they've got cash flow issues, I'm not sure. Second, we invest in our suppliers where we'll actually purchase capital equipment, which allows them to increase their capacity, increase their quality, reduce their cost, improve their profitability. Third, we have an active Six Sigma program where we will go in and train our suppliers. Everybody from the shop floor to management on how to run their business. And fourth, we invite them into our engineering group at an early stage to get their input on new designs and how they can best partner with us. So that's how we approach it, and it works very, very well.

Ben Elias - Sterne Agee & Leach Inc.

And lastly, you did talk about the state of the economy. And I think, we're drowning in debt. So you seem to have a lot of cash, plenty of it. Any thoughts on allocating some of that cash? I know R&D and CapEx are going up. Any thoughts on the portfolio?

Mark Pigott

Well, we continue to evaluate different opportunities, but we did increase our quarterly dividend, which is appreciated by our shareholders. And as you have rightfully noted, we will be increasing our investments on a global basis. And interesting enough, through this recession, the cash question has not come up because it's certainly been a benefit for PACCAR. And it's a cyclical industry, and we want to provide a great return to our shareholders. We want to be able to invest in world-class products and grow on a global basis. So that's our use.

Operator

Your next question is from the line of Seth Weber of RBC Capital Markets.

Seth Weber - RBC Capital Markets Corporation

Just a follow-up to the kind of a broader economic landscape discussion you're talking about before. Have you noticed any change in order patterns where customers are kind of waiting till the bitter end or till they can't really just hold out any longer before they order? So closer in versus couple of years ago?

Mark Pigott

Well, it's a good question. I think you could actually apply that question to the broader consumer that we all run into on a daily basis. There's been many pronouncements and headlines about the recession is over, but I think whoever came out with that has forgotten to tell the basic consumer because, you know what, in many towns across this great country, it certainly doesn't feel like the recession is over. So obviously, that has an impact on our customers and the trucking in general that people are saying, is it over? You say it is, but I see my neighbor's house just went into foreclosure. Nobody's building any new homes. Car production is at 30-year low. Consumer spending is not really strong, I would say. So people are saying, tell me when I can see three, four strong economic growth quarters in a row then I'll feel better about it. And that applies to you, me and all of our customers.

Seth Weber - RBC Capital Markets Corporation

Are you able to use just locations to try and grow share in your Finance business? Is your cash bringing a greater percent of sales with the PACCAR Finance?

Thomas Plimpton

Yes, we have, particularly in the recent months, we've seen our share penetration grow somewhat. We're very active with our dealers and our customers and supporting them in buying Kenworth, Peterbilt products around the world. So really focused on growing with good customers.

Seth Weber - RBC Capital Markets Corporation

On the CapEx ramp, is any meaningful part of that a reflection on any increased investment with the supply chain? Or is it just kind of as normal?

Mark Pigott

I think the supply chain is as normal.

Operator

Your next question is from the line of Lawrence [ph] Devin [ph] of JM Advisors LLC [ph] .

Unidentified Analyst

I was wondering what your thoughts might be on the future for natural gas-powered vehicles in the heavy truck industry and the likelihood of that becoming a significant factor and any comments you have as to timing and implications for PACCAR?

Thomas Plimpton

Well, LNG, CNG, that's what your talking about? We've been pioneers on that. We have product running, certain ports are advocates of it. We have great product. We have strong partnerships with different major industry suppliers. In terms of a significant share, probably not in the short term. Diesel really is the most efficient and effective power source for commercial vehicles. And well, if you go to Europe, for cars also. But we offer LNG, CNG and for those applications that desired, we are there. And we have I think the world's best solution, but in diesel, we continue to be the major driver for quite the foreseeable future.

Operator

Your next question is from the line of Daniel Johansson of NBIM.

Daniel Johansson

I have a question on the European revenue. If I look at the way to show it, it seems to be up 19% year-on-year. But I guess, you have 10% or so of currency headwind in there so on a like-for-like basis, it would be up 30% or so. And if I assume that is equal to deliveries, I would have actually thought it would be up a bit more than it is if you compare it to some of your competitors from Northern Europe that have shown quite much stronger growth rate. So are we seeing or are we looking for catch-up in the fourth quarter?

Mark Pigott

From your accent, you sound like you might be spending some time with our friends in Northern Europe. Well, I can't comment on what they're doing or not doing. I know that DAF is doing an excellent job. It seems to be the number two position, overall share in Europe. And we're getting good orders in. Our dealers are in great shape. So we are looking for DAF to increase its production rates in the fourth quarter as we've indicated and continue to grow.

Daniel Johansson

But if you know, if your competitors are delivering up to 80% more vehicles and you're running at some 30% up, is this a market share issue? Is it a regional issue? Is there any difference?

Mark Pigott

There is no issue. We're second largest supplier in Europe, and we're very happy our customers. Our customers are loving it, and we're getting many customers every week that are pleased to work with DAF and give their business to us for fantastic products. So not sure if there's any issue, but we're excited. We're pleased where we are and we're moving ahead.

Daniel Johansson

And maybe I missed this earlier on the call, but have you sort of like if I wait to get your market assumptions or so it seems like your revenue is going to be up some 30% or so next year according to the estimates you've given out. All else equal. Have you given some assumption on what sort of incrementals we should look for? Or how to think about that into next year?

Mark Pigott

No, we're still evaluating how that'll shake out.

Operator

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

Ann Duignan - JP Morgan Chase & Co

Just on the back of the last caller's question, when we were over at IAA, we did meet with some of your DAF management, and they did say that they were having some supply constraints, particularly on things like, I think they mentioned actually brakes. Is that something that just was a ramp-up issue? Or could it be an issue for the industry as we go into 2011 that suppliers just can't keep up with demand? I know you talked about your investment in suppliers, but that's maybe more a U.S.?

Mark Pigott

No, we do it worldwide. We're in good shape. I'm glad you had a chance to visit the stand and hopefully you were impressed by the wonderful selection of vehicles.

Ann Duignan - JP Morgan Chase & Co

But they did say they have supply constraints. I don't understand.

Mark Pigott

Everyday, there's something going on when you run large multinational companies. We're in good shape, Ann.

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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: PACCAR CEO Discusses Q3 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts