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PACCAR, Inc. (NASDAQ:PCAR)

Q3 2007 Earnings Conference Call

October 24, 2007 12:00 pm ET

Executives

Cathy MacLeod - Treasurer

Mark Pigott - Chairman and Chief Executive Officer

Ron Armstrong - Vice President, Financial Services

Michael Barkley - Vice President Controller

Analysts

Peter Nesvold - Bear Stearns

J.B. Groh - D.A. Davidson

Joel Tiss - Lehman Brothers

Jamie Cook - Credit Suisse

Robert Toomey - E.K. Riley Investments

Jon Steinmetz - Morgan Stanley

Andrew Casey - Wachovia Capital Markets

David Bleustein - UBS

Steven Volkmann - JP Morgan

Denovo Santiago - Massway Capital

Garrett Stevens - Giovine Capital

Jeff Glass - Birchway Capital

Operator

Good morning and welcome to PACCAR's Third Quarter 2007 Earnings Conference Call. All lines will be in a listen-only mode until the question-and-answer section. Today's call is being recorded (Operator Instructions).

I would now like to introduce Ms. Cathy MacLeod, PACCAR's Treasurer. Ms. MacLeod, please go ahead.

Cathy MacLeod

Good morning. We would like to welcome those listening by phone and those on the webcast. My name is Cathy MacLeod, Treasurer of PACCAR. And joining me this morning are; Mark Pigott, Chairman and Chief Executive Officer; Ron Armstrong, Vice President, Financial Services; and Michael Barkley, Vice President Controller. As with prior conference calls, if there are members of the media participating, we request that they participate in a listen-only mode.

Certain information presented today will be forward-looking and involve risks and uncertainties including general economic and competitive conditions that may affect expected results. I would now like to introduce Mark Pigott.

Mark Pigott

Good morning. PACCAR today announced a very good revenue and profit for the third quarter and the first nine months of 2007. PACCAR's performance reflects positive contributions from the company's global diversification, continued double-digit growth of worldwide aftermarket parts and Financial Services revenues and innovative new products.

The first nine months of the year, PACCAR earned excellent net profits of $966.2 million on revenues of $11.46 billion. These nine-month earnings are the second best in the company's 102-year history. We're very proud of the team. PACCAR shareholders earned over 32% return during the nine months, first nine months of this year and 56% over the prior 12 months.

In comparison, the S&P returned 9% and 16% for the respective periods. PACCAR has increased its regular quarterly dividend by 35% during the year, and averaged a 20% dividend increase every year in the last decade. We are pleased to have earned a compound annual growth rate of 22.2% in the last decade, compared to 7.7% for the S&P 500.

Turning to the third quarter, revenues were $3.76 billion and net income was $302.3 million. On a per share basis, adjusted for the recent 50% stock dividend, earnings were $0.81. PACCAR's after tax return on revenue during the third quarter was an industrial leading 8% that's after tax.

The positive impact of the stronger euro on quarterly revenues was $116 million. Strong GDP growth in Europe, Asia and North America contributed to our results. PACCAR realized strong earnings from sales of its premium products and services in Europe, Mexico, and Australia in the third quarter, moderated by soft market conditions in the U.S. and Canada.

Assets in the Financial Services business expanded to a record $10.7 billion during the quarter and generated record pretax profits of $73.4 million, a 10% increase over last year. PACCAR's worldwide aftermarket parts revenue continued its double-digit growth rate this quarter and is generating excellent profits, as PACCAR's population of our vehicles is now over 1.5 million units worldwide.

Turning to the European Union, which is our largest market, it now encompasses 27 countries and is generating robust demand as infrastructure, investment and freight traffic are at record levels. DAF has established itself as a quality leader and is recognized delivering the lowest cost of operations for its customers.

Responding to strong industry demand and the expanded EU for vehicles above 15 tons, DAF has obtained record build levels during the year. With this award-winning model XF105 DAF leads the industry in market share for the tractor segment this year. The EU economy continues to perform well, and the 27 EU countries should achieve a record year of 320,000 units.

2008 truck sales are estimated to be a record level of 330,000 to 350,000 units. Those of you who have been following PACCAR for the last 10 years or so, certainly realize that the company has significantly enhanced its product range and global markets. We now sell into over 100 countries.

And due to the growth of the world markets and PACCAR's success in those markets, the U.S. and Canadian truck markets are just a lot smaller portion of PACCAR's business approximately 30% on a revenue basis. As previously discussed, Class 8 industry sales in the U.S. and Canada will be in the range of 175,000 to 185,000 units this year.

The good news is that next year is estimated to be 210,000 to 240,000 units which is approximating a normal annual replacement volume. And even better news, PACCAR continues to increase its market share in the U.S. and Canadian Class 8 retail sales. Our share is now a record 26.5% up from a previous record of 25.3% last year. And for the last four months, it has been over 30%.

There's been some discussion in the industry about freight ton-miles. I thought we would address that. Looking at fright ton-miles on a normalized basis in the U.S. If last year was 100 and it was a record level, this year it's 95 so 5% down still freight traffic with many of our customers achieving record profits.

Taking a longer-term view. Over the past 10 years PACCAR's investment in technology, facilities and innovative new products and services have expanded our worldwide capabilities benefiting our customers and providing long-term growth and excellent cash flow. The pace of investment is increasing with many current projects underway.

PACCAR's $400 million engine production facility and technology center is under construction in Columbus, Mississippi. This state-of-the-art facility will incorporate leading edge diagnostic and tracking technology to produce, monitor and service the highest quality 9.2 liter and 12.9 liter PACCAR diesel engines.

Kenworth and Chillicothe completed its 105,000-square foot facility addition. The new assembly plant is achieving productivity gains of 30% by adding robotics, single touch material handling and the use of RFID tracking.

PACCAR is building its 13th parts distribution center near Budapest Hungary, a country, which is rapidly investing in all phases of its economy. Our new 270,000-square-foot center, which is scheduled to be opened next year, will be equipped with advanced inventory management and logistic tools and is located to serve the fast-growing DAF market in central and Eastern Europe.

One of the things that I think I'm most proud of for the PACCAR team is the company and its employees being recognized as global environmental leaders. DAF, PeterBilt, Kenworth, Parts, IT Parts have all showcased outstanding new hybrid vehicles for both the medium and heavy duty markets at recent transportation shows and forums.

DAF earned the distinction of being the first manufacturer to deliver 2009 emission-compliant vehicles in the European market. Kenworth and PeterBilt will be delivering medium-duty hybrid vehicles next summer. And a year or two after that, PACCAR and Eaton have joined together to develop hybrid vehicles for the heavy-duty market.

In addition to these new products, five of PACCAR's manufacturing and assembly plants have been ISO 14001 certified which is the internationally recognized standard for environmental management. All PACCAR plants are expected to earn the ISO 14001 certification in the next six months.

Turning to our products and our great customers, as you know, all of PACCAR products have established a reputation for outstanding quality and low cost of operations for our customers. During the third quarter, I am pleased to note that Kenworth swept the J.D. Power Awards for highest customer satisfaction. PACCAR has earned 23 J.D. Power Awards. The nearest competitor has earned just nine.

And turning to our shareholders, a great group. During the quarter PACCAR completed its $300 million share repurchase program with the repurchase of 4.58 million shares adjusted for the stock dividend for an investment of almost $250 million. And over the past three years, PACCAR has invested $978 million to repurchase 27.4 million shares and pay over $1.7 billion in dividends to our shareholders for a total return of over $2.7 billion.

All in all, a very strong, solid quarter, plenty of opportunities. PACCAR is pleased to have earned the second-best nine months results in its 102-year history and we are accelerating our investments to

build a strong and vibrant future.

Thank you. I look forward to your questions.

Question-and-Answer Session

Operator

(Operator Instruction) Your first question comes from Peter Nesvold with Bear Stearns.

Peter Nesvold - Bear Stearns

Good morning, Mark.

Mark Pigott

Good morning, Peter.

Peter Nesvold - Bear Stearns

Maybe if we can drill down to Class 8 in North America for a minute. And when I look normally from 2Q to 3Q, PACCAR's production is about flat, maybe up slightly. This quarter, you were down about 14% or so sequentially by our estimates.

As you look into fourth quarter, how does the run rate production progress from here? Are you flat again for 3Q to 4Q? That’s normally looks like, what you normally, maybe down 1% or so. But given the build rates as you exited the quarter, do you see any adjustments to those in the fourth quarter?

Mark Pigott

Well, we certainly adjust according to customer demand, and as we indicated in the press release, you know market is what it is, 175, 185. So, there might be some adjustment required to lower it slightly. The good news is, we continue to increase production at our plants around the world, and that's having a very positive impact.

Peter Nesvold - Bear Stearns

Actually that tells, I think, well into the second question I have.

Mark Pigott

I was trying to help you out here.

Peter Nesvold - Bear Stearns

No, I understand. I am just trying to get to the truth.

Mark Pigott

You got it right there.

Peter Nesvold - Bear Stearns

When I look at Europe, and you talked in the release and you mentioned it before you increased your production capacity in Eindhoven -- engines effective June. So, from third-quarter levels in Europe

how quickly and how much can you continue to expand your production capacity over there?

