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PACCAR (NASDAQ:PCAR)

Q2 2011 Earnings Call

July 26, 2011 12:00 pm ET

Executives

Robin Easton - CFO

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

R. Armstrong - President

Analysts

Michael Regan - Janus Capital

Jerry Revich - Goldman Sachs Group Inc.

Ann Duignan - JP Morgan Chase & Co

Michael Levin - Deutsche Bank AG

David Leiker - Robert W. Baird & Co. Incorporated

Kristine Kubacki - Avondale Partners, LLC

Stephen Volkmann - Jefferies & Company, Inc.

Brian Sponheimer - Gabelli & Company, Inc.

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

Seth Weber - RBC Capital Markets, LLC

Henry Kirn - UBS Investment Bank

Andrew Casey - Wells Fargo Securities, LLC

Adam Uhlman - Cleveland Research Company

Ben Elias - Sterne Agee & Leach Inc.

Barry Haimes - Sage Asset Management

Andrew Obin - BofA Merrill Lynch

Jamie Cook - Crédit Suisse AG

Joel Tiss - Buckingham Research Group, Inc.

Timothy Denoyer - Wolfe Trahan & Co.

Timothy Thein - Citigroup Inc

Operator

Good morning, and welcome to PACCAR's Second Quarter 2011 Earnings Conference Call. [Operator Instructions] Today's call is being recorded, and if anyone has an objection, they should disconnect at this time. I would now like to introduce Mr. 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, 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 reported excellent revenues and net income for the second quarter of 2011. PACCAR's second quarter sales and Financial Services revenues were $3.9 billion compared to $2.4 billion in the second quarter of 2010. Quarterly net income increased to $240 million, more than double the $100 million earned a year ago. I'm very proud of our 22,000 employees who have delivered excellent performance to our shareholders and customers.

PACCAR's results reflect the benefits of higher truck deliveries in North America and Europe and continued improvement in aftermarket part sales and Financial Services worldwide. As a result of the improving business conditions, PACCAR's board recently approved a 50%, 5-0%, increase in the regular quarterly dividend to $0.18 from $0.12 per share, in line with the amount paid prior to the recession. And we want to especially thank our shareholders for their support.

In the U.S. and Canada, the truck industry orders in the second quarter of 2011 increased to 68,000 units compared to 65,000 during the first quarter. U.S. and Canadian retail truck sales are estimated to improve in 2011 to a range of 180,000 to 220,000 units from 126,000 units last year. That's a 50% increase from last year and also reflects the industry retail sales of about 84,000 units for the first 6 months of this year.

We have lowered our industry retail sales forecast range in North America due to the uneven economic conditions and supplier capacity constraints, specifically tires and chassis components. The European truck registrations for the second quarter were 63,000 units, a slight increase on the first quarter registrations of 59,000. We estimate that Europe's greater than 15-tonne truck market will be between 230,000 to 250,000 units this year versus 183,000 units last year. That's a 30% increase year-on-year.

Looking at the 2 markets, there may be some questions about the health of the suppliers, and I would just remind you that in North America, our 2 largest car manufacturers, General Motors and Chrysler, went bankrupt during the recession, and as a result, the entire supplier industry suffered, whereas in Europe, although they had slower car sales because of actions by various governments, employment was able to be retained. There was no housing bubble, and as a result, suppliers are in much better shape in Europe.

The improving global economy is benefiting the truck market but is also increasing the material cost from suppliers. Aftertreatment, cooling, electrical, filtration, precious metals, such as platinum and palladium and overall emission-related costs of approximately $15,000 in North America in the last 5 years have impacted our entire industry's margins as the transportation industry is not able to fully absorb these additional costs. That's the price of doing business in our industry.

PACCAR's truck sales increased 26% from the first quarter and part sales increased by 4%. These 2 positive results generated increased net income but did reduce the overall gross margins due to the higher proportion of truck sales compared to parts.

Continuing with good news, PACCAR has increased truck production of all truck plants in North America and Europe to meet higher levels of demand. The improved market pricing and factory productivity generated higher quarterly truck gross margins of 8.1% in the second quarter compared to 5% a year ago. And looking ahead, PACCAR estimates that we'll deliver 5% to 10% more trucks in the third quarter compared to the second quarter, subject to suppliers’ ability to meet industry demand.

PACCAR's strong balance sheet and excellent operating cash flow have allowed the company to accelerate its investments to enhance operating efficiency and develop innovative new products, such as PACCAR's MX diesel engine, and I know a number of you were able to read the latest Forbes Magazine article that had highlighted PACCAR as one of the top 50 innovative companies of today and tomorrow, a nice reflection on what we've done for 105 years.

We’ve received over 18,000 orders for our MX engine in North America, and the engine is being installed in about 25% of Kenworth and Peterbilt heavy-duty trucks. Feedback continues to be excellent from our customers.

PACCAR Financial services revenues were $258 million in the second quarter compared to $239 million a year ago. PACCAR Financial's second quarter pretax income improved to $57 million compared to $34 million earned a year ago. This was due to better finance margins and a reduction in the provision for credit losses. The credit loss provision for the second quarter of 2011 were $11 million compared to $17.4 million a year ago. Another piece of good news, past dues fell to 2.2%, their lowest level since the first quarter of 2008, over 3 years ago.

And finally, during the quarter, PACCAR made good progress in its search for a DAF factory site in Brazil. I note that many of our competitors continue to highlight Brazil as being their most profitable industry area. We look forward to joining them, and our goal is for DAF to achieve a 10% share of the Brazilian truck market in the medium term. Thank you, and I look forward to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Adam Uhlman of Cleveland Research.

Adam Uhlman - Cleveland Research Company

Can we start by talking about the margin trends in the quarter and with the gross margin in particular, and could you talk about how the margin unfolded in Europe versus North America and then, overall, your expectations for the third quarter given the 5% to 10% increase in builds that you are talking about?

