PACCAR, Inc. Q2 2008 Earnings Call Transcript

Jul.22.08 | About: PACCAR Inc. (PCAR)

PACCAR, Inc (NASDAQ:PCAR)

Q2 FY08 Earnings Call

July 22, 2008, 12:00 PM ET

Executives

Robin Easton - Treasurer

Mark C. Pigott - Chairman and CEO

Ronald E. Armstrong - Sr. VP

Michael T. Barkley - VP and Controller

Analysts

J. B. Groh - D. A. Davidson

Jamie Cook - Credit Suisse

Andrew Casey - Wachovia Securities

Andrew Obin - Merrill Lynch

Henry Kirn - UBS

Kristine Kubacki - Avondale Partners

Operator

Good morning, and welcome to PACCAR's Second Quarter 2008 Earnings Conference Call. All lines will be in a listen-only mode until the question-and-answer session. Today's call is being recorded and if anyone has an objection, they should disconnect at this time.

I would now like to introduce Mr. Robin Easton, PACCAR's Treasurer. Mr. Easton, please go ahead.

Robin Easton - Treasurer

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, Senior Vice President and Michael Barkley, Vice President and Controller.

As with prior conference calls, if there are all 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 - Chairman and Chief Executive Officer

Good morning. PACCAR today announced very good earnings for the second quarter of 2008. In fact it was the sixth best income quarter in the company's 103 year history and the fourth best revenue quarter in our history, excellent results.

PACCAR's performance reflects the company's global diversification, world-class technology and a growing aftermarket and financial services business. PACCAR's strong balance sheet and outstanding cash flow have allowed the company to increase its capital investments in new products, enhance facility efficiency and increase aftermarket capacity.

We invested over $205 million in capital projects and research and development during the quarter. PACCAR's net sales and financial services revenues were $4.1 billion for the quarter. Net income was $313.5 million compared to $298.3 million last year.

On a per share basis, earnings were $0.86, up 9% compared to the second quarter of 2007. PACCAR's after tax return on revenue during the quarter was 7.6%. PACCAR has certainly benefited from having over 65% of its business outside the U.S. We delivered increase revenues and profits from commercial vehicle sales in Europe and Australia. Europe truck sales are robust due to the growth in Central Europe as countries invest in their infrastructure.

Our Financial Services business is expanding as total assets reached $11.1 billion. The healthy performance of our finance and after market segments has complimented the manufacturing business. Taking a little longer term prospective over the past 10 years, PACCAR has invested over $3 billion in products, infrastructure and technology to develop and produce the industry's highest quality vehicles and services.

As part of this ongoing investment program, PACCAR's $400 million world class engine facility is progressing on schedule and due to be completed in late 2009. This investment complements the company's state of the art engine factory in the Netherlands and will enable the company to manufacture 12.9 liter and 9.2 liter engines for using Kenworth, Peterbilt and DAF vehicles worldwide.

Taking a look at other programs, DAF will begin construction of a new 135,000 square foot cab paint facility in Westerlo, Belgium. This project will utilize leading edge technology and will ensure that the Westerlo paint facility is a leader in being environmentally friendly. The new cab paint facility will increase DAF's manufacturing capacity by 20% and is expected to commence operations in 2010.

As you saw in the press release, PACCAR parts continues to expand capacity to serve the worldwide commercial vehicle markets. We opened a new 260,000 square foot distribution center in Budapest, Hungary last month and that will serve DAF dealers and customers in Central Europe.

Business continues to be good but PACCAR is also very proud to be an environmental leader, and to deliver the highest fuel economy in the industry to its customers. Kenworth, Peterbilt and DAF are at the forefront of hybrid technology development. Kenworth and Peterbilt medium duty trucks utilizing advanced diesel electric drive system that target 30% fuel efficiency improvement are scheduled for production in September, just a little over a month from now.

Kenworth will expand its presence in the environmentally friendly liquefied natural gas market by beginning production of Class 8 vehicles next year under an agreement with Westport Innovations. And all of our manufacturing facilities worldwide have ISO 14001 environmental certification, a terrific achievement.