Mark Pigott

Well, it is an ongoing program. We are also increasing capacity at our Leyland facility in the U.K. And it is a fantastic facility as well as Westerlow in Belgium. So, we are continuing to ramp up our production. I don't have a specific figure to give you on that. Whereas, The Rye show is going on in Amsterdam. Today is press day, and we will be showing some exciting new products.

But everybody is doing well in Europe and DAF is certainly pleased to be the quality and resell leader, and we are going to continue to invest in the company to increase capacity.

Peter Nesvold - Bear Stearns

When I look at that -- at the increase of capacity, I guess, it is more on the test sales, it looks in the release?

Mark Pigott

That is correct.

Peter Nesvold - Bear Stearns

Effective June. So, was there a step change increase in the production capacity in 3Q that went effective as of that time which kind of continues to trend flat, gradually upward or was there no such kind of step change increase?

Mark Pigott

No, we have continued to increase capacity really through becoming more efficient, and, of course, many, many investments throughout all of DAF and Leyland. So I think you are correct. We’re increasing capacity and production.

Peter Nesvold - Bear Stearns

Okay. But I want to get little more specific here. I mean, when you talk about efficiency, I think of that, I think okay kind of low digit type percentage in increases in production capacity. I just want to understand, was there anything in 3Q that might have driven something more significant, high single-digit type increasing production value from 2Q to 3Q in Europe?

Mark Pigott

I think, we have been very fortunate to have a great teams working and achieving about 5% to 7% efficiency improvements over the course of year in, year out. And, I think that kind of range is what you’re probably looking at.

Peter Nesvold - Bear Stearns

And in terms of pricing of that, I have to believe it’s pretty strong. We heard from Volvo this morning, European booking is up 90% in 3Q for them. When does, I am assuming you are getting a step increase in pricing. Can you quantify it and when does it kind of roll through the production?

Mark Pigott

Well, I am not sure what any of our competitors are doing, but its nice being with DAF, the quality leader. So, we have seen some improvement in -- in margins and pricing. And, when you take a little longer-term view of Europe, and when we say Europe, we’re really talking about 27 countries now, which I think is an important distinction to make.

You got a lot of growth going on particularly in that Central and European van and of course Western Europe is too 2% GDP. It looks like for the next three to five years it should be, reasonably good.

Peter Nesvold - Bear Stearns

Maybe I will revisit that at the end of the call, if there is some time.

Mark Pigott

Thanks a lot.

Operator

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

J.B. Groh - D.A. Davidson

Good morning, Mark. Congratulations on the quarter.

Mark Pigott

Thank you very much. Appreciate it.

J.B. Groh - D.A. Davidson

I had a question on your kind of penetration goals for new domestically produced engine and what are your thoughts there, you know, there have been some rumors of someone leaving the market and that sort of thing? I wanted to get a feel for what you think that could be eventually?

Mark Pigott

I have been around here so long, I am sort of immune to rumors anymore. The exciting news for us is we have got great engines. We believe they are the best in the world. Certainly, in the European market they are regarded as the best. Even our competitors grudgingly say that. So that’s the engine we are bringing over to put in Kenworth and PeterBilt trucks.

Our customers and dealers are very excited about it. In fact many of our suppliers have embraces an opportunity to grow their business with the opportunity, it is very positive. In addition, depending on what the dollar does, it might be a real exciting opportunity to expand DAFs capacity by shipping engines from Mississippi over to Europe. But, of course, that is a little bit dependent on exchange rates at the time.

So, our goal is to provide our customers with the best product in the marketplace, and we feel confident with this engine they are going to be getting exactly that.

J.B. Groh - D.A. Davidson

I mean, is it safe to say that you think you can get a third?

Mark Pigott

We don't go out as you know you’ve been following us, we don't come out with a specific number, but we look at it this way, at DAF we have 100% share.

J.B. Groh - D.A. Davidson

Okay. And then you have been pretty active on the share repurchase front. And looking out to the regular special dividend in Q4, how should we think about the payout ratio and return to shareholders. Does the fact that you have been pretty active on the repurchase front lower that traditional payout you get for the full year?

Mark Pigott

I can't really comment on it. But I will give you a good counter boy, because that’s the first time I think I heard anybody ever say regular special dividend. I haven't been able to bring that in my lexicon now. But as far as any other items I really can't comment.

J.B. Groh - D.A. Davidson

Thank you, Mark.

Mark Pigott

Thank you. Appreciate it.

Operator

Your next question from Joel Tiss with Lehman Brothers.

Mark Pigott

Joel, good morning.

Joel Tiss - Lehman Brothers

Good morning. How are you.

Mark Pigott

Good, thanks. You have a big game coming up here tonight. I don't know if you were going to switch your allegiance or not.

Joel Tiss - Lehman Brothers

I don't know. I still like the Mets. Can you give us just a little help on the margins declining the Financial Services business?

Mark Pigott

In the financial services business?

Joel Tiss - Lehman Brothers

The operating margins.

Mark Pigott

Okay.

Ron Armstrong

Yeah, the margins continue to be strong. We are -- our new business volume is still generating strong margins. We are getting an increasing share of the PACCAR products that are sold. And the portfolio continues to perform well and inline with our expectations.

Joel Tiss - Lehman Brothers

Is the growth that you are experiencing coming at reduced margins to the existing business?

Ron Armstrong

No, no, the new business volume is being added on and is generally in line with our expectations and recent historical margin percentages.

Mark Pigott

And Joel, if you look at it, of course, the finance groups achieved record income as, if you know. And we are seeing very strong growth, particularly in Europe, because we just have been there for, five or six years, and then just looking back to the middle of the

Summer, when we acquired the leasing company in Germany.

That is starting to gain some traction. That's very positive. So, you know, record results and good all the way around. I think, let me just ask Ron to comment because obviously there is lots of discussion in the financial community about, let's call it turbulent market. maybe Ron can give you a little flavor on how well positioned PACCAR is.

Ron Armstrong

In the U.S. as well as the other capital markets, what we have seen recently is a flight to quality by investors wanting to buy PACCAR's commercial paper and medium-term notes.

Our excellent double Aminus credit rating has given us an even greater cost advantage against many of our competitors and our peers, sometimes a 100 basis points and more. And as I've said our portfolio continues to perform well.

Thinking about your question about margins, what you maybe seeing is just a fact of interest rates are up on both the revenue and cost side, and that's the effect I think you are seeing. Does that help you out? Joel?

Operator

We may have lost Mr. Tiss.

Mark Pigott

Okay. Thank you.

Operator

Move on to the next question, Mr. Jamie Cook with Credit Suisse.

Mark Pigott

Good morning, Jamie.

Jamie Cook - Credit Suisse

Good morning. I didn't think I was missed or, but nothing has changed nothing has changed over here. But I guess my first question speaks to, I guess goes to the strength of the European markets. Mark, can you just talk about any possible capacity constraints you are seeing or supplier constraints you are seeing over there and is that limiting your ability to meet demand?

Mark Pigott

That is a great question. I think one of the strengths and I think one of the unique strengths of PACCAR is our relationship with our suppliers, where, we are investing many millions of dollars.

It could be $20 million, $30 million, $40 million per year in our suppliers to help them achieve improved quality, capacity, and profitability, that’s a byline you don't see in many industry particularly in the automotive type of industry.

So I think everybody is working very hard through the entire logistic chain to increase their capacity, and it is never just a linear process. So I think as one of the fellows early on said you have different step changes, but I think people are looking out 3 to 5 years

saying, it should be a pretty good market throughout Europe.

And we are certainly working with our suppliers to increase their quality and capacity and profitability. So I think we might be in better shape than many of our competitors.

Jamie Cook - Credit Suisse

Okay. And then I appreciate you including central Europe in your outlook in terms of your retail sales forecast for Europe in 2008. Can you comment though, what are you expecting out of the export market to Mexico, Australia, those markets, because they obviously, been very strong, and I think helpful in this sort of North American downturn. So what are your thoughts for those markets?

Mark Pigott

Well they are, Mexico is at record levels. Australia is at record levels this year. The other element I just bring up and doesn't typically get too much discussion during these meetings is our aftermarket customer support and parts program.

This team is doing a really excellent job. I just flew back from Budapest where we began the construction of a new distribution center, but the technology that is going into those facilities and the customer services reaching all the way through our dealers out to our customers is probably three to five years ahead of our competitors in terms of providing absolutely world-class service.

We benchmarked Wal-Mart. We benchmarked Amazon and other very good logistic companies and PACCAR comes out looking very, very good. So as I indicated and we said in the press release, next year we are looking for a return to more of a normalized U.S. and Canadian market, and couple of that with what we estimate to be another very strong market in Europe.

Jamie Cook - Credit Suisse

And Australia and Mexico?

Mark Pigott

Mexico I think will be another strong year. I can't really say whether it’s going to be a record or not, but…

Jamie Cook - Credit Suisse

There is awful lot thought process.

Mark Pigott

The emissions regulation deadline in the middle of the year, which will have some impact, but, as you know, we have 40% to 50% market share down there, and we continue to invest. We have a brand-new factory and continue to invest in that new factory.

