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Executives

Robin E. Easton - Treasurer

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

Michael T. Barkley - Principal Accounting Officer, Vice President and Controller

Ronald E. Armstrong - President and Principal Financial Officer

Robin Easton -

Analysts

Andrew Obin - BofA Merrill Lynch, Research Division

Andy Kaplowitz - Barclays Capital, Research Division

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Jerry Revich - Goldman Sachs Group Inc., Research Division

Henry Kirn - UBS Investment Bank, Research Division

Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

Joel G. Tiss - Buckingham Research Group, Inc.

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division

Jamie L. Cook - Crédit Suisse AG, Research Division

Adam William Uhlman - Cleveland Research Company

Seth Weber - RBC Capital Markets, LLC, Research Division

Brian Michael Rayle - Northcoast Research

Patrick Nolan - Deutsche Bank AG, Research Division

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Robert Wertheimer - Vertical Research Partners Inc.

Timothy J. Denoyer - Wolfe Trahan & Co.

Michael Regan

PACCAR (PCAR) Q4 2011 Earnings Call January 31, 2012 12:00 PM ET

Operator

Good morning, and welcome to PACCAR's Fourth 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 E. 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 C. Pigott

Good morning. PACCAR reported record quarterly revenues and strong net income for the fourth quarter of 2011. PACCAR's fourth quarter sales and Financial Services revenue were $4.85 billion compared to $3 billion in the fourth quarter a year ago, a 58% increase. Quarterly net income increased to $328 million, a 92% increase versus the $170 million earned a year ago. I am pleased to report that this was the best quarterly profit since the first quarter of 2007, 5 years ago.

Earnings per share were $0.91 in the fourth quarter, nearly double the $0.46 earned in the fourth quarter of 2010. PACCAR's 2011 yearly net income of $1.04 billion was the fourth highest profit in company history and marked the company's 73rd consecutive year of earning a net profit. Quite a record. I'm very proud of our 23,400 employees who have delivered industry-leading products and services to our customers worldwide.

Increased truck deliveries, higher aftermarket sales and growing Financial Services business worldwide contributed to PACCAR's increased profits. Our customers in North America are benefiting from increased freight tonnage and higher freight rates, which is generating good profitability for their business and enabling them to replace their aging fleets.

In the U.S. and Canada, Peterbilt and Kenworth achieved a record Class 8 market share of 28.1%. Kenworth Mexicana achieved a record Class 8 market share of 45% in Mexico. Europe's 2011 industry registrations were up 33% compared to 2010, and DAF achieved a record 15.5% share in the above 15-tonne market.

You all read the newspapers or do it electronically, and you can see that economic uncertainties in recent months in the Eurozone have resulted in lower industry truck orders. As result, DAF has reduced build rates by a total of 20%, similar to many, in fact most of its competitors, since last November. The good news is that freight tonne miles in Germany, which is the largest market in Europe, is the highest in 5 years, which we hope will translate into increased truck orders as the year progresses.

PACCAR delivered 41,000 trucks during the fourth quarter, 69% more than the same period last year. Market pricing has improved, and coupled with increased plant utilization has generated higher quarterly truck gross margins of 9.3% in the fourth quarter compared to 6.7% a year ago. PACCAR does expect to deliver slightly fewer trucks in the first quarter compared to the fourth quarter due to the lower production rates at DAF.

U.S. and Canadian industry retail truck sales were 197,000 units last year, in line with our estimates, and we are estimating that they will improve to a range of 210,000 to 240,000 units this year, assuming ongoing replacement of the aging truck fleet and some economic growth. In Europe, the greater than 15-tonne market was 244,000 units in 2011, and it's anticipated the European industry truck sales this year will be in the range of 210,000 to 240,000 units. While we welcome improved markets in the U.S. and Canada, it's still a far cry from the 360,000 units which were the record about 5 years ago.

The company generated over $1.5 billion in cash from operations in 2011. And we're very proud to say that we returned over $800 million to stockholders in dividends and share repurchases. Capital additions totaled $538 million. PACCAR plans to continue to make significant investments in its business this year. Capital spending is estimated to be $450 million to $550 million, and research and development will be in the $275 million to $325 million range.

More good news, PACCAR's SG&A percent of 2.6% was a quarterly record, reflecting excellent productivity and cost controls throughout the company and I thank all our wonderful employees for their hard work.

PACCAR is increasing its investments to expand its geographical footprint and build on its technology and productivity leadership. I think many of you saw the press release of the groundbreaking for the construction of the new DAF assembly facility in Ponta Grossa, Brazil, and we have begun construction of the factory and look forward to building trucks in Brazil in the middle of 2013.

PACCAR did deliver a record number of Kenworth and DAF trucks in 2011 in the Andean region of South America, where we've been present for 40 to 50 years.

Switching continents, following the establishment of the PACCAR Technical Center in Pune, India, DAF participated in the Delhi Auto Expo, India's largest commercial vehicle show. That was about 3 weeks ago. And many of you have visited the European and North American truck shows. I would just tell you that if you go to the show in Delhi, over 1.8 million visitors attend that show over a 2-week period. In fact, they limit attendance to 100,000 per day.

China continues to be the largest truck market in the world. However, industry heavy truck sales in China last year were down about 13% due to lower government incentives. PACCAR did expand its Shanghai purchasing office last year and increased the level of component purchases from Chinese suppliers.

Finally, PACCAR established a new sales office in Moscow, Russia last year and in December, we opened a new parts distribution center in Moscow. These actions are facilitating DAF's continued growth in the expanding Russian and CIS truck market as well as Eastern Europe.

PACCAR Financial Services revenues were $266 million in the fourth quarter compared to $244 million a year ago. PACCAR Financials' fourth quarter pretax income improved to $67 million compared to $50 million in the fourth quarter of 2010. This was the highest quarterly pretax income since the fourth quarter of 2007, and was achieved due to better finance margins and portfolio growth. Past dues were at a low level of 1.5%.