Mark Pigott

Sure. Well, I think, looking forward, as our industry, and I stress the industry, achieves more of a logistical equilibrium as suppliers are able to ramp up and invest in their companies and smooth out the delivery of many components, it should benefit the entire industry, including our customers, of course. There may be a slight improvement in margins. Obviously, PACCAR continues to invest in making our plants the most efficient in the industry. So overall, I know there's been a few questions about the margins, but I think as I indicated in the first prepared comments, our sales in trucks and parts and finance are improving, and as we get a higher proportion of truck sales and truck margins, they tend to reduce the overall margin because of the proportional weight.

Adam Uhlman - Cleveland Research Company

Was there a material impact to margin from customer mix in the quarter from larger fleet sales? I noticed that your market share was up quite a bit.

Mark Pigott

Over the last, certainly, 10 years, as the industry has evolved away from the, let's call it, owner/operator smaller fleets to more medium and larger fleets, so has PACCAR's customer mix. I think it's very much in line with any of our competitors, and our market share is close to record levels in North America and certainly in Europe, which is, I think, reflecting more our customers’ demand for higher quality products. But I don't think there's really a mix issue in terms of any margin, no. Good question, though.

Operator

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

Seth Weber - RBC Capital Markets, LLC

I guess just on North America, the tempered outlook for the sales number. I mean, do you think that just gets pushed out to 2012? Or how should we think about that?

Mark Pigott

Well, we look at the number of retail sales, and there's a lot of things that you've got to look at in terms of moving parts: orders, build and retail sales, obviously the 3 major components. Backlogs are increasing certainly throughout the industry at Kenworth, Peterbilt and DAF, which is good. I think there might be an element of push out. You're talking about a market that is up 50% from a year ago. Now, would we like it to be higher? Would you like it to be higher? Certainly, but that's kind of the world we're living in. The economy once again, even though we all read the headlines and people are having record results here, there and everywhere, if you peel back that onion a little bit, a lot of the companies, even some that reported today, a pretty considerable mixture of their benefits are Asia, China, India, Brazil, whether they're an industrial company or even on a consumer side. And that usually doesn't get reflected in the headline. So we have limited exposure to South America and to Asia. We have some but limited. So I think our results really reflect what's going on in North America and Europe. So next year, we hope things will be good. You got housing at a 50-year low, which impacts I'd say most basic materials and industries. You take a look at excellent companies like a Wal-Mart, a Lowe's, a Home Depot, people aren't putting a lot of money into fixing up their houses. So that impacts glass, brick, wood, concrete, TVs, refrigerators, carpets. All those things get moved by trucks. So I say as we indicated in our press release, the recovery is uneven, and then you overlay a 9% or 9.5% unemployment rate, and I think people are rightfully just -- they're cautious about what's going to happen.

Seth Weber - RBC Capital Markets, LLC

Sure. And I guess just reading the press release, I mean, it sounds almost like -- are you increasing your investments with the supply chain at this point to help them along or is that…

Mark Pigott

Yes we are. And I'm glad you brought that up. I think we took an initiative, oh gosh, probably 15 years ago, where we would actually invest in capital equipment for our suppliers. We would retain ownership, and let's say you're running a $50 million company, which is a good-sized supplier. And you need to get a piece of equipment that might be $0.5 million. Well, that's a pretty substantial investment. If it makes sense, we'll go in, we'll purchase that. You, as a supplier, will run it. Hopefully, you'll be able to improve your quality, reduce your cost, reduce the amount of overtime and actually use it to supply other customers besides us. So it's kind of a win-win. So we are doing -- have done a lot of that and continue to do it and, in some cases, have probably accelerated that. So we want these suppliers to make money. We want our dealers to make money. We want our customers to make money, so we're going to see what we can do to help them.

Seth Weber - RBC Capital Markets, LLC

And would you put that at kind of tens of millions of dollars this year?

Mark Pigott

I would say it's probably $5 million to $10 million range. It varies on the timing. Some of the pieces of equipment may take a year to build.

Operator

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

Ann Duignan - JP Morgan Chase & Co

Mark, can you just expand on the chassis component shortages? Can you just elaborate on what specific component are you talking about? Is it the whole bunch of little things or is it axles or is it one supplier or many suppliers? If you can just expand on that, it would be very helpful.

Mark Pigott

Absolutely. I think it's a host of suppliers. As you know, Ann, 1, 2 components, you need them all to make a truck to be able to deliver to a customer, and I think -- let me start on sort of the macro level. Certainly, a number of our competitors, and some that I'm sure you cover, have had week-long shutdowns. In fact, I think 1 or 2 have shutdowns right now because of supplier issue. And we're seeing this more in North America, but we've also seen it in Europe. So it's affecting the whole industry. When we sort of go on a more focused micro level, it can be anything to do with the rear suspension area. It can be an axle-related type of component. It could be components inside the cab that we might be purchasing. So I'd say every week, probably there may be a new supplier that's popping up. It may be that these suppliers are running 24/7. And God bless them for doing that. Everybody's working very, very hard. We've got a lot of people in different suppliers, facilities, assisting them whether it's investment as I talked about on the previous question, helping them lay out new lines, but there are suppliers in the automotive supply base in North America was really impacted seriously, much more than maybe people understand. I've seen the term hollowed out in different articles. When you've got a major contraction in the car industry, and a lot of these suppliers supply car and truck, and people talking about double dip, suppliers are rightfully very cautious. Should they add new facilities? Should they hire more people? Should they expand their facility? What if the economy, whether it's because we don't have a debt ceiling agreement or unemployment continues, what if there's a double dip? They don't want to get caught again. There's a lot of people that are rightfully cautious and conservative, and we're working with them to meet our needs, but it's not just all rosy out there.

Ann Duignan - JP Morgan Chase & Co

Okay. And I appreciate that, and that kind of leads me into my second question, and that’s your outlook for North America and taking it down. I presume, just correct me if I'm wrong, that's your outlook for retail sales given the economic...

Mark Pigott

That is correct. That is retail sales, and it reflects exactly what the industry is seeing, and that is 83,000 classic trucks have been retailed for the first 6 months, which means if we're going to get to 180,000 or 200,000 for the year, you're going to need a 25% to 40% increase in the second half. That's just the math.

Ann Duignan - JP Morgan Chase & Co

I appreciate that, but can you talk about your outlook for build versus retail? I mean, if I look at the backlogs, backlog build...