So one of the advantages of the Mexican market is ability to export duty-free to a number of markets in, well, South America but even into Europe. So we are taking advantage of that.

Jamie Cook - Credit Suisse

All right, I will get back in queue. Thank you. Thanks a lot.

Mark Pigott

Thanks a lot.

Operator

Your next question comes from Robert Toomey with E.K. Riley Investments.

Mark Pigott

Hello, Bob.

Robert Toomey - E.K. Riley Investments

Hi, good morning,. Mark, how are you?.

Mark Pigott

Fine, thanks.

Robert Toomey - E.K. Riley Investments

Good. Congratulations on another great quarter.

Mark Pigott

I appreciate it.

Robert Toomey - E.K. Riley Investments

I have a question. You mentioned in your prepared comments that you are seeing 30% productivity gains at the Chillicothe factory and the Kenworth expansion.

And I’m just wondered, if that outsized improvement, is that a little bit better than you’ve seen in some of your other -- plant upgrades and if so, do you think there is the possibility of seeing even further improved productivity gains over, the kind you have been getting for the last few years?

Mark Pigott

Well, obviously, our company very well, and so it's a part of the DNA of PACCAR's continuous improvement Kaizan and that we’ve been doing that for let's say 102 years. What we’re implementing at many of our facilities is along the lines of, sort of, our leadership in Six Sigma and Lean Manufacturing but also increasing the capital investment to make specific capacity and productivity enhancements.

Just as an example, Our Leyland facility pioneered and was the first in the world to design and implement a robotic chassis paint line. Now robots are not new and chassis lines are not new, but what is new is a robot moving painting a moving line.

And that is the first in, anywhere in the automotive world or commercial vehicle world. We’re now, and we have many patents on that. We are now implementing that in a number of our facilities around the world. It’s a major capital investment, but a huge improvement in already great quality and inefficiency.

So that type of specific investment is being made because of some very innovative thinking by many of our teams.

Robert Toomey - E.K. Riley Investments

Okay. Thank you. And the other question I had was, is it possible -- you talked a little bit earlier about strength in central and Eastern Europe, and you are talking positively about the long-term growth there.

Can you give us a little more color on either sizing the potential there or maybe comparing it to Western Europe or North America, say over the next five years?

Mark Pigott

Sure, that's a great question. Just ballpark sort of, if you normalize the figures and obviously it’s changing, but if five years ago, Central Europe was, let's say, 5,000 to 10,000 new units a year,

we are not talking about used units because that's also a very strong market for everybody in Europe.

But it was 5,000 to 10,000 units. This year we’re sort of saying 40,000 to 50,000 units and three to five years out, it could be 90,000 to 100,000 units. And if you go out five or ten years, there are some people are saying it might be a market as big as Western Europe.

Now who knows. We’ll see what happens, but the investment and the path towards a capitalistic system that many of these countries are embarking on and, of course, they now have very low tax rates.

Many of the Central European countries are -- let's call it, 15% to 20% tax rates are making attractive for companies to come in and invest. Road buildings are going on. New businesses are there, infrastructure development.

And we’re really not even mentioning turkey, which is the biggest country that could be in the EU. I am not involved with the politics, but the largest population and the largest landmass outside of

Russia.

So, for PACCAR, we're really looking at the market let's call it from the top of Scotland all the way to the Middle East. It's going to be a very big market. Very exciting.

Robert Toomey - E.K. Riley Investments

And any, any read on what's happening, Mark, in Russia in your opportunities there?

Mark Pigott

Well, we have sold into Russia for decades. Russia is developing their infrastructure and there is increased demand for new and used. I'd say primarily used but new is increasing. I don't have a figure for you, but it's a landmass larger than United States, and a lot of people there. And, they are making their investments to grow their country.

Robert Toomey - E.K. Riley Investments

Great, thanks very much.

Mark Pigott

You bet. Thanks a lot, Bob.

Robert Toomey - E.K. Riley Investments

Yeah.

Operator

Your next question comes from Jon Steinmetz with Morgan Stanley.

Mark Pigott

Good morning, Jonathan.

Jon Steinmetz - Morgan Stanley

Good morning. Thanks. Just a few follow-ups here. Are you able to provide a little bit of a walk on the European year-over-year revenue? Say you're up about $500 million. Are you able to talk about how much would have been currency translation versus volume versus maybe some of the price mix that drops out after those two are involved?

Mark Pigott

Well, we can talk a little bit about currency. The impact on revenues from the currency movement quarter-on-quarter was a $116 million.

Jon Steinmetz - Morgan Stanley

Okay. So 3Q…

Mark Pigott

That's all we could really break out for you. But obviously a lot -- a lot of growth.

