PACCAR Q3 2007 Earnings Call Transcript

Oct.24.07 | About: PACCAR Inc. (PCAR)

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 2007Earnings Conference Call. All lines will be in a listen-only mode until thequestion-and-answer section. Today's call is being recorded (OperatorInstructions).

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

Cathy MacLeod

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

Certain information presented today will be forward-lookingand involve risks and uncertainties including general economic and competitiveconditions that may affect expected results. I would now like to introduce MarkPigott.

Mark Pigott

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

The first nine months of the year, PACCAR earned excellentnet profits of $966.2 million on revenues of $11.46 billion. These nine-monthearnings are the second best in the company's 102-year history. We're very proudof 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 therespective periods. PACCAR has increased its regular quarterly dividend by 35%during the year, and averaged a 20% dividend increase every year in the lastdecade. We are pleased to have earned a compound annual growth rate of 22.2% inthe last decade, compared to 7.7% for the S&P 500.

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

The positive impact of the stronger euro on quarterlyrevenues was $116 million. Strong GDP growth in Europe, Asia and North Americacontributed to our results. PACCAR realized strong earnings from sales of itspremium products and services in Europe, Mexico, and Australia in the thirdquarter, moderated by soft market conditions in the U.S. and Canada.

Assets in the Financial Services business expanded to arecord $10.7 billion during the quarter and generated record pretax profits of$73.4 million, a 10% increase over last year. PACCAR's worldwide aftermarketparts revenue continued its double-digit growth rate this quarter and isgenerating excellent profits, as PACCAR's population of our vehicles is nowover 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 asinfrastructure, investment and freight traffic are at record levels. DAF hasestablished itself as a quality leader and is recognized delivering the lowestcost of operations for its customers.

Responding to strong industry demand and the expanded EU forvehicles 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 forthe tractor segment this year. The EU economy continues to perform well, andthe 27 EU countries should achieve a record year of 320,000 units.

2008 truck sales are estimated to be a record level of330,000 to 350,000 units. Those of you who have been following PACCAR for thelast 10 years or so, certainly realize that the company has significantlyenhanced its product range and global markets. We now sell into over 100countries.

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

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

There's been some discussion in the industry about freightton-miles. I thought we would address that. Looking at fright ton-miles on anormalized 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 customersachieving record profits.

Taking a longer-term view. Over the past 10 years PACCAR'sinvestment in technology, facilities and innovative new products and serviceshave expanded our worldwide capabilities benefiting our customers and providinglong-term growth and excellent cash flow. The pace of investment is increasingwith many current projects underway.

PACCAR's $400 million engine production facility andtechnology center is under construction in Columbus, Mississippi. Thisstate-of-the-art facility will incorporate leading edge diagnostic and trackingtechnology to produce, monitor and service the highest quality 9.2 liter and12.9 liter PACCAR diesel engines.

Kenworth and Chillicothe completed its 105,000-square footfacility addition. The new assembly plant is achieving productivity gains of30% by adding robotics, single touch material handling and the use of RFIDtracking.

PACCAR is building its 13th parts distribution center nearBudapest Hungary, a country, which is rapidly investing in all phases of itseconomy. Our new 270,000-square-foot center, which is scheduled to be openednext year, will be equipped with advanced inventory management and logistictools and is located to serve the fast-growing DAF market in central andEastern Europe.

One of the things that I think I'm most proud of for thePACCAR team is the company and its employees being recognized as globalenvironmental leaders. DAF, PeterBilt, Kenworth, Parts, IT Parts have allshowcased outstanding new hybrid vehicles for both the medium and heavy dutymarkets at recent transportation shows and forums.

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

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

Turning to our products and our great customers, as youknow, all of PACCAR products have established a reputation for outstandingquality 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 highestcustomer satisfaction. PACCAR has earned 23 J.D. Power Awards. The nearestcompetitor has earned just nine.

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

All in all, a very strong, solid quarter, plenty ofopportunities. PACCAR is pleased to have earned the second-best nine monthsresults 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 PeterNesvold 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 aminute. And when I look normally from 2Q to 3Q, PACCAR's production is aboutflat, maybe up slightly. This quarter, you were down about 14% or sosequentially by our estimates.

As you look into fourth quarter, how does the run rateproduction progress from here? Are you flat again for 3Q to 4Q? That’s normallylooks like, what you normally, maybe down 1% or so. But given the build ratesas 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, andas 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 newsis, we continue to increase production at our plants around the world, andthat's having a very positive impact.

Peter Nesvold - Bear Stearns

Actually that tells, I think, well into the second questionI 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 youmentioned 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 yourproduction capacity over there?

Mark Pigott

Well, it is an ongoing program. We are also increasingcapacity at our Leyland facility in the U.K. And it is a fantastic facility aswell 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 isgoing on in Amsterdam. Today is press day, and we will be showing some excitingnew products.

But everybody is doing well in Europe and DAF is certainlypleased to be the quality and resell leader, and we are going to continue toinvest 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 theproduction capacity in 3Q that went effective as of that time which kind ofcontinues to trend flat, gradually upward or was there no such kind of stepchange increase?

Mark Pigott

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

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 digittype 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 teamsworking and achieving about 5% to 7% efficiency improvements over the course ofyear in, year out. And, I think that kind of range is what you’re probablylooking at.

Peter Nesvold - Bear Stearns

And in terms of pricing of that, I have to believe it’spretty strong. We heard from Volvo this morning, European booking is up 90% in3Q for them. When does, I am assuming you are getting a step increase inpricing. Can you quantify it and when does it kind of roll through theproduction?

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 someimprovement in -- in margins and pricing. And, when you take a littlelonger-term view of Europe, and when we say Europe, we’re really talking about27 countries now, which I think is an important distinction to make.

You got a lot of growth going on particularly in thatCentral and European van and of course Western Europe is too 2% GDP. It lookslike 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 thereis 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 newdomestically produced engine and what are your thoughts there, you know, therehave been some rumors of someone leaving the market and that sort of thing? Iwanted 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 torumors anymore. The exciting news for us is we have got great engines. Webelieve they are the best in the world. Certainly, in the European market theyare regarded as the best. Even our competitors grudgingly say that. So that’sthe engine we are bringing over to put in Kenworth and PeterBilt trucks.

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

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

J.B. Groh - D.A. Davidson

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

Mark Pigott

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

J.B. Groh - D.A. Davidson

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

Mark Pigott

I can't really comment on it. But I will give you a goodcounter boy, because that’s the first time I think I heard anybody ever sayregular 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. Idon'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 alittle 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 newbusiness volume is still generating strong margins. We are getting anincreasing share of the PACCAR products that are sold. And the portfoliocontinues to perform well and inline with our expectations.

Joel Tiss - Lehman Brothers

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

Ron Armstrong

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

Mark Pigott

And Joel, if you look at it, of course, the finance groupsachieved 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 verypositive. 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 inthe financial community about, let's call it turbulent market. maybe Ron cangive you a little flavor on how well positioned PACCAR is.

Ron Armstrong

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

Our excellent double Aminus credit rating has given us aneven 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 continuesto perform well.

Thinking about your question about margins, what you maybeseeing is just a fact of interest rates are up on both the revenue and costside, 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 nothinghas changed nothing has changed over here. But I guess my first question speaksto, I guess goes to the strength of the European markets. Mark, can you justtalk about any possible capacity constraints you are seeing or supplierconstraints you are seeing over there and is that limiting your ability to meetdemand?

Mark Pigott

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

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

So I think everybody is working very hard through the entirelogistic chain to increase their capacity, and it is never just a linearprocess. So I think as one of the fellows early on said you have different stepchanges, 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 increasetheir quality and capacity and profitability. So I think we might be in bettershape than many of our competitors.

Jamie Cook - Credit Suisse

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

Mark Pigott

Well they are, Mexico is at record levels. Australia is atrecord levels this year. The other element I just bring up and doesn'ttypically get too much discussion during these meetings is our aftermarketcustomer support and parts program.

This team is doing a really excellent job. I just flew backfrom Budapest where we began the construction of a new distribution center, butthe technology that is going into those facilities and the customer servicesreaching all the way through our dealers out to our customers is probably threeto five years ahead of our competitors in terms of providing absolutelyworld-class service.

We benchmarked Wal-Mart. We benchmarked Amazon and othervery good logistic companies and PACCAR comes out looking very, very good. Soas I indicated and we said in the press release, next year we are looking for areturn to more of a normalized U.S. and Canadian market, and couple of thatwith 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 reallysay 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 sharedown there, and we continue to invest. We have a brand-new factory and continueto invest in that new factory.

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

Jamie Cook - Credit Suisse

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

Mark Pigott

Thanks a lot.

Operator

Your next question comes from Robert Toomey with E.K. RileyInvestments.

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 commentsthat you are seeing 30% productivity gains at the Chillicothe factory and theKenworth expansion.

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

Mark Pigott

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

Just as an example, Our Leyland facility pioneered and wasthe 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 arobot moving painting a moving line.

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

So that type of specific investment is being made because ofsome 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 itpossible -- you talked a little bit earlier about strength in central andEastern Europe, and you are talking positively about the long-term growththere.

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

Mark Pigott

Sure, that's a great question. Just ballpark sort of, if younormalize 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 verystrong market for everybody in Europe.

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

Now who knows. We’ll see what happens, but the investmentand the path towards a capitalistic system that many of these countries areembarking 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, infrastructuredevelopment.

And we’re really not even mentioning turkey, which is thebiggest 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'scall it from the top of Scotland all the way to the Middle East. It's going tobe a very big market. Very exciting.

Robert Toomey - E.K. Riley Investments

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

Mark Pigott

Well, we have sold into Russia for decades. Russia isdeveloping 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 MorganStanley.

Mark Pigott

Good morning, Jonathan.

Jon Steinmetz - Morgan Stanley

Good morning. Thanks. Just a few follow-ups here. Are youable 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 wouldhave been currency translation versus volume versus maybe some of the price mixthat drops out after those two are involved?

Mark Pigott

Well, we can talk a little bit about currency. The impact onrevenues 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 obviouslya lot -- a lot of growth.

Jon Steinmetz - Morgan Stanley

Sure. I mean out of the other 400 or so, was there more of acoming 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 anindustry forecast than a PACCAR specific forecast per stay. But when you thinkabout it do you think the second half to be substantially stronger than thefirst half or do you feel like that sort of an equal run rate throughout theyear?

Mark Pigott

Well, I think the second half will probably be a littlelarger 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 seehow the general economy does and obviously there is a normalized replacementdemand. I mean there is a lot of freight being hauled as I mentioned in myprepared comments. It might be down 5%, but so let's call it; the freight isthe second best year in United States history. So vehicles are being used andthey have to be replaced. And the good thing is and that we didn't reallymention this was the '07 technology to meet the new emission requirements '07technology to meet the new emission requirements is very well accepted. It'salmost 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 theprovisions were up a little bit from a pretty low level. But can you talk interms of real time trends that you're seeing any upticks and delinquencies andthat kind of stuff any small carriers that are having problems in theenvironment and sort of in this macro environment perspective.

Mark Pigott

The portfolio continues to perform well. And we're, seeingcontinued 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 makinga lot of money.

Jon Steinmetz - Morgan Stanley

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

Mark Pigott

No, we don't. And as Ron said it's just an excellent financecompany 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 WachoviaCapital 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 Europeanquestion, 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 changedthrough the years and mitigated some of the, typical European vacationschedules.

Mark Pigott

Yes, that's correct.

Andrew Casey - Wachovia Capital Markets

Back to kind of Peter's questions and then the one that justcame from Mr. Steinmetz, the year-over-year comp in Q3 '06, was there anythingat 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 pulledthis 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 ina very professional manner. What I think, many of the U.S. analysts and wewelcome you to tour our facilities in Europe and talk with the teams overthere. I think you would enjoy it and be very, very impressed.