Mark Pigott

The build is sort of running in line with retail sales. I mean, I can't -- I don't really know what the competitors are doing in terms of dealers, but our dealers, they're -- let's call it new truck inventory, so that would be trucks that are on the lot when you go see them, is at a 5-year low. So what that really means is when we build the truck, the customer gets the truck. So build becomes retail sales very quickly. There's not a 3, 4, 5, 6 month delay. The customers who are -- the customers have reported their earnings, and a number of them are up 5%, 10%, 20%, which is encouraging. That's good. They want the trucks. They're not going to wait around for them. So we see some improvement. Suppliers are getting healthier. There is a growing backlog which is healthy, and everybody in the industry is pushing to increase their build, but you can't build if you can't get components from your suppliers.

Ann Duignan - JP Morgan Chase & Co

And supposing you were able to free up all the capacity you need in your supply base, would you accelerate your build for a while to exceed retail just to get those dealer inventories back to...

Mark Pigott

The way we run it, we have orders, we build for the customer. So if we're able to increase, and as I indicated in my comments, we're planning to have a 5% to 10% increase in the third quarter compared to the second quarter, we'll increase the build to meet our customers’ demand, in line with what we can get from suppliers. So I think it's getting better. And I think that's the important message is it's getting better. The orders have been relatively consistent. There have been 1 or 2 high months, but you can kind of level those out, and suppliers are making investments. We're making investments in suppliers. And I don't think we can look away. A 50% increase year-on-year, that's pretty strong, particularly in the automotive industry. You don't see that on the car side. I don't think they could handle a 50%. I mean that would be amazing. So I think we have to give credit to the truck people to be able to get a 50% increase.

Operator

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

Jerry Revich - Goldman Sachs Group Inc.

I'm wondering if you can talk about what was the impact of higher material costs in the quarter roughly and what was the impact, if any, of higher expedited freight costs due to the spike in trends?

Mark Pigott

Well, they certainly had some impact, but we don't really break that out. As part of doing business, sometimes, the supplier picks up the cost. Sometimes we do, but all I can say is, if you've ever been in the plant, you don't want to get too many things being brought in by airplane. It tends to gets expensive, but we don't really break that out. I mean it's just the cost of doing business that way.

Jerry Revich - Goldman Sachs Group Inc.

In terms of the industry pricing environment, Mark, can you comment on by market what's the range of price increases you're hearing about or contemplating in the bids that are going out today versus the bids that maybe went out 3 to 6 months ago?

Mark Pigott

I'd say there is some improved pricing in the marketplace. As I noted earlier, a number of our customers, in fact, quite a few of our customers are seeing improved profitability. Obviously fuel, they have to watch what's going on with fuel. But the customers and the very good customers who are here and have survived really 3 major economic shocks in the last 10 years, they're very well-run companies. They understand that to meet the different emission levels, of course, the latest one being 2010, costs are going up, and obviously as a manufacturer, what we need to bring to the party is improved fuel economy whether it's through better engine performance or just more streamlined vehicles. So you're talking about a couple of percent increase out to the customers, which then they have to turn around and pass on to their end customers. So you're seeing that. So that's positive. And just how to see how the general economy is doing, some areas are doing well, but others are obviously slow. And I think that is reflected in the type of customers. If you're in the building products type of industry, it's pretty slow. If you're maybe doing a few things to the retail mall or consumer, it might be pretty good. I think it's gradually improving.

Jerry Revich - Goldman Sachs Group Inc.

And lastly, excellent market share in the quarter. Given the supply chain challenges you've highlighted, do you expect to maintain the share gains you delivered this quarter? I obviously appreciate you look at market share over longer time periods but would love your sense on how do you feel about your ability to maintain where you got to in the second quarter?

Mark Pigott

Well, let's look at it in 2 segments, if you will. Europe, DAF has just been an amazing success story. And obviously, we have the attention of all of our major competitors, and as we continue to reiterate, we'd like to get to that 20% level. We're a little over 15%. We kind of go between 15% and 16%, which is a great improvement from the 7% to 8% it was 10 years ago. So that's had a good benefit. And DAF probably has the best dealer network in Europe, one of the few independent dealer networks, so these dealers are really working hard to break into new customers, new accounts. So we look for steady improvement, but recognize that we are now in the sights of all of our competitors in Europe. In North America, 26.7% is certainly one of the highest shares we've had in many years. I think because we've worked with suppliers, we've been able to deliver maybe a few more vehicles than some of our competitors. Some of our competitors might have had longer shutdowns or had shutdowns. We haven't really had to do any of that. But in that range, we always like to be there, but the main thing is continue to deliver great results to our shareholders. That's the key.

Operator

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

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

Most of my questions have been answered, but I was kind of curious what your thoughts on this CSA and potential driver shortage here in the next 24 months. What do you think that means for the industry overall and PACCAR in particular?

Mark Pigott

Well, I think it's probably, overall, although there'll be some short-term pain probably at a few different customers, I think it's overall good to have a standard. This is an industry that we love. We live in it every day, and we're very proud of what it's done for certainly North America and Europe in having a very attractive transportation sector. I think in terms of drivers, just 5, 6 years ago, if you had said housing was down, you would have said, well, that would have resulted in a lot more drivers because there is a real correlation between people driving or building homes. Because of CSA and the different regulations, that correlation is probably still intact, but it's reduced in intensity or correlation. I know some of our customers are finding it a challenge to find good drivers. What that usually results in is higher pay for the drivers, and usually, our customers are pretty good at balancing that because they've got customers that they have to deliver to. They've got trucks -- they don't want trucks standing still as the economy gradually improves. So I think overall, it's a capitalistic system, works as pay goes up, you'll get more people that at one time, say, well I'm not interested, saying that is attractive for me. It is a good company, let me get into that. So if the pay goes up, more people will get interested and good people, that's the key. Good professional drivers.

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

Well, I think you mentioned in the past sort of premium trucks as kind of a driver retention tool, so I'm just trying to balance that with the fact that their cost might be going up a little bit and...