Asia continues to be an area of focus for PACCAR. Our new office in Shanghai is increasing the sourcing of parts and the sale of PACCAR powertrain components to Chinese customers.

PACCAR plans to further expand its presence internationally with the opening of an engineering, purchasing, information technology and sales office in Pune, India later this year.

PACCAR's conservative credit practices have benefited the company and its customers. PACCAR Financial Services continues its global expansion as the European financial portfolio now exceeds $3.1 billion or approximately 30% of the worldwide business.

Portfolio quality is good but parts too account 2.7% at the end of June. The resale value of PACCAR products continues to generate a premium versus the competition in every market we serve. Looking at the global truck markets for 2008, there continues to be a positive economic growth in Europe though it is slowing in Western Europe.

We expect the European over 15 ton market to range between 350,000 to 360,000 units, which would be a record. DAF is planning to increase production in September by 5%. We have lowered our 2008 retail Truck sales forecast for the U.S. and Canada to be in the range of 150 to 165, to reflect ongoing challenging markets due to a slower economy.

Finally, during the second quarter, PACCAR repurchased approximately 1.89 million of its common shares, for an investment of $89.8 million. And over the last six months PACCAR has bought 4.3 million shares for a total investment of slightly over $200 million. PACCAR has achieved an average annual total shareholder return for the last 10 years of 19.6% compared to 2.9% of the S&P 500 index.

Thank you and we look forward to your questions.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from J. B. Groh with D. A. Davidson.

J. B. Groh - D. A. Davidson

Good morning, Marvey, [ph]. How you doing?

Mark C. Pigott - Chairman and Chief Executive Officer

Good.

J. B. Groh - D. A. Davidson

I thought the gross margin in the ... on the truck sales was pretty decent considering what we've seen going on with steel prices and anything related to oil. Could you, may be outline some of the initiatives that you're working on now or may work on in the future to sort of defend that margin in the phase of these raw material price increases.

Mark C. Pigott - Chairman and Chief Executive Officer

Well, that's a great question and we addressed part of that in the press release in terms of the ongoing efficiency improvements and of course the investments in our factories and our products and our services to get that 5% to 7% efficiency improvement every year which is a pretty relentless goal, but we have a great team and there are achieving it every year. But certainly, PACCAR like almost every other company in the world has been impacted by the increase in commodity prices and it's difficult to pass reserves along. But of course we are continuing to increase our investments in our factories, we talked about in the press release about Chillicothe, but every single facility we have worldwide is getting investment to make us more efficient, higher quality and of course a big part of our investment in R&D and capital is developing new products that are not only higher quality, more fuel efficient but less costly to manufacturers. So it's across the board, broad spectrum of activities.

J. B. Groh - D. A. Davidson

And then on the global sourcing fund, I imagine that there is opportunities there still?

Mark C. Pigott - Chairman and Chief Executive Officer

Yes, we touched on it in the press release and in my comments that we're going to be opening an office later this year in Pune and of course we've been in China as we say for over a 100 years. But in a relatively small fashion, and we're starting to get some good traction there, not only on the sourcing side but also on the sale side as people enjoy the benefits of the PACCAR engine. In fact, very pleased to see that the PACCAR engine was voted the best bus engine in China two years in a row. So that's going in the right direction.

J. B. Groh - D. A. Davidson

And if you had the ball park sort of where you are versus what the potential is on the global sourcing, I mean would you say you're half way that where you think you could be or just give us some perspective there?

Mark C. Pigott - Chairman and Chief Executive Officer

I would say we're early days.

J. B. Groh - D. A. Davidson

Early innings. Okay. And thanks for your time. Congratulations on the numbers in the tight environment.

Mark C. Pigott - Chairman and Chief Executive Officer

Thanks for your questions.

Operator

Your next question comes from Joe Otis [ph] with Buckingham.