So in conclusion, I'm pleased to say that PACCAR is well positioned to deliver the highest-quality products and services to our customers as we grow in traditional and new markets.

Thank you and I look forward to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Andrew Obin from Bank of America.

Andrew Obin - BofA Merrill Lynch, Research Division

Just a question in terms of how we should be thinking about operating leverage at PACCAR going forward. Just looking at this quarter, I would've expected that we got more bang for the buck, given the improvement in Denton in Chillicothe, but operating leverage was similar to the third quarter. So is that the new run rate for operating leverage at PACCAR, or there are some period costs that are going to go away going to next year?

Mark C. Pigott

I think the leverage is very good at our facilities. Obviously, there were -- we pride ourselves being the most productive manufacturer in our industry. And so I say going forward, or I don't know what you mean by that, but maybe this year, probably be in the same range.

Andrew Obin - BofA Merrill Lynch, Research Division

Well, but my only question is that historically, coming out of the bottom of the cycle, even adjusting, and I understand that there was a mix adjustment there was a lot of stuff going on, operating leverage at PACCAR was sort of at high teens, low 20s, and this is not to say that the results you have are bad...

Mark C. Pigott

No, they're excellent, as a matter of fact.

Andrew Obin - BofA Merrill Lynch, Research Division

That's what I thought you were going to say. And having said that, in the past you sort of -- there was more oomph, so to say, coming out of the cycle and this time around is just -- you have said there, earnings pickup.

Mark C. Pigott

Yes, well I'm not sure that the industry is coming out of the cycle as has been talked about. We're essentially at a market now of 200,000 units and if you go back 5 or 6 years, you'll see market's 250,000, 280,000 300,000, 340,000, 360,000. Those are not quite double, but 50%, 60%, 70% higher. And those are -- so it continues to be a great market. We enjoy it, but it's surely not to the heyday that it was 5, 6, 7 years ago.

Andrew Obin - BofA Merrill Lynch, Research Division

And just a short question, are there any period costs associated with the start-up of the Brazilian plant at this point?

Mark C. Pigott

Not significant, no.

Operator

Our next question comes from the line of Andy Kaplowitz from Barclays Capital.

Andy Kaplowitz - Barclays Capital, Research Division

Mark, your guidance for truck sales in U.S. and Canada is right smack in the middle. It's at replacement demand. But when you talk to your customers, is there any evidence that they are going to start expanding their fleets? What I'm trying to figure out is if there's really any upside here, given that the last few months have been a little stronger than some people would've expected in the U.S.

Mark C. Pigott

Yes, good question. Well we were just with a large group, sort of a cross-industry mix, if you will, last week and I'll just share a few thoughts. First of all, the customers that are operating today have survived a number of severe recessions over the last 10, 12 years. So they're very good operators. They know their business, they're flexible, they're adaptable. So our customers now are making good profitability. A number of them that are involved in the oil and gas boom are doing very well. And what's interesting, we find a number of customers that typically have not been in that business are, I'd say, gravitating to that or is at least allocating a portion of their resources to explore being in that business. You're now seeing a little bit of improvement in home remodeling, which has been pretty dormant for the last few years. And you can track that through some of the big-box retailers that focus on home remodeling. That can be good for the Trucking business. The technology side, the engine side, we got EPA 13 coming up in about 11 months. We expect that the engines that we will provide, because of things like common rail, will generate a improved fuel economy of a couple percent. I think that will get people interested in upgrading their fleets. And then finally, the age of the part is still 6, 7, 8 years old. And depending on which statistic you look at, but it's certainly one of the oldest in the last 20, 30 years. So customers are doing well, some are doing very well. Certain segments that have been quiet in terms of hauling are starting to improve. Products are coming out of the marketplace that will generate better fuel economy and whether it's more aerodynamics or better engines. And you still got old fleet. So I think the customers are feeling better than they did a few years ago.

Andy Kaplowitz - Barclays Capital, Research Division

Mark, that's good color. And then, maybe just a follow-up on Andrew's question. Around -- and really the mix over the next year or in 2012 between the U.S. and Europe, Europe is obviously coming down a little bit and the U.S. is improving. When we look at the margins of those 2 regions, how does that affect 2012 margins in general? Europe may be a little higher margin, or am I mistaken in that?

Mark C. Pigott

Well typically, I think when you look at our industry, as markets go down, I'm talking about the -- less trucks are ordered, margins go down because OEMs are scrambling for the business. So as you look at Europe and you see the press as much as we do -- Europe is a complicated, multi-country coalition. You hear in the press today that unemployment is -- just hit a 10.4%, which is the highest in a number of years whereas in Germany, unemployment is the lowest in over 10 years. So there's a whole lot of things going on. But I think as the market is lower in Europe, that's going to have probably the effect of having some lower margins. As market in the U.S. and Canada improves, maybe margins will slightly improve. But I think overall, it will be about the same as we saw last year.

Operator

Our next question comes from the line of Ann Duignan from JPMorgan.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Just to step back, talk about your own particular integrated engine. You're still settling 79%, 76% of your trucks are going out with Cummins Engine. Can you just talk a little bit about how the introduction of your own engines is going? Have there been any warranty issues? And then some perspective on where we might be by this time next year.

Mark C. Pigott

Well, we were selling about 25%, sometimes 30% depending on the month of our own engine. That's in North America. Of course in Europe, it's a much higher percent of our own engines there. It's going well. We're now a little past a year in production, and we're having customers that are ordering their second tranche of engines because of the good fuel economy and reliability and quietness. I think it's been a good start-up, and we continue to invest in the factory and putting in more machining capability. And I think it'll be great to have you come down later in this year, maybe in the fall to sort of see the progress that's being made. I'll be down there in 2 days, and I think it's been very, very good. So all in all, excellent strategic move for PACCAR and Cummins continues to be an excellent partner with us around the world.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Okay. And then as a follow-up, just in Europe, I mean in the U.S., I appreciate that PACCAR -- both Kenworth and Peterbilt are pretty strong in the oil and gas sectors. In Europe, the short gains by DAF, is that more because the geographies that DAF is leveraged to are stronger, or are there specific segments where DAF is particularly valued?