Jon Steinmetz - Morgan Stanley

Sure. I mean out of the other 400 or so, was there more of a coming from volume than there was from mix in pricing.

Mark Pigott

I'd say they are pretty equal.

Jon Steinmetz - Morgan Stanley

Okay.

Mark Pigott

Yeah.

Jon Steinmetz - Morgan Stanley

Regarding the U.S. forecast and I guess it's more of an industry forecast than a PACCAR specific forecast per stay. But when you think about it do you think the second half to be substantially stronger than the first half or do you feel like that sort of an equal run rate throughout the year?

Mark Pigott

Well, I think the second half will probably be a little larger than the first half.

Jon Steinmetz - Morgan Stanley

Okay. But it's not some sort of massive hockey stick backup?

Mark Pigott

Well, I can't really comment but we will just have to see how the general economy does and obviously there is a normalized replacement demand. I mean there is a lot of freight being hauled as I mentioned in my prepared comments. It might be down 5%, but so let's call it; the freight is the second best year in United States history. So vehicles are being used and they have to be replaced. And the good thing is and that we didn't really mention this was the '07 technology to meet the new emission requirements '07 technology to meet the new emission requirements is very well accepted. It's almost a non-event now. So, I think people are saying, I need a new vehicle, business is good, got to go buy one.

Jon Steinmetz - Morgan Stanley

And lastly, in the finance company, it looked like the provisions were up a little bit from a pretty low level. But can you talk in terms of real time trends that you're seeing any upticks and delinquencies and that kind of stuff any small carriers that are having problems in the environment and sort of in this macro environment perspective.

Mark Pigott

The portfolio continues to perform well. And we're, seeing continued strong performance.

Jon Steinmetz - Morgan Stanley

Okay. Any number or anything that you guys…

Mark Pigott

A lot of people making a lot of money.

Jon Steinmetz - Morgan Stanley

I am sorry?

Mark Pigott

I said there is a lot of our customers making who are making a lot of money.

Jon Steinmetz - Morgan Stanley

Yes, they are. And it there any, I don't know if you guys give out anything in terms of delinquency type numbers, 30 days or 60 days publicly.

Mark Pigott

No, we don't. And as Ron said it's just an excellent finance company and we have great dealers and great customers, and a good team.

Jon Steinmetz - Morgan Stanley

Okay. Thank you very much. Thanks a lot, appreciate it.

Operator

Your next question comes from Andrew Casey with Wachovia Capital Markets.

Mark Pigott

Hello, Andrew.

Andrew Casey - Wachovia Capital Markets

Good morning.

Mark Pigott

Good morning.

Andrew Casey - Wachovia Capital Markets

I kind of feel like the Stanford band guy after…

Mark Pigott

This is me after they beat USC, we hope.

Andrew Casey - Wachovia Capital Markets

Yeah. I am going back a few more years.

Mark Pigott

I know you are. I know you are.

Andrew Casey - Wachovia Capital Markets

Anyways, if we could go back to kind of the European question, and congratulations on that performance.

Mark Pigott

Thank you very much.

Andrew Casey - Wachovia Capital Markets

The sequential, I realize that you guys have kind of changed through the years and mitigated some of the, typical European vacation schedules.

Mark Pigott

Yes, that's correct.

Andrew Casey - Wachovia Capital Markets

Back to kind of Peter's questions and then the one that just came from Mr. Steinmetz, the year-over-year comp in Q3 '06, was there anything at all odd about that given the October emission standard over there?

Mark Pigott

Are you talking about for DAF?

Andrew Casey - Wachovia Capital Markets

Yes.

Mark Pigott

Help me out with the question a little bit more.

Andrew Casey - Wachovia Capital Markets

A lot of us are trying to figure out really how you pulled this off given in North America.

Mark Pigott

Oh, I see, okay. Well, do you have a minute?

Andrew Casey - Wachovia Capital Markets

Sure.

Mark Pigott

Okay. First of all, I think the press release handled it in a very professional manner. What I think, many of the U.S. analysts and we welcome you to tour our facilities in Europe and talk with the teams over there. I think you would enjoy it and be very, very impressed.

But we have owned DAF for a 11 great years and we have a terrific team there, we’re very proud of them. What they have been able to do is amazing and I am the first to admit it. They are the only manufacturer that every model has been Truck of the Year.

They have established the best range of product from A to Z. Nobody else is close. They have increased their quality. They are the quality leader. They are the low-cost operational cost for our customers. They are the highest resale value. They are the innovation and technology leader, they are the first to meet all the new emission requirements either a year or two years ahead.