Mark C. Pigott - Chairman and Chief Executive Officer

Good morning, Joe and welcome back.

Unidentified Analyst

How are you doing?

Mark C. Pigott - Chairman and Chief Executive Officer

Pretty good.

Unidentified Analyst

I wasn't gone long. I just wonder if you could talk a little bit about receivables and inventories that showed some jump more than 40% in the quarter and can you just give us a little bit of an idea what's behind that?

Mark C. Pigott - Chairman and Chief Executive Officer

Sure. Of course as you know PACCAR prides itself on being a logistics leader and inventory turns leader, what you're really seeing there is the very gradual methodical build up of some engines inventory to make a very smooth transition as we go into 2010.

This is working with our current engine suppliers to have a moderate and regularly scheduled program of buying engines to make that transition very smooth for our customers and our suppliers and our factories.

Unidentified Analyst

So we're kind of an all time high there and you think we'll start to dribble that down or are we still a little bit in the building stage on that?

Mark C. Pigott - Chairman and Chief Executive Officer

Well, there might be some additions but you've been around the industry for quite a while as we do move in to 2010, obviously that will come down quite rapidly. So it's part of a very measured plan to make the transition smooth and seamless for everybody involved.

Unidentified Analyst

Okay. and when are we going to be able to get any hints from the customers about their preference for SCR versus EGR? Can you give us any hints on what to look for there?

Mark C. Pigott - Chairman and Chief Executive Officer

Well, the SCR infrastructure rollout is really sort of beginning now. Its early days but we and others in the industry are working not only with the ATA but more importantly probably with customers, with truck stop and fuel providers to put that infrastructure in.

And, there might be some choice in 2010, but by the time you get to 2013, 14, 15, it's all going to coalesce into pretty similar systems. So I think right now there's some discussion about it, but you look five years down the road, it's going to be pretty similar emission program going on.

Unidentified Analyst

And that sort of level of confidence that I am hearing from you is that from performance or is that from what you hearing from customers or--?

Mark C. Pigott - Chairman and Chief Executive Officer

Well, of course. For us, our engines in Europe have been running with SCR for quite a while and performing well, very well. You have seen that DAF seems to get lots of awards from engine performance and fuel economy and so and we've got lots of engines out running now and I think it seems to be going pretty well.

Unidentified Analyst

Okay. And last question, could ... are you going to be able to help your customers transition into price increases in 2010 with a little bit... like put a little bit in '09 and then a little more in '010, just to sort of help them to transition into where we are going to be eventually?

Mark C. Pigott - Chairman and Chief Executive Officer

Well, there certainly will be a price increase. These emission systems are quite costly and of course the let's call it, rare materials are going into them have seen some dramatics spikes. So I think as we have seen over the last 20 years, you put out what will be accepted by the market and you got to figure out the rest by continuing to be more efficient and absorb it in our own facilities. It's a balance.

Unidentified Analyst

Okay. Thank you.

Mark C. Pigott - Chairman and Chief Executive Officer

Good. Thank you.

Operator

Your next question comes from Jamie Cook with Credit Suisse.

Mark C. Pigott - Chairman and Chief Executive Officer

Good morning Jamie.

Jamie Cook - Credit Suisse

Hi, good morning. Just a follow up question on the sort of material cost issue. As I look out sort of over the next 6 to 12 months ... from your comments it sounded like the ability to maintain your margins is more a function of PACCAR, PACCAR doing a better job on the operations front in terms of global sourcing or increasing efficiencies versus your ability to get price in the market?

Mark C. Pigott - Chairman and Chief Executive Officer

Yeah. It's a good question. Certainly, we're working hard as we have for a 103 years to get more efficient, so that'll have a positive impact and... but we're seeing as is everybody who makes about anything it's not just automotives, it's... go to the mall, go to anything that's made in this world is being impacted by all commodities and when that will be tempered is certainly the source of much discussion and debate around the world.