Mark C. Pigott

That is one of the best questions you've asked, Ann.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Finally. After 10 years.

Mark C. Pigott

DAF is the tractor leader in Europe. So that is the on-highway segment. And it's been a wonderful 15 years since we acquired DAF and I mean, they're just part of the family. So really what happened, as we grew the company and we've got wonderful dealers, DAF dealers throughout the continent, the initial focus was to sell tractors on-highway. Those are the people that you would see more typically. And so they've grown that very strongly and have 19% share of the tractor market throughout all of Europe. And now that's -- so that's been really the driver for the overall share growth. Now, of course we've always had great product, but we're focusing additionally on the vocational segment. Now some of the vocational segment is good, some of it's a little bit slower, but that's a big focus, particularly on our -- what we call our CF models. And so I see some real exciting opportunities as the years progress because we'll have a very strong base on the tractor side and continue to strengthen our vocational side. And then we also have, call it the urban vehicle, the LF, which is growing. And we're market share leaders, particularly in the U.K. and a few other countries. But that's got a lot of runway ahead of it. So I think DAF's done a great job. We're just picking the segments, designing the product, giving the support, getting leadership and then building on that into the next segment. Excellent question.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

And I presume you'll offer the complete DAF range in Brazil.

Mark C. Pigott

Yes, we do. And we're hoping to invite everybody there and give us about a year or so to get everything going, but we'll have the complete range for the LF, the CF and the XF.

Operator

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

Jerry Revich - Goldman Sachs Group Inc., Research Division

Mark, can you talk about your business in Europe? You picked up market share over the course of 2011, and I'm wondering if you can touch on whether you expect a tailwind to your sales numbers versus the overall industry because you're exiting the year at a higher market share rate. And I'm wondering if you could share with us how many dealer locations your partners have added over the past 12 months in the region.

Mark C. Pigott

Well, we have -- DAF has about 1,000 dealer locations throughout all of Europe, which is working very, very well. And I think you kind of touched on an interesting point, and that is one of the real strengths of our brand is the strength of the independent dealer network. 99% of our dealer are independent, and I think that has been an area that probably doesn't get enough press and that is these dealers are really focused on working in their home territories. They live there, they work there, their families work there and I think that's been somewhat of a contributor to the growth of DAF over the years. In terms of the tailwind coming from 2011, we don't really forecast market share. We continue to grow and produce the best products, and that has generated increased share as our customers benefit from our products and services. So we look to steady, steady growth. But some years are better than others, but we've been very fortunate and have grown pretty steadily over the last 15 years.

Jerry Revich - Goldman Sachs Group Inc., Research Division

And Mark, can you comment how far out your backlog extends in the European business at this point versus where it was maybe a quarter ago?

Mark C. Pigott

Versus a quarter ago? Well, I think it's comparable. Obviously, we've had to adjust the build rates to maintain, let's call it, the weeks of visibility for the production side. And that's kind of how we manage it.

Jerry Revich - Goldman Sachs Group Inc., Research Division

And on your Parts business, obviously, we're hitting a transition point for the overall market. Can you talk about what kind of order rates and demand you're seeing in Europe on the parts side? Is it similar to what we're seeing on the new truck demand?

Mark C. Pigott

The Parts business is very steady, if that's what you're kind of asking. Parts, once again, all of the European truck parts, the overall market is not as old as the U.S. and Canada. It is aging somewhat, and we have many new innovative programs whether it's all-makes branding, just more technology involved to make it easier to order parts. We continue to expand our production capability within our parts distribution centers. So Parts business is pretty steady, and good freight's still going on. As I mentioned, the mouth statistics in Germany, so customers -- as we say, if you don't read the paper or you don't read your electronic mail, business is pretty good for many of our customers. Yes, there's -- some Southern Europe is more challenging, but a lot of our customers are doing well. They're just cautious about ordering right now because there are some macroeconomic and political issues that frankly I don't think any of us know how that's going to get resolved. So the customers that are driving and hauling freight every day are saying, "Love the product, would like to order more. I'm going to order some." Just because something unusual happens. I want to be in good shape as their own independent company. So Parts are good business.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Okay. And lastly, can we talk about the margin structure for '12 versus '11, and the level of operating leverage we should be looking for? Obviously, you're going to get some nice productivity gains out of your freshly added U.S. workforce but on the flip side, with lower production rates in Europe. Do you still expect to deliver similar level of gross margin leverage that you did this year or in '11?

Mark C. Pigott

I think you summed it up very accurately. There's some slight upside potential in North America, but that's countered or muted by what's going on in Europe. So I think it's going to be comparable, maybe a little bit down this year compared to last year. Just -- we will have to see how Europe shakes out.

Operator

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

Henry Kirn - UBS Investment Bank, Research Division

On the mix in revenues, the fourth quarter revenues were a lot stronger than we expected. Was there anything in the geographic or product mix that influenced the quarter? Or did pricing step up more severely than maybe I expected in the quarter?

Mark C. Pigott

I think across-the-board we had good orders, good productivity coming out of our factories. There was some element of improved pricing. I think we touched on that in the earlier question in North America. It was just a very good quarter all the way around. Parts are good, finance was good, I think everything contributed to a very good quarter.

Henry Kirn - UBS Investment Bank, Research Division

And then as we go into '12 for Europe, not to kill the topic, but is it possible to get a little more granularity around expectations by region within Europe? And then maybe the cadence of demand, as we go in 2012, as we sit here now.