Mark Pigott

Absolutely. No, I mean it's a very good point. It's sort of a given in our strategy and also in the strategy of many of our customers to have a good-looking Kenworth, Peterbilt or DAF truck out there and use that to pull people in, and that continues to be an element of the recruiting. But you also have to have the overall compensation package, which I think many of our excellent customers continue to review on a regular basis. So you put the package out there. It's attractive. You're going to have more people interested in taking the job.

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

And then just one clarification, I think you've given sort of some guidance numbers on R&D for 2012 or -- I mean, 2011, of $275 million to $300 million. Are we looking at the sort of same, sort of percentage of sales going out a year for 2012?

Mark Pigott

Well, we probably won't see the percent of sales, but I think the dollars should certainly be in that range because of the strength of PACCAR and an excellent balance sheet, which I know you've noted, and we appreciate that. We're trying to accelerate new products, new processes, new systems and stay at the forefront, and as I mentioned, it was a nice recognition by Forbes Magazine on being one of the world's top 50 innovative companies. You've got to keep innovating. So I think the dollars are probably in line.

Operator

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

Henry Kirn - UBS Investment Bank

Wondering if there was any way you could parse out the difference in your North American industry forecast between the supplier constraint and just the general macroeconomic uneven recovery?

Mark Pigott

Probably that would be a much longer conversation. I'm not sure that either of us would be completely happy with the outcome of that. It's all bundled in, and it's just what our team works with every day. Yes, I know the question, but it's very complicated.

Henry Kirn - UBS Investment Bank

So from your standpoint more of a tweaking based on being 3 months further into the year?

Mark Pigott

Yes, exactly right. You've followed us and the industry long enough to -- in every 3 months, we get a little bit smarter on where the industry is going to go, and of course, we've also seen dramatic changes, not these last 3 months but in previous years. A lot of things can happen in 3 months. So I think Ann or some of your other colleagues mentioned, we'd love to get to 180,000, 200,000. That's our estimate but for the first half, it was 83,000 retail sales.

Henry Kirn - UBS Investment Bank

Makes sense. And then as you manage the business, as we go through this transition phase of the cycle, what do you see as the margin puts and takes that are in your hands to manage in the second half of the year?

Mark Pigott

Well, obviously, how we run the company, the efficiency of productivity is completely in our control, and I'm very proud of the team. They've done an outstanding job forever. And we'll continue to do that. The working with suppliers, I think, as a number of them get on firmer footing, which all of them want to be, and as we're able to help them out, whether it's to say making a capital investment or just helping them lay out factories or work with their Tier 2 or Tier 3, there may be some benefit in a long-term arrangement. And I think, the biggest thing that's probably out of our hands is the general economy, and I know a lot of the analysts who've covered the industry, particularly through the heydays of '06, '07 and '08. And I think we need to recognize that a lot of the margins being generated then, the whole economy was just really doing well. I'm not talking about trucking. I'm talking about just the general economy. It was buoyant, there was a lot of confidence, housing was, gosh, probably 1.8 million housing starts in that timeframe. We're now at about 500,000 to 600,000, so it's down 60%, 70%. Car sales were bumping 15 million, 16 million, 17 million. There was a lot going on, and so margins for every industry were pretty good. Customers were able to pass along costs as they came in. And now we're in a different economic cycle. So if you guys can tell me when we're going to get back to '07, '08 general economic buoyancy, that will be great.

Henry Kirn - UBS Investment Bank

We'll keep waiting for it.

Mark Pigott

We're working on it. We've got great results and great teams and a lot of products that we're very proud of and great customers, so say, $240 million this quarter versus $100 million a year ago, I think a nice reflection for everybody's hard work.

Operator

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

Andrew Casey - Wells Fargo Securities, LLC

Couple of questions. First, around Europe, and then I was wondering about your broader view, given all the government uncertainty, but on the European outlook, suggest the second half's up somewhere in the neighborhood of 10% to 20% from the first half. Is in your opinion, does that on an industry basis kind of follow normal quarterly seasonality, or is it more of a uniform strengthening? Kind of the basis behind that is we've heard some industry chatter about potential looseness in the industry backlog later this year.

Mark Pigott

Yes, I've seen 1 or 2 of my competitors commenting. I think what we're seeing, and obviously we can't mention too much about that, but what we're seeing at DAF in Europe is some increased share. And increased share in a bigger market than a year ago, so that translates for us more units. And growing in central Europe, probably [ph] Southern Europe on a general economic platform, has got some challenges, which we know all about. But DAF, I think it's got some upward potential and the overall industry, 10% to 20% I think that's in line. We're comfortable with that.

Andrew Casey - Wells Fargo Securities, LLC

Okay. And then the broader question, I'm wondering if you've seen any short-term customer capital investment deferral related to all the government uncertainty in either Europe or the U.S., understanding U.S. is more -- right now more of a replacement demand.

Mark Pigott

Yes. I think in Europe, and this is something that you would know as well as any of us, the Portugal, Spain, Italy, the usual group, Greece not so much because it's not such a big truck market, but people are thinking about what they're going to do. We do reasonably well. We typically, we're #2 in market share in those markets, but those markets are not big. So the benefit for us is the strong economic performance of Germany. We do well in the U.K. We have for decades, France, good market, we're now #2 in France behind one of our competitors. And Central Europe and some into Russia, so that's good. And then selling some components, whether it’s a cab or an engine into Asia. People really enjoy and appreciate the DAF quality and attention to detail. So it's smaller numbers, but that's improving. And you say in North America, we're still in the replacement side and depending on what replacement cycle number you look at, and for a number of years, we said it's about 220,000, 225,000, and we're not really to that level yet. We're probably still a little below replacement, which if that holds true and the general economy improves, bodes well for our industry.

Operator

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

Joel Tiss - Buckingham Research Group, Inc.

The production ramp-up costs in the quarter and probably in the first half of the year, it's probably taken a little bit out of the margins. Is that likely to persist, or you think that's going to be a little more front-end loaded?

Mark Pigott

Well, I don't think it has that much impact. Obviously, we're very used to going up in production and probably going down in production because we've been doing it for a long time. PACCAR is very efficient. I think if anything, you can say it's front-end loaded, but I don't think it's really much to talk about. Our factories are at strong build levels, and we'll probably have 50% more in-house capacity in terms of the efficiency just over the last 6, 7, 8 years. And we have long-term employees working there, great engineering, great materials people. So going up, they were ready to go up and build, right? And they're ready to do more if the market demands it.