So we hope that the escalating prices will moderate and actually come down. We can't say when that's going to happen. So what we can do is work on what we can control and that is be more efficient, have great designs and we've got great relations with our 800 or so suppliers long term contracts for a vast majority of them which has some protection. But we recognize that those suppliers are in business too and their costs are getting impacted.

So I think everybody is working very well together and this is going to be an ongoing way of doing business.

Jamie Cook - Credit Suisse

And then can you just sort of talk about your thoughts longer term on this pre-buy that we are supposed to have ahead of the 2010 emissions standard I mean the Northern America economy's clearly worse and while Western Europe has been an area of strength for you guys that economy is deteriorating as well. So I mean, how do you think about that when we think about our forecast for sort of 2009, and then I guess just as a percentage how big is sort of Western Europe relative to everything else, so we can get a just a feel for how much that will impact you?

Mark C. Pigott - Chairman and Chief Executive Officer

Just as an aside, I think the financial analyst spend more time trying to get a number in the pre-buy than I find in our industry. So may be we should be coming to you for that number.

I think we all, we've been through various pre-buys over the last 20 years and PACCAR has done well in all of them. I think... I am not sure a pre-buy is definitely a benefit for the industry at any level, whether it's the manufacturers, the suppliers, the customers and the ultimate end-user consumers.

So as we look over a ten to twenty year range we've got our replacement cycle and size of about 250,000 units, obviously we've had years higher than that and current year is lower than that.

So our estimate is that even though the economy is challenging now in North America, that... the just mathematical formulae of vehicles running and needing to be replaced will generate more of a norm towards that replacement figure of 250,000 and if we're looking at 150 to 165, that's a great increase, for next year that's a tremendous increase.

Now, I don't know where that fits in terms of what number you have for a pre-buy but overtime, the truck market is growing about 1% faster then the GDP around the world. We expect that to continue and next year in North America, even with a tough economy I think its just law of averages that we will tend towards that replacement cycle level.

Jamie Cook - Credit Suisse

But what about your thoughts especially in Western Europe?

Mark C. Pigott - Chairman and Chief Executive Officer

Western Europe, you've got a couple of different chapters in that book. One you've got in Western Europe and then you've got Central Europe and then you've got Eastern Europe and each of those is unfolding at slightly different rates. Whether it's expanding or contracting, Central and Eastern Europe are booming, 20% of our business now is in Central/Eastern Europe. So, that's good and that's why we just opened up a new facility as I mentioned in Hungary and expanding our capacity.

So, PACCAR's through its stock group, is market share leaders in many of the Central European countries, whether it's Poland or the Czech Republic. So those companies or those countries will continue to grow and as we look at to 2015, there is some estimate that that market size and Central Eastern Europe will be equivalent to Western Europe. So it's a little bit complicated in terms of what the total...let's call it EU 27+2 market is which is the way most of us look at that right now, yeah, there are slowdowns in Ireland, Spain but that could be compensated by growth in Central and Eastern Europe.

Jamie Cook - Credit Suisse

All right. Thanks, I'll get back in the queue.

Mark C. Pigott - Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from Andy Casey with Wachovia Securities.

Mark C. Pigott - Chairman and Chief Executive Officer

Good morning, Andy.

Andrew Casey - Wachovia Securities

Hey, good morning, Mark. Good morning, everybody. Just follow up on Jamie's last question on that Western versus Central Eastern trends over in Europe. You're increasing that production, kind of into a slowing Western European market that we've heard about from several non truck companies so far. Can you ball park how much of that 5% incremental production increase would be market share in Western Europe versus the continued growth in the non developed regions?

Mark C. Pigott - Chairman and Chief Executive Officer

Well, I think realistically it's...a portion will be for Central Europe but we're also looking to grow our share which we have about 14% share in Western Europe. So we see great growth opportunities in Germany which is the largest Western European market. We're also grow... growing in Italy, we're growing in Spain even though it's a tough market, the U.K. we are the leader... we are leader in Belgium, leader in Holland.