Mark C. Pigott

Well, I think -- we're -- of course we're in Europe in a big way. We're in every single country, and it's a complicated subject in terms of what's going to happen for the market. That's why we gave a range of $2.10 to $2.40, which is down from the $2.44 a year ago. But I mean, you see the news every day, every week, every month, there's a slightly different or modified approach to dealing with some of the more troubled countries. I think in terms of our specific industry, there's a lot of freight out there. There's a lot of people who have -- once again comparable in North America, who have survived the last 10 years are in good position. They've got good, solid operations. There's very, very few cancellations. So people are just cautious about what's going to be happening. But they're ordering trucks, they like the trucks, they would like to order more. We've got big -- a couple of big truck shows going on this year in Europe. It will be I think exciting to see how those progress. But there's just the overhanging points about the general macroeconomic and political structure, how that's going to shake out. You talk with the customers, they're loving our trucks, they would like to buy more. I think once things clear up, they will buy more.

Operator

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

Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

Mark, a few questions. The first is kind of a detailed one on the quarter, and then the others are kind of looking forward. On Q4, can you give us the revenue and gross profit split between truck and parts, please?

Mark C. Pigott

The gross profit for the margin percentages?

Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

No, no. If you could give -- and I know you gave it typically in the 10-Q and will in the 10-K. I'm just wondering what the revenue contribution and gross profit contribution, if you could give it just for parts, that would be very helpful.

Mark C. Pigott

We can. We don't have it right on hand. Can we take it off-line?

Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

You bet. And then near term, within that slight decrease that's discussed for Q1 volumes and appreciating the relative share gain that you've had against strengthening in the aftermarket, could you help us understand PACCAR's latitude to increase production? Specifically what I'm looking at is, given the average monthly production in Q4 appears to be about 3% below the average monthly production that you achieved in 2006, and I know there's been a change...

Mark C. Pigott

2006?

Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

I'm going back to the peak year.

Mark C. Pigott

That's fun.

Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

Yes. I'm wondering, can you maintain your current share if the volume goes back to that 2006 level over the next 2 years?

Mark C. Pigott

Now that is an excellent question. And I think that's an important point that PACCAR is and has been for 106 and 107 years focused on being the best quality, productivity, innovation technology. That is our focus. And if we had this conversation 25 years ago, our market share would've been, let's call it, 10% to 12% instead of 28%. And what I think has happened, gradually over time, is that the benefits of excellent productivity and services in terms of the products and services that we offer, more and more customers are saying, "You know, there really is an advantage to purchasing Peterbilt, DAF, PACCAR Parts, PacLease, PACCAR Financial. Whatever it is, there are some advantages in terms of helping me as a customer perform better." So as the market goes up, our goal is to continue to provide those outstanding services and sort of the share takes care of itself. As I say, this is a record share. It's not something that we've said over years and years of conference calls that this is our goal that we want to get. It's happened because our customers said, "We love your products." So if we go back to a 360,000-unit market, which I don't see, maybe you do, we'll produce as much as we can, but the more important criteria is always at the highest quality.

Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

Okay. And then lastly, this is a bit of a longer-term question and it's kind of been out there in discussions in investor circles, could you kind of weigh in on your view as to whether the EU could potentially have a U.S.-style prebuy in front of the Euro 6? I mean, typically the region doesn't really react that way.

Mark C. Pigott

No, that's a good question, obviously something that we spent a bunch of time reviewing. And I think as you've indicated, typically they don't have that much of a prebuy. I would say that sometimes there is vocation-specific prebuys. Well a couple of things are going on. First of all, and I think this will be an advantage for -- certainly for PACCAR, is that you're now getting to a point in 2013 and sort of after that where the engine technology and the emission standards will be very closely aligned. And I think that will be good for almost all manufacturers and certainly for us rather than working to an EPA standard into a Euro standard, so that'll be good. In some countries in Europe offer a, let's call it, environmental incentive to try to persuade customers to purchase earlier because the engine will be more environmentally friendly. Some countries just don't do that. A lot of times, the new environmental regulations come with a cost, and we've talked about that over the last year or 2. And so that sometimes stimulates a prebuy. Typically in North America, it's more of a laissez faire capitalistic approach. There's no incentive. So there is a prebuy because people say, "I don't think I want to pay 8,000, 10,000, 12,000. Euro 6 is going to have an increase of -- you've seen the press, probably EUR 10,000 to EUR 15,000 and so that might -- it might have some people saying, "I'll do a bit of a prebuy." But right now, very few countries -- I think Switzerland, but very few countries have weighed in saying, "Here's an incentive to get a Euro 6 early." So I probably won't expect too much going in Europe. And by the way, it's January 1, 2014 is the new date for the mission change in Europe. So you're still 2 years away.

Operator

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

Joel G. Tiss - Buckingham Research Group, Inc.

I want to ask a really bad question because all the good questions aren't really getting answered.

Mark C. Pigott

Joel, we're counting on you.

Joel G. Tiss - Buckingham Research Group, Inc.

All right. Well at least, I got to be consistent. Can you give us what the geographic mix of the Other segment is, a little more color on that?

Mark C. Pigott

For Other, as in Australia and countries around the world? Is that really what you're asking?

Joel G. Tiss - Buckingham Research Group, Inc.

Yes, and even if you want to do sort of fuss it up so we don't really get any information to like Asia, Latin America, rest of the world or whatever you may do.

Michael T. Barkley

Sure. You could primarily see the Mexico, Australia and the Andean region of South America, which would be countries like Colombia, Ecuador and so forth.

Joel G. Tiss - Buckingham Research Group, Inc.

So would Latin America be more than half of it?

Michael T. Barkley

No, I don't think it would be more than half of it, but it would be 1/3 of it maybe.