Joel Tiss - Buckingham Research Group, Inc.

Okay. And one of your esteemed Italian competitors yesterday was talking about European incentives starting to hurt the market a little bit there and didn't exactly say but were hinting that demand is weakening a little bit. Can you just give us a little bit more of a focus on what's going on under the -- behind the scenes in Europe?

Mark Pigott

I'm not sure what European incentives. We don't get any, so maybe somebody is getting something that we don't. I am not sure who you might be talking about, but if I connect the dots, so to speak, we’re selling at the premium end and some others may not be at that end. So I'm not sure what you mean by incentives.

Joel Tiss - Buckingham Research Group, Inc.

Okay. Yes, they were talking about financing. The dealers are getting aggressive on financing and giving attractive terms to try to move products.

Mark Pigott

Well, of course, you know PACCAR financially. You know what we do on that. We've had good results, and we're having improved results as we shared in the press release. Now I don't know. I mean, our dealers are independent. But they use PACCAR Financial, and so I'm not sure what they're talking about. We're doing well. Our share is good. Quality is great, and we keep working on it.

Operator

Your next question comes from the line of Steve Volkmann of Jefferies.

Stephen Volkmann - Jefferies & Company, Inc.

Trying to think about conceptually I guess the difference between some near term, it sounds like supplier kind of issues, and I think you're kind of saying that you expect those to be kind of working their way through the system and maybe behind us as we get toward the end of the year...

Mark Pigott

Yes, let's say through the rest of the year. We don't want to get too ambitious here.

Stephen Volkmann - Jefferies & Company, Inc.

Okay, fair enough. But that fades over the next couple of quarters I guess. But I guess I'm thinking more longer term. You guys have always done a pretty good job through various cycles of offsetting whatever the market throws at you with productivity increases and still delivering a pretty reliable kind of margin through a cycle. And I guess I'm trying to figure out if you think that, that's actually changed now. Has the supplier -- have your suppliers just -- has the balance of powers tipped enough so that you're not going to be able to do that anymore? Or is it...

Mark Pigott

Well, it's a very good question. I would say that probably PACCAR has the best relationship with suppliers. So that is the same excellent relationship we've had for decades. I think what the industry, and it's for the whole industry and everybody being affected is the increasingly expensive cost associated with meeting the different EPA regulations. It's all been in the press, and this is nothing new. But essentially, every 3 years, '02, '04, '07, '10, '13, there are significant technology enhancements that need to be developed. And the customers benefit ultimately. Certainly the world benefits as we have a wonderfully low emission vehicle. But the last -- we've been in a recession for 4 years in our industry, since '07. Nobody likes to talk about it, but that's the facts. And so for 4 years, which really covers 2 major cost milestones, if you will, '07 and '10 where customers are saying, we know you have $15,000 worth of costs, but I can't pass that long. And as a consumer, I can appreciate that. So that's, I think, if you pull that out, our margins are excellent. I'm very proud of the team. We've got great margins considering the environment we're in. And we're working hard through new products, new markets, aka Brazil, new developments in all elements to, first of all, increase our net income because that's really what our goals are. And that should result in some margin enhancement. But that's the macro view of the world we live in.

Stephen Volkmann - Jefferies & Company, Inc.

Okay, that's helpful. And any comments about Eastern Europe, what's going on over there these days?

Mark Pigott

As far as the truck market, we've had good success, and they tend to be still some low-cost manufacturers. We have some customers that are either adding additional distribution centers or actually relocating from traditional Western Europe markets, but Europe is a complicated scenario right now as you can see from some of your studies, particularly on the financial and political side. So we're in all the major markets and continue to add dealers and the trucks do very, very well. So whatever happens, I think DAF is well positioned.

Operator

Your next question comes from the line of Tim Thein of Citibank.

Timothy Thein - Citigroup Inc

I just wanted to come back on the truck gross margin. And you highlighted earlier, you saw a nice -- I think you're up to 8.1% in the second quarter. But still well as you look back since you started disclosing this back, and again, I know there's a lot of differences between '08, but you're at double digits there on a similar level of delivery. And again, as you pointed out, you've got -- presumably mix isn't as favorable as it was then, and you've got the new products and investments and all these other headwinds. But if we work through this kind of near-term supplier issues, do you think by 2012, given continued improvement in the overall market, do you think you can realistically get to a double-digit level there on the truck side?

Mark Pigott

We really can't forecast that. And the, as I shared previously, a lot of the cost, it's not supplier. It's regulatory. That's the impact. Those are not going away. In fact, they will continue to increase because although 2013 will be not as expensive, there will be costs associated with it. And so that's the difference.

Timothy Thein - Citigroup Inc

And presumably, there's a bit of a hit on the percentage margin relative to the dollar margin, I understand as well.

Mark Pigott

Yes, that is correct.

Timothy Thein - Citigroup Inc

Okay. And switching gears, just in terms of the overall company cash generation by our math, anyway, PACCAR had the second quarter of negative free cash flow due to higher finance receivables, as well as build an industrial working capital. Do you expect as you look in the back half of the year, do you think this reverses or just is higher level of growth going to necessitate a higher level of overall working capital?

Mark Pigott

What major are you using to calculate your figure?

Timothy Thein - Citigroup Inc

We're just using total operating cash flows less CapEx, and that includes equipment on operating lease, which is was negative $310 million in the second quarter, negative $465 million in the first.

Mark Pigott

We had positive operating cash flow of $792 million, and we would expect, as many of our customers use the leasing product, that we will continue to invest in operating leases going forward. So the trend in that metric will probably be similar as we look into the second half.

R. Armstrong

Yes, the operating leases are funded by debt -- a lot of those funded by debt in our finance operations and finance leasing operations. So that's just the way you approach that free cash flow calculation.

Timothy Thein - Citigroup Inc

Yes, fair enough. Okay.

Mark Pigott

We think it's positive. Obviously, we need to talk to you about it.