So we're looking to grow in those markets and that's complimented by the growth of Central Europe. So I'd say it's a mix, I don't think I can say it's this percent versus that percent. It's a mix. Plus export business; whether it's the Middle East, little bit of Africa.

Andrew Casey - Wachovia Securities

Okay. Then second half of last year versus this year, is there any difference in production seasonality or should number of days be about the same?

Mark C. Pigott - Chairman and Chief Executive Officer

Yes, you're talking about for the first half or the second half?

Andrew Casey - Wachovia Securities

Second half, second half of '08 versus second half of '07?

Mark C. Pigott - Chairman and Chief Executive Officer

I think its going to be pretty comparable. The second half of last year for us in North America, we had some shut down days to balance production versus market requirements. We still have six more months to go this year. But I think it's pretty comparable.

Andrew Casey - Wachovia Securities

I guess I wasn't... the spirit to the question wasn't really focused on North America. In Europe you had some production downtime in the fourth quarter to kind of affect the capacity expansion?

Mark C. Pigott - Chairman and Chief Executive Officer

Yes. Well, we have a Christmas shutdown some years and but the build rate this year is higher than it was last year in Europe. And that's good, we got a lot more demand and we still have a backlog close to a year in Europe. And customers are really enjoying the benefits of the DAF product.

Andrew Casey - Wachovia Securities

Okay. And then if can to U.S. and Canada for a minute, your industry forecast is basically on the industry level for sales to continue to decline in the second half. If you look at everything that's going on in the economy, some of your suppliers kind of exiting in 2010 from the industry. Do you think the supply chain could support a significant rebound in '09 if the demand was actually there, not only the replacement demand but some sort of purchase distortion against the 2010 standard?

Mark C. Pigott - Chairman and Chief Executive Officer

Yes I do. I think... as I mentioned earlier, we've got bit about 800 major suppliers around the world and of course we spend a lot of time with all of them and as I think I mentioned on earlier calls, we're one of the few OEMs that actually invest in strengthening their capacity and quality in terms of buying equipment for a lot of our suppliers.

So we know the suppliers very well, long term agreements and I think that would be great news for the market to increase, I think suppliers are certainly welcome in. They get more volume going through their facilities and which would help with some of the costs and I think that would be a benefit to PACCAR. So, I think the market... it really hasn't been that much change in supplier capacity affecting us.

Andrew Casey - Wachovia Securities

Okay. And then on the very near term in the quarter you had a sequential increase in the provision for losses and receivable in the finance sub. Can you describe the as mainly related to U.S. and Canada, which is pretty consistent with what we've seen in defaults and all that stuff. Unused truck pricing, can you comment on directionally where that's going. It seems like from channel checks its still kind of going down and I am wondering what effect that may have on, not PACCAR's specifically, but industry pricing for new equipment, have you seen any discounting going on?

Ronald E. Armstrong - Senior Vice President

On the used truck side, there has been some modest decline we have seen in the first half of the year. But the PACCAR products continue to demand a 15% to 25% premium relative to the competition which is ... our credit losses are up but it has helped cushioned the effect of those credit losses. The portfolio continues to perform well, reflecting our solid earnings for the quarter and we have lot of confidence in the long term outlook for the financial services sector.

Mark C. Pigott - Chairman and Chief Executive Officer

That was Ron Armstrong.

Andrew Casey - Wachovia Securities

Thanks, Ron. And was there...would you offer any comment on any trends you're seeing in new truck prices. It seems like certainly with the infra cost increases, the industry in general seems to be trying to recover those and yet we're seeing some market share shifts. I'm just wondering if there have been any aggressive type deals that would explain some of the market share shifts.

Mark C. Pigott - Chairman and Chief Executive Officer

Our pricing is pretty stable and we expect it to remain relatively stable for the short-term. But obviously, that's what we're seeing.

Andrew Casey - Wachovia Securities

Okay. Thank you very much.

Mark C. Pigott - Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from Andrew Obin with Merrill Lynch.

Mark C. Pigott - Chairman and Chief Executive Officer

Good morning, Andrew.