Mark C. Pigott

Yes, yes. So -- and we -- as I mentioned, that includes Mexico and Australia where -- we've been there for 50 years, a long time. We are seeing some good growth in the Andean region, particularly in Colombia, where we have about 50% market share. That's going very, very well. We've added a distribution center in Santiago, Chile. So that market is growing. And typically, those products are -- a lot of them are made in our Mexican factory. And then out of Australia, you might sell some -- well, we sell some to New Zealand. We sell some to, say, Papua New Guinea. We don't really -- so those would be the primary markets in Other.

Joel G. Tiss - Buckingham Research Group, Inc.

Okay. And then what about the goal for 3 to 5 years? Where do you think your global mix, and now you can include the U.S. and Europe?

Mark C. Pigott

Well, I think the biggest investment going on right now is obviously in Brazil. And we've indicated openly that we want to initially get to 10% share. And if you've got a market of 125,000 units for Brazil, that's 12,500 trucks right there. And we'd like to grow it further, but it's early days for us. We're just starting to put our dealer network in position. We're just literally beginning the preliminary construction of the factory. So that will take time, but that will be a good-size market. Then there's sort of the large market of China, which we are continuing to add people to and we're selling engines and we're selling trucks primarily into the vocational natural resource segment. That's still the biggest market in the world this year, probably about 800,000 units, which is pretty large. It's lower than 1.1 million, but it's still an excellent market. And I think the challenge there and kind of what's interesting is how the commercial truck industry will respond to a market that's down 10% to 15%. Will there be consolidation? The government owns all the truck makers. Is it going to be a natural consolidation, or will it be government-directed? There's still no profit being generated in the commercial vehicle manufacturing segment. So it's a -- if you pick the wrong partner and the government decides that partner should be consolidated, you might have picked the wrong one. So it'll be interesting to see what happens over the next 3 to 5 years in China.

Joel G. Tiss - Buckingham Research Group, Inc.

And last one, how much do you expect to spend on your global expansion initiatives in 2012 roughly?

Mark C. Pigott

Yes, probably less than $50 million. And a big chunk of that will be building a factory in Brazil.

Operator

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

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division

Most are asked and answered, so let me just -- a couple of details. We had talked in some previous quarters about some issues with your supply chain kind of struggling to keep up. Can you just update us on that?

Mark C. Pigott

Sure. That's a good question, Steve. I would say that most of the suppliers have responded in a positive fashion. They've seen -- I'm talking particularly in North America right now, but they've seen pretty steady orders and demand from us and other OEMs. In fact, obviously increasing. So they've been able to feel a little more confident about hiring people back, maybe taking on a second shift, investing in some capacity, whatever their particular need is. And I'm just feeling a little bit better as they go into '12 with the, let's call it the U.S. economy or GDP growing at, let's call it 2% plus. Even the car business is now starting to bounce back a little bit. I think suppliers are positive, and so I think the challenge is probably last summer and early fall where many suppliers were just still not convinced that this market was going to continue. They've now probably mostly come to the realization that market looks to be pretty good.

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division

Okay. So in other words, they're kind of catching up and delivering on time and on schedule?

Mark C. Pigott

That is correct.

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division

Excellent. So second question is maybe a little longer. I know you've seen 1 or 2 cycles under your belt and...

Mark C. Pigott

In the last 5 years.

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division

Exactly. And it seems like you have some pretty positive outlook on sort of the fundamentals here but predictably, some investors are starting to question whether 2012 or '13 could be the peak of the current cycle. And I just wondered if you might have a view on the longevity potential here.

Mark C. Pigott

Well, I think these cycles tend to run in about sort of 5-year intervals. I think there was an earlier question about some leverage and how we're doing. I mean, I think to generate over $1 billion in net income our fourth best year in a market that is about half of the record levels is really a remarkable result. I think we've got definitely some ways to run. There's a lot of segments of the economy that are still at the pretty low levels. We talked about housing is at, what, 50 year lows. That's a big driver for so many industries, and a lot of those industries are dependent on trucks. Cars production, which is another big driver for a lot of industries and you're talking rubber, electronics, steel, aluminum, glass, et cetera. They hit a high of $17 million and then dropped down about $10 million and now they're thinking about $13 million. So they're, let's call it, 3 quarters of the way back to record levels. So I think in some of these things, there's a little more confidence and we get some positive, pro-business, government outlook that the whole economy in North America could be pretty good for a number of years. But it's a cyclical business. Not every top of the cycle will be a record. I know it's nice to have that in the economist's world but unfortunately in the real world, it's just not that way. But replacement demand, which we have not seen for 5 years, we're certainly hoping to get to it this year. Let's call it 225,000 units. But when you get the economy operating positively in all cylinders, it would be very exciting for the truck industry. We're ready for it. Our factories are the most efficient and productive they've ever been. Our dealers are the strongest. We've got more new products. We're in more segments than ever before. So we're looking forward to it.

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division

Sounds good. And I guess if that were to happen in the past, you've gotten very, very close to about a 15% gross margin. Is there any reason not to think that could happen again?

Mark C. Pigott

I think we would -- we're basically at 13% right now and the market's half what it was, so absolutely.

Operator

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

Jamie L. Cook - Crédit Suisse AG, Research Division

Two quick questions. One, longer term, Mark, can you just elaborate on your strategy to build out the distribution network in Brazil with regards to your DAF dealers and the potential investment required? And then just a shorter-term question, just to reconfirm, so basically in response to Jerry's question, you're saying incremental margins and gross margins could be flat to down for the full year relative to 2011. I just want to make sure I heard you correctly.

Mark C. Pigott

That -- yes, I'll take the second one first. That is correct, depending on what's going on in Europe, Jamie.

Jamie L. Cook - Crédit Suisse AG, Research Division

Okay. All right. And then just -- sorry, second longer-term question?