But we have owned DAF for a 11 great years and we have aterrific team there, we’re very proud of them. What they have been able to dois amazing and I am the first to admit it. They are the only manufacturer thatevery 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 qualityleader. They are the low-cost operational cost for our customers. They are thehighest resale value. They are the innovation and technology leader, they arethe first to meet all the new emission requirements either a year or two yearsahead.

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

And so with the, first of all, two things, in Europe, anumber the governments have a more proactive strategy that they encouragecustomers 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 tendsto level the demand curve, not the what we see in the U.S. more of a stepfunction.

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

So sort of long answer to it, but very good question. ButDAF has done is taken advantage of some legislative requirements and said let'scome out with a brand-new product and the customers have responded verypositively saying not only does it meet the new emission requirement, but it’sa brand-new vehicle that is going to make me as a customer a lot of money. Howis 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 2007emissions changeover ended up being

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

Mark Pigott

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

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

They understand and their business is very strong, by theway. They recognize that if that's their business, new technology is going tocome 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 andyear out.

David Bleustein - UBS

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

2010?

Mark Pigott

I really can't comment. We're ready with a host oftechnologies to deliver our customers the best products in the world. So thatis 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 BearStearns.

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 SCRright 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. Youuse SCR , the end of using SCR in the '09 engines or 2010 engines here tobuilding capacity for '09. Does it make sense to support three differenttechnologies?

I mean, at what point does the added complexity ofsupporting different manufacturers start to erode your ability to maximize fueleconomy and other factors?

Mark Pigott

Well, one of the wonderful strengths of PACCAR, and as youknow there are many, is to offer our customers a selection, and that results ina premium product and a very, very happy customer which is really our ultimategoal. So it's an excellent question. And it is one that we discussed for 102years. And we are committed to making sure that our customer have an optionand, 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 JPMorgan.

Mark Pigott

Good morning Steve.

Steven Volkmann - JP Morgan

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

Mark Pigott

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

Steven Volkmann - JP Morgan

Okay. Fair enough. Any comments on the share repurchasesgoing forward?

Mark Pigott

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

Steven Volkmann - JP Morgan

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

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 theyare really voting with their dollars with respect to the different engines outthere now. Is that accurate?

Ron Armstrong

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

Steven Volkmann - JP Morgan

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

Ron Armstrong

You know it's an everyday program. And if the customer wantsX, 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 MasswayCapital (ph).

Ron Armstrong

Good morning

Denovo Santiago - Massway Capital

Hi, good morning. The growth rate that you have in Europelooks like those are peak numbers or maybe above their replacement rate. Whatis 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 areexpecting 300 and…

Mark Pigott

I see, okay. Well, to what, of course, now what we areincluding 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 growthin 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 numberthat 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 includethe 27 EU countries.

Denovo Santiago - Massway Capital

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

Mark Pigott

Well, I am not sure which ones you are looking at from a fewyears ago but in '04. If you look at central, Eastern, and let's say that's40,000 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 thinkthose numbers -- when you include overall, they are on the -- countries thatyou sell to, do you think you are above, below, on average of the replacementrate? Where are you.

Mark Pigott

Oh, I see. Well I think at this time there is very stronggrowth and many new economies coming into the equation. So I am not sure whatthe replacement rate was going to be at this time, because we haven't hit let'scall it a normalized replacement cycle yet. Everybody in central Eastern arebuilding 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 reallyestablish 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 ischanging for, if you take one typical unit that you sold a year ago or twoyears ago and compare with the pricing that you are getting now, where are youat 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 GiovineCapital.

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 theclean power technology, your auxiliary power unit, whether that will be workedinto the production line yet or still on aftermarket option and what theadoption rates are?

Mark Pigott

Yes. It’s still a very exciting project. I appreciate youbringing it up. And it’s really met with great industry response, but it’sstill 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 BirchwayCapital.

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 sharein 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 ofyour competitors you might be gaining that share from?

Mark Pigott

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

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 earningsconference call. Thank you for participating. You may now disconnect.

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