Andrew Obin - Merrill Lynch

Good morning. Just a question for you, just to follow up on the question on the credit losses. What's the run rate for credit losses in 2Q '08 on the U.S. portfolio, if you could share that?

Mark C. Pigott - Chairman and Chief Executive Officer

Well, our credit losses are roughly, not in the U.S and Canada, running about 80%, 90% of our total losses that we're experiencing. So, that's where we are at.

Andrew Obin - Merrill Lynch

Well, you guys are going to disclose that once you file the Q. Do I have to wait until the Q?

Mark C. Pigott - Chairman and Chief Executive Officer

Yeah, I don't have that specific number in front of me but--.

Andrew Obin - Merrill Lynch

Got you. Another question, are you seeing a pickup in credit losses in the European book?

Mark C. Pigott - Chairman and Chief Executive Officer

No, the European portfolio has continued to perform very well with continuing historically low loss levels.

Andrew Obin - Merrill Lynch

And then finally, could you remind us as we think about the European market because as you pointed out it's tough to think about the U13, and U27 [ph] with the lump [ph] in Russia. Could you just give us a sense how the markets breakdown now, Western Europe versus Eastern or Central Europe versus Russia, just the markets and the way you are in Eastern Europe and Russian in terms of market share in relative basis. Is that something you care to discuss?

Mark C. Pigott - Chairman and Chief Executive Officer

Yes Mark here, we can discuss that a little bit. Say for Western Europe... well I say we're typically looking at numbers probably 250 to 275 and I would say to get up to the 350 to 360, that would be... well that would be Centrally Europe, Russia might be, it's a little bit confusing because you got a used product going in there also but might be 20,000 to 40, 000

Andrew Obin - Merrill Lynch

Okay and so 20 to 40 in Russia would be on top of this 350 to 360.

Mark C. Pigott - Chairman and Chief Executive Officer

Typically that's not being included in anybody's reports because its... lets say those numbers are fluid.

Andrew Obin - Merrill Lynch

Yes, I appreciate it, thank you very much, great quarter.

Mark C. Pigott - Chairman and Chief Executive Officer

Yes, thank you, appreciate your comments.

Operator

Your next question comes from Henry Kirn with UBS.

Mark C. Pigott - Chairman and Chief Executive Officer

Good morning Henry.

Henry Kirn - UBS

Good morning, how you're doing today?

Mark C. Pigott - Chairman and Chief Executive Officer

Good, how you doing?

Henry Kirn - UBS

Good.

Mark C. Pigott - Chairman and Chief Executive Officer

Excellent.

Henry Kirn - UBS

Quick question about hybrid and LNG trucks.

Mark C. Pigott - Chairman and Chief Executive Officer

You bet.

Henry Kirn - UBS

How long would it take for them to become significant contributor, what are you thinking of those over the next couple of years?

Mark C. Pigott - Chairman and Chief Executive Officer

I think that they will have great success there is obviously a wonderful ROI for someone purchasing these or let's say a year and a half to two years and you get a benefit from the government, a tax credit, there is increased cost to purchase the vehicle obviously. Right now they're focused on the proven applications, to stop and go because that's the technology that essentially is recharging the lithium ion battery pack. So, if you're driving around in a city or urban application even utilities, people running vehicles putting up stop lights or what ever, there is a tremendous payback.

But looking at that market it's a small portion of the total industry. And we're working with Eaton and others on a Class 8 application but that's still a year or more away and because some of the technology is still being evaluated and developed and that's vehicles running for days at a time with very little stop and go. So some of the new technologies are still under development. It was because PACCAR's also developed a number of other items to improve fuel economy and that is No Idle and that's starting to have some positive impact for many of our customers because as you may know the majority of vehicles that are running around the roads and there are about 5 million of them in North America and about that same number or so in Europe, they idle at night to keep the engine going. So they got heating, cooling, power for their operations and PACCAR's through Kenworth and Peterbilt Group have developed some innovative technologies that you can turn off your engine.