Mark C. Pigott

Okay. Yes, on the Brazil distribution, that's an exciting process, kind of spring boarding off an earlier answer. One of the real advantages that we bring and is sort of reiterated by many of our dealers is that with an independent dealer network, there's a lot more profit potential for an entrepreneur to be a dealer of ours versus our competitors. And I think you can see that not just in our industry, but just any industry. So we have obviously -- have the groundbreaking. You've got the press release. We're investing the money, we bought the land and for the last year or so, I've been working very avidly on getting the distribution framework in place. We now have the framework, and we're getting excellent response and that is -- there are every state from Amazonia down to the south of Brazil has trucks. We want to cover every state from early days of production, which is mid-2013. We've laid out the criteria in terms of what we're looking for and to have a dealership, it's a $5 million type of investment because you need a number of acres of land. You need a facility, you've got to hire the people. But in exchange for that, you've got a good, wide geographic territory that you will control. We bring in what we consider some great products and services, distribution centers, financing the parts back up. And we're getting a great response from some competitor dealers who are finding they have very limited opportunity to generate profit, from industrial dealers who are used to equipment sales, from agricultural dealers who obviously are used to tractors, trailers and construction and ag equipment. So it's a wide range. And even some automotive dealers who may be in the heavier range of the automotive sector. What's interesting, and you probably appreciate this, Jamie, I know you've traveled a lot, is that a number of these dealers have come -- potential dealers have come to North America and come to Europe and talked to our existing dealers and saying, "What's really going on?" And they've come to our factories to see the quality and the innovation we put in, and the response has been very, very positive. And they then go back to Brazil and sort of spread the word that, "Wow, I've talked with a Kenworth, a Peterbilt, a DAF dealer. Yes there's an investment required, but the profitability over the medium and long term is excellent." So it's exciting.

Operator

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

Adam William Uhlman - Cleveland Research Company

Just a couple of cleanup questions here. I guess first in Europe, could you speak to what dealer inventory levels look like and what the company's own truck inventory levels look like today?

Mark C. Pigott

Sure. In terms of our own inventory, we basically don't have any inventory. We build to demand so that is not -- so there's nothing really much to talk about there. Dealer inventory is still in very good shape. And we've adjusted our build rates, our production rates, as you know. But the dealers are moving the inventory through their pipeline in a very normal process. The customers have got very good access to credit. There's still a lot of freight being hauled. So the people ordering trucks want those trucks and are putting them into service in a very normal fashion.

Adam William Uhlman - Cleveland Research Company

Okay. And do you believe your competitors' dealer inventory levels are also in good condition?

Mark C. Pigott

I don't really know. I drive by many of my competitors, and sometimes they seem to have a lot of inventory. But I don't think that's a very scientific approach, but we focus on what our dealers are doing.

Adam William Uhlman - Cleveland Research Company

Okay. And then what were the past dues for the quarter? And then also, was there any impact from currency to sales or earnings?

Mark C. Pigott

Okay. On the past dues, we were at 1.5% and currency, let me turn that over to Michael.

Michael T. Barkley

Yes, the currency impacts were pretty small. There was $8 million for the quarter on revenues and about $500,000 for pretax income.

Operator

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

Seth Weber - RBC Capital Markets, LLC, Research Division

Mark, just going back to your last answer to the last question, the credit availability in Europe, is that in the industry? Is it available across the industry, or is PACCAR just becoming more aggressive with their own portfolio?

Mark C. Pigott

Well first of all, I think I would say that we probably have the best portfolio of anybody in the industry. So aggressive is not typically a term that I would apply to our portfolio. In fact, I'd say very conservative. And that's why we've generated very low past dues. So I think the credit is pretty much available. When we go to shows at industry, whether we're selling people our trucks or they're buying a competitors', credit is out there. It's available, yes.

Seth Weber - RBC Capital Markets, LLC, Research Division

Okay. And then just kind of going back to Europe, when you tempered your outlook for Europe for next year, I mean, can you just talk about what you saw through the cadence through the fourth quarter and maybe what you've seen here in January and kind of when you decided to make a change to your outlook?

Mark C. Pigott

Well, I think we adjusted our production rate in November. So we were seeing that going into October because it takes a while to adjust the production rates. And I think we've seen that gradual slowing of orders through the end of the year. Obviously, the end of the year, particularly with all the conflicting news coming out about the economic, political activities in Europe, it's very -- there's a lot going on. And now that we're essentially through January, I think we're seeing that more stabilize, but at a lower level. And that's why we've made this adjustment to our production rate. As Scania has, I understand that people like Mercedes and others, they were shut down for close to a month which we haven't done that approach. But it's a whole industry just trying to work through what the ongoing demand. And so in terms of the range of $2.10 to $2.40, that's why we start out the year with a broader range because there's just so much going on. I'd love to see how it shakes out.

Operator

Your next question comes from the line of Brian Rayle from Northcoast Research.

Brian Michael Rayle - Northcoast Research

Most of my questions have been answered. On the financing side, great, great quarter in terms of profitability. Was there anything that we should think about from loans issued, say, 2, 3, 4 years ago in terms of tightening the standards, or is it just truly the better profitability of your customers?

Ronald E. Armstrong

Well I think primarily, it's the better profitability of our customers. Their cash flow has improved. It's strong. And so they're able to make their truck payments, and we continue to refine our credit underwriting from -- continually, just like we're doing in our factories. There's always room to improve. We're continually refining our credit underwriting standards, and so we're pleased with our performance portfolio position and where it will progress as we go forward.

Mark C. Pigott

I think I'd just add onto that. I think Ron summed it up very well. We've also continued to invest and strive to be a leader on the technology side of the finance so that we are able to analyze the credit worthiness of our customers, give that to them in a very timely fashion, allow them to access their own accounts electronically, make the payments, look at the scheduling over the next 1, 2, 3 years, how that affects their particular business. So you're actually bringing a valuable add-on benefit. It's not just about who has a rate, but it's who has a service that allows the customers. They could be hauling wheat, they could be hauling electronics. They're all different cycles, and who has a program such as PACCAR Financial or PacLease in a slightly different way that works with the customers' needs. So I think our information technology group, I want to give them a plug right now, PACCAR's #1 Information Technology Company in the country, according to the InformationWeek magazine. I think that's been a real benefit throughout our company.