Operator

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

Jamie Cook - Crédit Suisse AG

Just 2 quick follow-up questions. One, Mark, unless I've missed this, last quarter during Q&A you sort of alluded to where gross margins would trend out for the year. And I think you said it’d be somewhat flat for the year and average flat with Q1 levels. Can you just give us your updated thoughts on that? And then just second question, can you just give us an update on sort of utilization trends that we're seeing at the Columbus, Mississippi, engine plant?

Mark Pigott

Gross margins?

Jamie Cook - Crédit Suisse AG

Yes, gross margins first for the year.

Mark Pigott

Gross margin figures for the quarter or the first half?

Jamie Cook - Crédit Suisse AG

Well, no, for the year. I mean, last quarter in Q&A, Mark answered, someone asked a question about where gross margin should trend for the year, and he sort of said probably comparable to Q1 levels. I think people were, unless I misinterpreted, were expecting a 13.5% operating -- I'm sorry, gross margin for the year.

Mark Pigott

We would expect our gross margins for the year to be -- combined between truck and parts to be probably trending more towards the June 30 level.

Jamie Cook - Crédit Suisse AG

Okay, so down. And then just, last, can you just give us an update on the Mississippi?

Mark Pigott

On Mississippi? Yes, it's going well. I'd say we have about 25% year-to-date market share in the Kenworth and Peterbilt. We're starting to have customers on some repeat purchases, and so in terms of utilization, we still have -- or capacity utilization, we have a lot of capacity left, and certainly, we can bring in additional machines if we feel that we need additional capacity. So we're in very good shape.

Operator

Your next question comes from the line of Tim Denoyer of Wolfe Research.

Timothy Denoyer - Wolfe Trahan & Co.

A question on the timeframe of some of these supply constraints easing. With your investments in suppliers, do you have a sense of -- I think you said at one point earlier in the call perhaps year end we'll start seeing a lot of these easing?

Mark Pigott

I think that's a fair comment, I think, from an overall perspective, and that's for the whole industry. Obviously, everybody making something in the automotive sector is having some impact. So we think it should be improved. Next year, we'll probably bring a different group of suppliers that will maybe have some challenges, but that's what we do. And I think depending on how the general economy unfolds, which will be interesting, over the next week, to see how the United States of America deals with a few issues, it should be reasonable.

Timothy Denoyer - Wolfe Trahan & Co.

Okay. And then switching to Brazil quickly, can you talk about your long-term outlook for that market? And given the rates it's producing today, it seems like there's a few things supporting that market in terms of an emissions change coming up and some tax incentives. Do you expect -- would you be surprised with a significant drop in that market next year, and where do you see that going longer term?

Mark Pigott

Yes. Well, longer term, we see it going up. And whether it's 5%, 8%, 10% per year, which we certainly have seen over the last decade or so. Brazil is a large country. 200 million people in an area the size of Continental United States. They've got some major infrastructure programs that are well underway. Olympics, World Cup are 2 major ones but just a general improvement in their highway system. You've got some very positive government policies that are allowing quite a few millions of Brazilians to move up the social scale to middle-class. And as a result of that, you've got increased demand for housing and all the goods that go along with housing. Now balancing that, there are challenges, as you would find for any rapidly growing country, whether it's interest rate, inflation, currency versus other currencies, and that's something that I'm sure the government is working on very hard. So will it have some ups and downs in the truck market? Certainly. We've seen it in every other market, and just as an aside, the Chinese market, which continues to be the largest truck market in the world, greater than 15 tonnes, so let's call it the medium- and heavy-duty trucks, it could be down 10% this year. And we've been going to China, and gosh, for decades, if you would talk with any of the Chinese manufacturers even a year ago and said that you think things are going to go down, you would have probably been -- there would have been a long silence because everybody there is geared at 7%, 8%, 9%, 10% growth, but the market will be down in China 10%. And let's put that in perspective. That's over 100,000 trucks down, which is more than 1/2 of the U.S. and Canadian market. So those are significant changes, but that's the way the world is. It doesn't always go up, and we've been doing this for a long time, so Brazil may have a lower truck market, but I think overall, it looks very good. They don't have much of a rail system, a very limited rail system. You've got a growing population, a population moving towards more middle class and still very exciting, very attractive marketplace for trucks.

Timothy Denoyer - Wolfe Trahan & Co.

Okay. And then just going at the margin question from a different perspective, I certainly appreciate that the emissions costs are the main driver here, but is there any impact from product mix as truckers maybe shift towards the aerodynamic trucks as well?

Mark Pigott

No. No, no, the aerodynamic trucks, which I would call the -- that's the new traditional. You can quote me on that. Everybody understands that fuel, diesel is at $4, $4.50, most likely it could go higher. We're certainly the lowest fuel cost of major markets. And no, I think the margins, there's really not a mix impact in terms of margins.

Operator

Your next question is from the line of Andrew Obin of Bank of America Merrill Lynch.

Andrew Obin - BofA Merrill Lynch

Just going to question back on the margin question, and I know you look at your set of peers a certain way, but if you look at companies that you don't necessarily consider your peers, like Caterpillar or Deere or even C & H, if you look, they are able to earn same or higher margin on same volumes. And in your case, if I go to 3Q '08, 1Q '07, 1Q '06, we had manufacturing revenue of 37 and earnings quite a bit higher, and those companies are also facing supply constraints, massive production ramp ups and actually, they are putting in a lot of money into engine technology. In fact, they're more vertically integrated than you are. So what is happening here?

Mark Pigott

Well, first of all, they have a completely different supply base. Their industry, while it certainly has ups and downs, to be fair, didn't have major bankruptcies in the industry. And if you peel it away, and they're excellent companies, excellent companies you've mentioned.

Andrew Obin - BofA Merrill Lynch

I'll throw Volvo in the mix, too.

Mark Pigott

A bigger percent of their business is coming from outside of North America. So we can't really -- we're not in this to compare how we're doing. This is how we're doing. PACCAR is doing very, very well, and we'll continue to do well and proud of the team.

Andrew Obin - BofA Merrill Lynch

Let me just ask a modeling question then. I think you said your production rates entering 3Q will go up 5%, 10% on a sequential basis?

Mark Pigott

That is correct.