You can turn off your engine for eight hours. There is real fuel economy improvement. So there is a lot of work being done and it'll certainly have a benefit for a certain group but for the total market, new technologies still need to be developed.

Henry Kirn - UBS

Okay. That's helpful. Piece for my follow up, as you look at the global landscape, are there any geographies where it might be attractive to add to your presence through M&A, the way you did with DAF in Europe?

Mark C. Pigott - Chairman and Chief Executive Officer

We're looking for opportunities and I think we know all the players in the world. But as you know, as you've studied the company, I know you studied PACCAR a lot. The company continues to evolve over the last 100 years into complementary type of businesses also. So I think we can certainly grow our core business but there are plenty of opportunities out there.

Henry Kirn - UBS

Okay. Thanks a lot.

Mark C. Pigott - Chairman and Chief Executive Officer

Thank you, appreciate it.

Operator

Your next question comes from Kristine Kubacki with Avondale Partner.

Mark C. Pigott - Chairman and Chief Executive Officer

Good morning, Kristine.

Kristine Kubacki - Avondale Partners

Good morning guys. I just had a few questions here. One is to follow up on what you're just mentioning last eight years. We've been hearing from a lot of truckers about the progress that anything that will save them fuel like aerodynamic. I was wondering on the penetration of APUs, are you seeing in acceleration in interest, or is it real ...you were taking real orders at this point.

Mark C. Pigott - Chairman and Chief Executive Officer

Yes. First of all we don't call them APUs.

Kristine Kubacki - Avondale Partners

Okay.

Mark C. Pigott - Chairman and Chief Executive Officer

That's not what we are selling. We certainly have an APU if you want that, but this is a patented design that we have that is not technically APU. But that aside, we're getting orders, I mean we're building these and they are in productions. They're running around the roads.

Kristine Kubacki - Avondale Partners

And then in terms of kind of thinking ahead of 2010 in SCR, what kind of, one of the things that counts for benefit is the fuel efficiency gain. Can you remind us or have you said openly about what you expect that engine to achieve in terms of fuel efficiency versus say the 2007 engine?

Mark C. Pigott - Chairman and Chief Executive Officer

No, we haven't. We haven't commented on that.

Kristine Kubacki - Avondale Partners

Okay. But do you think that there will be a fuel efficiency gain in terms of the SCR versus enhanced EGR?

Mark C. Pigott - Chairman and Chief Executive Officer

Well, we certainly are always working on improving the fuel economy of our vehicles every year. And that's a combination of engine after treatment aerodynamics, redesign, that's an ongoing goal of ours and we've been able to deliver that for many, many years but, we're working on that one.

Kristine Kubacki - Avondale Partners

Okay. And then just one final question, on the construction you say completed next year, and the late next year on the engine plant. I was wondering what kind of expectations do you have in terms for start-up in terms in 2010.

Mark C. Pigott - Chairman and Chief Executive Officer

That will be early 2010 for start-up and it'll be a gradual buildup as the way we're doing. We want to make sure that it's absolutely running very, very well through our quality standards and so far it's on track. You drive by on the freeway, you can see a very good looking building sitting there right now.

Kristine Kubacki - Avondale Partners

Do you have any expectations that you're willing to share in terms of market size?

Mark C. Pigott - Chairman and Chief Executive Officer

Meaning in terms of how many engines we're going to build?

Kristine Kubacki - Avondale Partners

Right.

Mark C. Pigott - Chairman and Chief Executive Officer

Well, we're going to build as many as our customers want. That's typically the way we approach it.

Kristine Kubacki - Avondale Partners

Do you think you're going to have a hard time converting or how do you go about the value preposition with some of the... cost saving dominated by the 15 liter. How do you kind of come down and sell the smaller, the 12.9 liter engine?

Kristine Kubacki - Avondale Partners

Yes. Well, as you're aware, the 15 liter in commercial vehicle's really only in North America. Everybody that is, every OEM in the market is global and certainly we're one of the leaders on that.