Brian Michael Rayle - Northcoast Research

Yes, absolutely. Have you seen any difference between the sort of purchaser versus the lease customer, or they have both trended up at the same rate?

Ronald E. Armstrong

I think they both are doing well. I mean I think that, again, the whole freight environment, there's plenty of freight. The rates are good. And so we've seen all of our customers have better cash flow performance in their businesses as we came out of the recession.

Operator

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

Patrick Nolan - Deutsche Bank AG, Research Division

I just had a couple of quick follow-ups on the Financial Services business. For the full year this year, can you tell us, either for full year or the fourth quarter, what your provisioning versus charge-offs were?

Mark C. Pigott

For most part, our charge-offs are probably comparable to our level of provision. We've seen some provision benefits as our past dues have come out, but our portfolio is growing as well. So all those things sort of worked to offset each other.

Patrick Nolan - Deutsche Bank AG, Research Division

So when you look at it on a full year basis this year, there's no reason to think that there's any anomaly as far as low provisioning as you reduce your allowance that wouldn't reoccur next year?

Mark C. Pigott

No, no, I don't think so at all.

Patrick Nolan - Deutsche Bank AG, Research Division

Okay. And just one other thing I noticed. I noticed the Financial Services assets stepped up pretty substantially from Q3 to Q4, even more so than you saw your revenue increase in the truck side of the business. Was there a big tick up in your share of your sales that were running through PACCAR Finance?

Ronald E. Armstrong

Yes, for the year, we ended the year at 31% finance market share compared to 28% last year, so in a good quarter. A lot of customers in servicing units lease units in the fourth quarter because of the tax benefits that are available to those customers. So we had the benefits in our retail lease portfolio, and so it was a good quarter for the finance company.

Mark C. Pigott

I think another point, Patrick, on that is you've been covering the market for a while and you sort of got that ebb and flow in cyclicality of the business that PACCAR Financial and PacLease, we're there every day for the customer. And a few years ago, when we had the calls, some of the focus from the analysts were who's the part of the industry. And there were some fairly big names, some names that only have 1 or 2 letters in their names. They departed the industry and customers, they don't forget that. So I think some of that shared improvement as people have been saying, "You know what, PACCAR or maybe it was Mr. Kenworth or Peterbilt or DAF, you were there for me during the tough times. Things are improving. I want to continue and even grow that business with you." And that -- once again, I think that's a real strength of PACCAR, something that we don't probably get enough play on.

Operator

Your next question comes from the line of Jeff Kauffman from Sterne Agee.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

This as Sal Vitale on for Jeff. Just a quick question. With financing becoming more available, are you seeing more activity in the owner operating market?

Mark C. Pigott

Well, the owner-operator market is a little bit of a misnomer nowadays. And maybe this will be the last quarter that we really talk about it. There are still some entrepreneurs, some companies that will have a handful of trucks. But that's probably 10% of the total market and typically they have aligned themselves with either an end customer or a major freight company because there's just a lot of benefit whether it's cheaper fuel, insurance, healthcare, the availability of freight to haul. So I think we continue to supply everybody that wants our products but it's more and more -- it's called the small, medium and large trucking companies.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Okay. That's helpful. And then just a follow-up question on your pricing comment earlier. I think you said that you're seeing some good pricing in North America in the fourth quarter. Is that like low single-digit, mid single-digit? Can you provide any additional clarity on that? And then additionally, is that pure price that you're referring to or are there additional components? Is it price per truck going up? Is it pure or is it just additional componentry?

Mark C. Pigott

Good question. I think we're seeing some of the pricing going up and some of that's being driven by the continued strong used truck market. We're now rebounded on used trucks to a level that we saw a number of years ago. So as the used truck values go up, more and more truck companies, operators are saying, "You know, it may be a good time to trade in. A new truck isn't that much more expensive." I mean, it's still -- there's still an increment but with the new truck, I can get better fuel economy, lower operating costs, I don't have to do as much maintenance on it, et cetera, et cetera. So that tends to push up the actual price of the new truck. I don't think that componentry -- we've already kind of worked the componentry in, particularly the after treatment and new emissions. I mean that's -- and we've talked about that for a long time, so let's move off of that. Now it's just people saying, "Hey, I'd like to get a new truck because there are benefits to it." So I think it's -- I don't know what you mean by pure, but the margins we're getting are because people are willing to pay a little higher price for a new truck.

Operator

Your next question comes from the line of Rob Wertheimer from Vertical Research Partners.

Robert Wertheimer - Vertical Research Partners Inc.

Two quick questions. One was on just the improved pricing you just -- actually on 2 topics you just touched on, price and mix. On pricing, is it better realization on past increases? Is it mixed between the larger fleets and the medium fleets, or is it a new price increase? And can you mention the last time you took a new actually list increase?

Mark C. Pigott

We typically have a list increase twice a year. Whether all of that list increase generates or translates into more dollars, it depends on the market. But we're always working with our major suppliers who, some of them you carry who seem to like to increase their prices. So we increased our pricing. The more vehicles you buy, it's kind of like anything. If you buy more, you're going to be looking for some better price. And that's very true of the industry in which we compete every day. So typically, if you're buying a couple hundred, pricing will be one element. If you're buying 5 trucks, the pricing is something else. But what we want to make sure is that every customer gets the best product in the industry and delivers them the benefits they need.

Robert Wertheimer - Vertical Research Partners Inc.

Okay. And I guess just to be clear then, you probably did see some improved price realization on past increases in 4Q and would probably presumably roll on another list price increase in 1Q?