Andrew Obin - BofA Merrill Lynch

Does this include a production on a sequential basis that one of these months will be down relative to where we exited in July or August could be down relative to May, June when your production in North America because if I do the math, that's what it seems to imply.

Mark Pigott

Well, we have a 2-week schedule summer shutdown at DAF in Europe. So that obviously has an impact.

Andrew Obin - BofA Merrill Lynch

And North America?

Mark Pigott

No. Steady as she goes.

Andrew Obin - BofA Merrill Lynch

So no production declines in North America in July?

Mark Pigott

Well, I can't say. We're still in July and working with suppliers, but we're looking for overall increase in production for the quarter.

Operator

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

Kristine Kubacki - Avondale Partners, LLC

I was just thinking that given the backlog over the overall industry and the supply constraints, that pricing would be moving up a little bit more aggressively, I guess, across the industry, and I understand that the fleets being the big buyers right now are driving a hard bargain, but are you seeing anything in your competition that is maybe utilizing pricing out there more than you'd like them to be?

Mark Pigott

Kristine, I've been doing this for 32 years, and PACCAR has always been the premium priced, premium quality supplier to the industry, and that's what we focus on. What our competitors do with their pricing is always just something we live with.

Kristine Kubacki - Avondale Partners, LLC

I thought I'd try. Then I guess my final question is are your build slots for North America are full for the full year, especially in the fourth quarter or do you have any room there if the supply chain can handle it?

Mark Pigott

We have some openings in the fourth quarter.

Kristine Kubacki - Avondale Partners, LLC

How about the third quarter?

Mark Pigott

In the third quarter, we're pretty much filled up, yes, but if you want that truck, we can get it to you in the fourth quarter.

Operator

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

Ben Elias - Sterne Agee & Leach Inc.

I just wanted to follow up on your comments about your European forecast, you took that up. I was wondering where you're seeing strength or weakness geographically and what's really driving that?

Mark Pigott

Well, I think that's a good question. It's fairly straightforward obviously. Northern Europe is going to be stronger than Southern Europe. And I think that's -- Central Europe is pretty good. I was just in Central Europe a few weeks ago, and the economies are in reasonable shape. DAF, you may not know this, but DAF is number one in share in Hungary, Poland and the Czech Republic. And those economies are pretty good, so that's really sort of the short answer.

Ben Elias - Sterne Agee & Leach Inc.

Okay, but is the growth in those new economies sort of outpacing the recovery or replacement in the old economies? Or are you seeing better replacement of lead replenishment in the more Western and Northern countries?

Mark Pigott

Well, I think typically you've seen a little bit faster GDP growth in Central Europe. With the unevenness and the challenges facing the Eurozone right now, a lot of these are starting to vary, but the markets where we're strong, and of course, we're quite strong in all the markets. We're gaining share even in a down market. I'd say the good thing about DAF is we're in all those major markets and able to benefit. Obviously, Germany is the big economic engine for all of Europe and perhaps U.K. has a good economy although having some challenges now.

Ben Elias - Sterne Agee & Leach Inc.

And you're not facing the same supply chain issues in Europe?

Mark Pigott

That is correct. That's a very good point.

Ben Elias - Sterne Agee & Leach Inc.

Okay. Second question, it's been a while since you introduced disc brakes as standard equipment on I think the Peterbilt line. Have you been able to...

Mark Pigott

This year. It was this year.

Ben Elias - Sterne Agee & Leach Inc.

This year. Okay. Well, have you noticed any change in customer purchasing when it comes to these products on the Peterbilt side or...

Mark Pigott

I think customers are very happy with them. Obviously, they're standard in Europe. And so the recognizable benefits of the shorter stopping distance is better achieved by the disc brakes. And I think over time, the North American industry will be moving more towards disc brakes.

Ben Elias - Sterne Agee & Leach Inc.

Okay. But you're not sort of putting them on the Kenworth trucks, are you?

Mark Pigott

They're selectively as an option if that's what you'd like.

Ben Elias - Sterne Agee & Leach Inc.

Okay. And what's the adoption rate there?

Mark Pigott

I don't have that exact number for you. But if you’d like to order one, I can get it for you.

Ben Elias - Sterne Agee & Leach Inc.

The information? Or the brakes?

Mark Pigott

No, the actual truck.

Operator

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

David Leiker - Robert W. Baird & Co. Incorporated

Just 2 last items here on margins, I want to come out at a little bit different. If we look at the ability to recover the price of the emission changes, is that something that you think is unable to be recouped at all in the cycle, or do we just need to get volumes back up to 275, 300, 325 and you're able to recoup that? What's your thought on that?

Mark Pigott

Well, as we've mentioned a number of times, as the general economy improves, and if that drives a market to 300, which would be very significant increase, I would say that probably reflects a much stronger general economy, which we have seen in the past, usually allows higher margins in a whole host of industries, and that would be a good thing.

David Leiker - Robert W. Baird & Co. Incorporated

Okay. And then the second item that's related to that, then given how difficult the downturn was on the supply chain, in an environment where we would see volumes march up like that, do these supply chains issues become a constant issue over 2- or 3-year period as we get a recovery? Or are these things that can get fixed and then things are okay?

Mark Pigott

Well, even in boom times, and we certainly have seen many of those, each company has its own cycle, if you will. And in boom times, we've seen companies go out of business. We've seen acquisition of supplier companies. But those are boom times that gets exacerbated obviously with slowdown. And remember, our industry went down 70%, 7-0 from the peak to the trough. That is pretty tough. So I think companies that have made it through on the supply side would love to have higher volumes and but each company makes its own decision, so when we say the supplier industry, we're sort of generously lumping everybody together but within that 800 or 1,000 different suppliers, each one has its own story. If there's a lot more volume for an extended period of time, I think it's fair to say the general supplier industry will do better. But that doesn't mean there aren't 1,000 different stories.

David Leiker - Robert W. Baird & Co. Incorporated

And then on the margin side, are you seeing any margin impacts from either efficiency issues, productivity issues, launching the MX engine, anything along those lines that are drags on margins as well?

Mark Pigott

No. In fact, quite the opposite. The efficiency, PACCAR being a leader on Six Sigma and 5S is actually making a positive contribution to the truck margin, which I've said has gone from 5% to 8.1%. So I give the plants and our teams there a lot of credit for their contribution.