They are the most productive, most efficient manufacturer. They have the best back up, they have the best finance. Now they have the best leasing, they have the best aftermarket. And it all sounds like, I am sure you are thinking, okay, fine, but everybody says that, but if you go there and go to Europe, you will find everybody saying that about DAF.

And so with the, first of all, two things, in Europe, a number the governments have a more proactive strategy that they encourage customers to purchase new technology by giving them some sort of incentive, maybe a tax break, maybe a mileage benefit, whatever it is. And so that tends to level the demand curve, not the what we see in the U.S. more of a step function.

So that's one thing. Two, with the new emission requirements from a year ago, which you accurately have indicated, DAF introduced not just an engine that met them. They introduced an entire new range product. And that new range of product the XF105, which won the Truck of the Year, new powertrain, basically has taken the industry by storm. It’s the number one vehicle in Europe hands down.

So sort of long answer to it, but very good question. But DAF has done is taken advantage of some legislative requirements and said let's come out with a brand-new product and the customers have responded very positively saying not only does it meet the new emission requirement, but it’s a brand-new vehicle that is going to make me as a customer a lot of money. How is that?

Andrew Casey - Wachovia Capital Markets

That works. Thank you very much.

Mark Pigott

Thank you.

Operator

Your next question comes from David Bleustein with UBS.

Mark Pigott

Good morning, David.

David Bleustein - UBS

Good morning. Quick question. You mentioned that the 2007 emissions changeover ended up being

almost a nonevent in the minds of customers. With that as it is, do you expect that to dampen the pre-buy in ’09 and downdraft in 2010 relative to '06, '07?

Mark Pigott

That’s an excellent question and I think it’s a perceptive question that may get factored in. There are still discussions with the EPA and how it’s going to be handled, but, you know and you’ve been in the industry for a while.

You know every three, four, five years, we have a new legislative requirement of some sort. It just happens to be on emissions in recent 10 or 15 years. I think customers are increasingly very sophisticated.

They understand and their business is very strong, by the way. They recognize that if that's their business, new technology is going to come along and they work very closely with PACCAR

and our dealers, and I think they are understanding that, let's get on with it, and maybe just have a normal purchasing cycle year in and year out.

David Bleustein - UBS

Fair enough. And then, what are your preliminary thoughts on the pervasive technology for

2010?

Mark Pigott

I really can't comment. We're ready with a host of technologies to deliver our customers the best products in the world. So that is still an ongoing discussion as you’ve indicated.

David Bleustein - UBS

Fair enough. Thanks a bunch.

Mark Pigott

Thank you.

Operator

Your next question comes from Peter Nesvold with Bear Stearns.

Peter Nesvold - Bear Sterns

Hi, Mark.

Mark Pigott

Hi, Peter.

Peter Nesvold - Bear Sterns

May I have as a follow-up on that last question. You use SCR right now in Europe on DAF engines?

Mark Pigott

Yes, we do.

Peter Nesvold - Bear Sterns

And so, if I were to just use as a working assumption. You use SCR , the end of using SCR in the '09 engines or 2010 engines here to building capacity for '09. Does it make sense to support three different technologies?

I mean, at what point does the added complexity of supporting different manufacturers start to erode your ability to maximize fuel economy and other factors?

Mark Pigott

Well, one of the wonderful strengths of PACCAR, and as you know there are many, is to offer our customers a selection, and that results in a premium product and a very, very happy customer which is really our ultimate goal. So it's an excellent question. And it is one that we discussed for 102 years. And we are committed to making sure that our customer have an option and, you know, that's -- that's kind of the way we are looking at that time.

Peter Nesvold - Bear Sterns

All right. Okay, thanks, Mark

Mark Pigott

Thanks.

Operator

Your next question comes from Steven Volkmann with JP Morgan.

Mark Pigott

Good morning Steve.

Steven Volkmann - JP Morgan

Good morning, guys. Just a couple of quick follow-ups I guess. On your market share plans for Europe, have those changed or been increased at all given what is going on over there?

Mark Pigott

No, in fact on the second page of our press release, there is a comment from ad, our President, that the goal is to achieve 20% and over for DAF.

Steven Volkmann - JP Morgan

Okay. Fair enough. Any comments on the share repurchases going forward?

Mark Pigott

No. I think we covered the share repurchases in the prepared press release, and we are just, I would publicly go on record saying we got the greatest shareholders in the world and they are fantastic.

Steven Volkmann - JP Morgan

Okay, great. And then you talked a little bit about the '07 change having been sort of turned into kind of a non-issue and gotten past us here, and there have been pretty significant market share values among your suppliers.

Are you seeing availability of the '07 engines in the U.S. Has that eased up. In other words, people can get whatever they want but they are really voting with their dollars with respect to the different engines out there now. Is that accurate?