Mark C. Pigott

Yes, that is correct.

Robert Wertheimer - Vertical Research Partners Inc.

Okay, perfect. And then just more broadly on industry mix, I'm curious and I understand quite well the owner-operator just being sort of a marginal part of the fleet at this point. There's still this large and medium, or medium and medium-large fleet. Have you seen any shift where the more medium-sized people are starting to come in and especially in the quoting and backlog activity?

Mark C. Pigott

Yes, I don't see more. I think it's been pretty consistent over the last year. And we do track, as everybody else tracks of what's the size of the customers, but you can also break it down by segment. We mentioned earlier the oil and gas boom, and you're seeing that in a lot of different areas of North America, whether it's Alberta or North Dakota or Texas or Pennsylvania. I mean there's -- it's sort of been a bit of our resurgence going on, which has been great for a lot of our customers. And some of those are small customers, some of those are larger customers. But I think that our people want the product, they see the advantage of the product and there's just a little more confidence in the general population now as the general economy is improving that they're willing to pay a little bit more because they feel that they can charge their end customers a little bit more. So it's sort of a pass-through along the logistics chain.

Operator

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

Timothy J. Denoyer - Wolfe Trahan & Co.

Quick question on the -- I wanted to follow up on the MX market to your question. In the U.S. and Canada, I think you had said something like, was it 25% to 30%?

Mark C. Pigott

Yes, that is correct.

Timothy J. Denoyer - Wolfe Trahan & Co.

Okay. I've seen some data that looks more like 21% for the year for North America, or are you just looking at...

Mark C. Pigott

That's what we delivered, but we've got obviously lots of engines we're building for customers, so yes.

Timothy J. Denoyer - Wolfe Trahan & Co.

Okay. And did you specify a target for 2012?

Mark C. Pigott

No, no. We're continuing to invest, and we look forward to that growing over time.

Timothy J. Denoyer - Wolfe Trahan & Co.

Okay. And then a different question on your comments in the press release on sourcing more components from Asia. Can you give us any sense of maybe what percentage of your material spend is coming from Asia at this point and how that's been changing and what types of components?

Mark C. Pigott

Well, that's a great question. We have increased our purchases, but of course we've also increased -- and from Asia, we also increased our purchases from other parts of the country or other parts of the world as the general markets have improved over the last few years. So I think in dollar terms, we're buying more from Asia. In percent terms, it's probably hasn't changed all that much. But certainly in dollar terms, it has.

Timothy J. Denoyer - Wolfe Trahan & Co.

Okay. And then one last one on the natural gas -- the oil and gas segment in general, can you give us a rough sense of what percentage of your U.S. and Canada deliveries were to that segment of the market this year and what that has been historically?

Mark C. Pigott

Yes. It's just a few percent of our total production. I mean, let's call it 1% to 2%.

Timothy J. Denoyer - Wolfe Trahan & Co.

Okay. 1% to 2% even in 2011, which was a very good year?

Mark C. Pigott

Yes, I'd say maybe it's sort of the 1% range, and some months it might actually be lower than that. You're talking about for an LNG, CNG-type of vehicle, right?

Timothy J. Denoyer - Wolfe Trahan & Co.

Okay. I was going to ask that as well. I was actually talking about 2 customers like the 2 customers that are doing.

Mark C. Pigott

I don't think I have that number off the top of my head, but that's gone up because they're great companies, Halliburton and Schlumberger and different groups. They are definitely increasing their purchase. I don't have that exact number. LNG, CNG is probably not still less than 1%.

Timothy J. Denoyer - Wolfe Trahan & Co.

That actually have a natural gas engine.

Mark C. Pigott

That is correct. I mean it's increased, but it's still a very small number.

Timothy J. Denoyer - Wolfe Trahan & Co.

And are those the -- is that the Cummins Westport engine? Is that 9 liter essentially, or is there another engine that you offer?

Mark C. Pigott

I'm not sure on that one. That's -- Westport has carved out a good niche in that marketplace.

Timothy J. Denoyer - Wolfe Trahan & Co.

Okay. Is there a bigger engine, or is just 9 liter that you offer?

Mark C. Pigott

Well there's a 9 liter -- I have to get back to you on that one.

Operator

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

Michael Regan

Quick question. You guys are one of the few companies that truly understand return of capital to shareholders, either in the form of dividends or timely repurchases of shares, has had a huge impact on your total return to shareholders and obviously...

Mark C. Pigott

We appreciate that, Michael. Thank you very much.

Michael Regan

Well, I the question that comes out of that, Mark, is that despite a stepped-up dividend and being more aggressive with the share repurchase, net cash on the balance sheet ended at its highest level perhaps ever in PACCAR's history. And even looking at it as a percent of the total market capital of the company, the highest in 5 years and I'm wondering is there a message in building so much net cash on the balance sheet in terms of concern about where the economy is? Or why, despite again nice moves on the dividends, I actually thought it could have much higher given your cash and the buyback with the shares trading where they are, why not even more aggressive? Why is cash continuing to build by another 22% this year?

Mark C. Pigott

Well, we've got a lot of opportunities but first of all, let me take it on the positive side with the special dividend, with the increase in the quarterly dividend with the repurchases. We believe and many, many shareholders are giving us very positive feedback to keep doing what we're doing. It is a cyclical business. We're not trying to send any message, but we do understand the business very, very well. And you've just seen in Europe within a matter of 3 months a 20% decline. There aren't a whole lot of industries that see moves that quickly to that magnitude. We got some great opportunities. We're going to be investing several hundred million or more down in Brazil. We're still investigating opportunities in Asia. We got a lot of new products. Like many others, we continue to work on. And we want to make sure that we're typically at about 45% to 55% payout rate to our shareholders of our net income. And it seems to be well received by the vast majority of our shareholders, so we keep working it. But I appreciate your points.

Operator

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

Robin Easton

I'd 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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