David Leiker - Robert W. Baird & Co. Incorporated

Okay. And then lastly, with bringing the MX engine over here and the new plant, is that a drag on margin now in terms of where your manufacturing levels are and...

Mark Pigott

No.

David Leiker - Robert W. Baird & Co. Incorporated

Importing products from Europe to make that engine, does that have any negative impact?

Mark Pigott

Not really. No, it's a benefit. It's a benefit to have our own engine. Our customers love it. We love it, and we're looking for very exciting ongoing development.

David Leiker - Robert W. Baird & Co. Incorporated

If you're running at the penetration rate that you are, wouldn't you have some manufacturing inefficiencies or not?

Mark Pigott

No. Because if you were -- toured the factory, I can't remember have you toured our Mississippi factory?

David Leiker - Robert W. Baird & Co. Incorporated

I have not been through it yet.

Mark Pigott

Okay. Well, when you do, I'm sure you'll love it. But we purposely designed it so that we could bring in by component at different production levels the machinery we needed. So you have different thresholds of production. So we anticipated that we'd be at approximately these levels. We have machinery to support it. As the market increases, we certainly have the room inside the factory to bring in the next threshold amount of equipment. So it's all aligned.

Operator

Your next question comes from the line of Barry Haimes of Sage.

Barry Haimes - Sage Asset Management

My question has been answered.

Operator

Your next question comes from the line of Brian Sponheimer of Gabelli.

Brian Sponheimer - Gabelli & Company, Inc.

Two quick questions. Just would you say that the supply chain issues got better as the quarter progressed?

Mark Pigott

As the quarter progressed, generally, probably a good statement I guess.

Brian Sponheimer - Gabelli & Company, Inc.

Okay. And just looking at -- we've spent plenty of time on the supply chain during the call, and I appreciate the clarity there, but you've talked about economic uncertainty, but you also talked about basically having your build slots filled for the balance of the year.

Mark Pigott

I said the third quarter.

Brian Sponheimer - Gabelli & Company, Inc.

Okay. So there's the -- if I'm thinking about the 20,000 unit drop in the range for the balance of the year, you're thinking that the fourth quarter is really where you may see some order cancellation and the potential to have some drag on volumes?

Mark Pigott

No. It's a good question, but not quite right. What we're saying is the industry won't build in retail as many as we thought 6 months ago. So we're not talking about cancellations. We're just talking about fewer trucks will be built and retailed.

Brian Sponheimer - Gabelli & Company, Inc.

Okay. I think we're thinking about the same thing, but...

Mark Pigott

There's no cancellations.

R. Armstrong

So the retails were 83,000 in the first half, and to get to our range, they have to be roughly 110,000.

Mark Pigott

So they have to go up 30%. So it's completely the inverse of your question.

Brian Sponheimer - Gabelli & Company, Inc.

Okay. So the lead time right now is less than 3 months as far as if I wanted to purchase a truck.

Mark Pigott

Let's call it 3 months.

Brian Sponheimer - Gabelli & Company, Inc.

Okay. All right. Clearly, we’ll have more clarity on this by September?

Mark Pigott

Absolutely.

Operator

Your next question comes from the line of Michael Regan of Levin Capital.

Michael Regan - Janus Capital

Well, first, I’ll start with a comment. Part of the confusion around free cash flow is while you've made some great steps in terms of the income statement and balance sheet in terms of breaking out the manufacturing from the finance business, it would really help if you did the same on the cash flow statement, and then you wouldn't get those questions.

Mark Pigott

We like the questions, but thank you for your insight. We appreciate it.

Michael Regan - Janus Capital

Okay. And more importantly, I think you’ve made it very clear that and you said it that the issue around gross margins has more to do with regulatory costs than it does with supplier. To me, that means, and quite frankly, Mark, I've never seen a machining business, heavy machining, heavy machinery that has better gross margins than an assembly business. So to me, what's different is as you ramp up the engine production in Mississippi, while your customers love it and all those things are good, on a gross margin level, it's got to be lower, maybe not significantly, but it's got to be lower than the traditional assembly businesses. And that might change over time when spare parts and parts become a bigger part of the business. But at least for right now, it's more of a secular issue as that mix shifts than it is cyclical relative to where we are in production or where we are with suppliers.

Mark Pigott

In the numbers we're talking about, it's just not that big an impact.

Michael Regan - Janus Capital

Okay. But again, the only thing that's different about PACCAR today versus PACCAR of the '08, '09, '10 where other people wanted to compare like-for-like volumes or revenues to today and competition that's had close to peak margins versus you guys, the only thing that's different is, today, you're a bigger manufacturer, heavy manufacturing where you always used to be -- the beauty of the PACCAR business model was assembly. And to me, that's the only thing I can see. So that's why I believe it's more of this secular shift towards making your own engines.

Mark Pigott

Well, actually, in '08 '09, of course, DAF was also a part of PACCAR, an important part of PACCAR. And they're vertically integrated. So that really hasn't shifted. What's changed is in '07, '08, it's a very strong economic environment, a lot of people making a lot of money. Margins were high. And you didn't have the overlay of these large costs. So if we get back to a GDP of 3%, 4% growth here and the market is as one of your fellow analysts said at 300,000, I would expect there will be some improvement in the margins.

Michael Regan - Janus Capital

But to your point about the overlay of large costs, there are larger costs associated with engine regulation, engine changes that are needed to have to be invested in than there are with the overall truck, and I think that supports my thesis around gross margins for the engine business versus assembly.

Mark Pigott

Well, I think we don't agree, but I appreciate your viewpoint.

Operator

Your next question comes from the line of Patrick Nolan of Deutsche Bank.

Michael Levin - Deutsche Bank AG

It's actually Mike Levin filling in for Pat this morning. Just had a minor follow-up. I just wanted to know if your comment around chassis components, the shortage there was specifically relating to you guys or just the industry in general?

Mark Pigott

I'd say almost all of these supplier components relate to the industry.

Michael Levin - Deutsche Bank AG

And it's also a factor for you as well, would you say…

Mark Pigott

Yes, sure. We're part of the industry.

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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