Ron Armstrong

I can't really comment. All I know is we build whatever our customers want.

Steven Volkmann - JP Morgan

Okay. But your not having any trouble getting engines from any of your suppliers?

Ron Armstrong

You know it's an everyday program. And if the customer wants X, Y and Z, we are going to work hard to get it for them.

Steven Volkmann - JP Morgan

Okay. Thanks. I appreciate it.

Operator

Your next question comes from Denovo Santiago with Massway Capital (ph).

Ron Armstrong

Good morning

Denovo Santiago - Massway Capital

Hi, good morning. The growth rate that you have in Europe looks like those are peak numbers or maybe above their replacement rate. What is the typical replacement rate for those markets?

Mark Pigott

You are talking about the truck rate?

Denovo Santiago - Massway Capital

Yeah. You are saying that, you know, this year you are expecting 300 and…

Mark Pigott

I see, okay. Well, to what, of course, now what we are including is the Central and Eastern European, so I think if you back that out, and I think as we talked a little bit earlier, we are seeing significant growth in the Central and European market.

The western European markets are also at very strong levels. So, I think that maybe what is slightly confusing.

Denovo Santiago - Massway Capital

Just kind of those numbers I can't compare with the number that use to relieve a few years

ago.

Mark Pigott

That is correct.

Denovo Santiago - Massway Capital

But how?

Mark Pigott

You are correct, right. We have now expanded it to include the 27 EU countries.

Denovo Santiago - Massway Capital

And how much more truck on average do you think this implies in that number?

Mark Pigott

Well, I am not sure which ones you are looking at from a few years ago but in '04. If you look at central, Eastern, and let's say that's 40,000 units to 50,000 units. Then the remainder would be Western Europe.

Denovo Santiago - Massway Capital

Okay. So -- so the question still remains. Do you think those numbers -- when you include overall, they are on the -- countries that you sell to, do you think you are above, below, on average of the replacement rate? Where are you.

Mark Pigott

Oh, I see. Well I think at this time there is very strong growth and many new economies coming into the equation. So I am not sure what the replacement rate was going to be at this time, because we haven't hit let's call it a normalized replacement cycle yet. Everybody in central Eastern are building up.

Denovo Santiago - Massway Capital

So, do you think it is hard to know right now?

Mark Pigott

I think it is going to take a few years for it to really establish itself in terms of what is the replacement rate.

Denovo Santiago - Massway Capital

In your comment early about on pricing in the U.S. if it is changing for, if you take one typical unit that you sold a year ago or two years ago and compare with the pricing that you are getting now, where are you at this point?

Mark Pigott

We don't typically comment on that.

Denovo Santiago - Massway Capital

Can you just like directionally?

Mark Pigott

No, we can't do that either.

Denovo Santiago - Massway Capital

Okay. Thank you.

Mark Pigott

Thank you.

Operator

Your next question comes from Garrett Stevens with Giovine Capital.

Garrett Stevens - Giovine Capital

Yes Hi. Thanks.

Mark Pigott

Good morning Garrett.

Garrett Stevens - Giovine Capital

Thanks. Good morning, Mark. Can you give us an update on the clean power technology, your auxiliary power unit, whether that will be worked into the production line yet or still on aftermarket option and what the adoption rates are?

Mark Pigott

Yes. It’s still a very exciting project. I appreciate you bringing it up. And it’s really met with great industry response, but it’s still early days and let's call it pre-production cycle.

Garrett Stevens - Giovine Capital

So, it is not currently in the production line yet?

Mark Pigott

It is, but on a very limited basis.

Garrett Stevens - Giovine Capital

Okay. Thank you.

Mark Pigott

Thank you very much.

Operator

Your next question comes from Jeff Glass with Birchway Capital.

Mark Pigott

Good morning, Jeff.

Jeff Glass - Birchway Capital

Good morning. Congratulations on great quarter.

Mark Pigott

Thank you very much.

Jeff Glass - Birchway Capital

I think you had commented that you are gaining market share in the class 8 segment in North America.

Mark Pigott

That's correct.

Jeff Glass - Birchway Capital

And I was wondering if you were able to comment on which of your competitors you might be gaining that share from?

Mark Pigott

You probably have those figures even better than I have, we just want to make sure that we’ve got the most satisfied customers in the industry.

Jeff Glass - Birchway Capital

Okay. Thanks very much.

Mark Pigott

Appreciate it. Thank you.

Jeff Glass - Birchway Capital

Yes, bye.

Operator

There are no further questions at this time.

Mark Pigott

No, thank you, operator.

Mark Pigott

Thank you.

Operator

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

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Source: PACCAR Q3 2007 Earnings Call Transcript
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