So it's kind of hard to say that there are so many unique aspects of the North American market versus the world market, consider... plenty of places in the world, you can drive 1000s of miles, there's plenty of places and large mountains and have deserts.

So I think we've been sheltered in North America by having very low fuel prices for a number of reasons. Certainly it's benefited our economy, but as you travel the world and you talk with customers who are used to paying $8, $9 and $10 per gallon, they look at 4.50 wishfully and say boy those were the days.

I think you'll see some structural changes if you'll say, hey I can go 60 miles an hour, I can go over high mountain passes and I can get a great fuel economy. But it's going to be with what the world drives and that's a 13 liter engine.

Kristine Kubacki - Avondale Partners

So have you heard from customers a greater acceptance of that then at this point?

Kristine Kubacki - Avondale Partners

I think --

Mark C. Pigott - Chairman and Chief Executive Officer

Or it's kind of your evolution--

Mark C. Pigott - Chairman and Chief Executive Officer

I think the market is having a wonderful soul searching time evaluating what happens in next 5 years to 10 years and fuel efficiency is one of the key criteria.

Kristine Kubacki - Avondale Partners

Okay. Very good, thank you for your time.

Mark C. Pigott - Chairman and Chief Executive Officer

Appreciate it, good questions.

Operator

Your next question comes from Ben Fulk [ph] with Marble Bar.

Mark C. Pigott - Chairman and Chief Executive Officer

Morning, Ben.

Unidentified Analyst

Morning, hello. Just a question just relating to Europe from me... I have heard from Volvo, from Mans, Scania, Diamler they are talking about orders down 30% to 40%. Obviously this is have more forward-looking, I guess, two questions please, just firstly just really want to get sense of order direction, I mean that all your peers are talking about weakening, not in just in Western Europe but in areas like the Baltic's and Poland as well.

Russia is obviously quite strong, but net 30% to 40% down year-to-date so just wanted to have to what extents are you able to offset that, in terms of market share gains. So just want to get a sense of order direction and then the second question is as the 38... 1% [ph] revenue growth in Europe, how much of that was attributable to FX and the underlying volumes of the, I appreciate those two questions, thanks.

Mark C. Pigott - Chairman and Chief Executive Officer

Okay, good questions. Well, I'm not sure what the competitors are doing. I know we're increasing our build rates, I'm not sure what they are doing. They may be decreasing but we're the quality leader, we're the efficiency leader, we're the fuel economy leader. So we may be seeing the benefits of customers saying, hey business is still there, is a lot of its growing, let's get the best product we can and that's the DAF product so... so far it looks good. Yes the economies are slowing in Western Europe. We recognize that, we see that, but at this time steady as she goes. Turning it over to the exchange, let me put Michael Barkley on it.

Michael T. Barkley - Vice President and Controller

Now with respect to the quarter, the impact of currency is about $270 million positive and with respect to the first half it's about $520 million. So the growth in Europe ex-currencies is in the 15% to 20% range.

Unidentified Analyst

Okay, great. And just one follow-up question if I may. I think the one of the reasons for the weakling in the 30% to 40% fall off in orders in the last three to four months is that, well all of your European competitors has been largely to do with lead times going from three to four months stretching up to 12 months and so if you were customer why buy a truck now especially given the kind of uncertain outlook of Western Europe so truly wanted to see how you are avoiding it, are your lead times kind of much shorter, like still three to four months. Is that why you're avoiding, what all of your peers are seeing or let me just try and understand why?

Mark C. Pigott - Chairman and Chief Executive Officer

I think for the last year, the entire industry's had lead times of about one year and that continues. And certainly, we continue to review the backlog in terms of order solidity, but they look good. We're increasing the build rate, but there is certainly a lot of benefits to having backlog of one year but in terms of satisfying immediate customer demands that sometimes is a bit of a challenge. But right now looks pretty good.

Unidentified Analyst

To see in unit terms orders are still up.

Mark C. Pigott - Chairman and Chief Executive Officer

Orders are good and our backlog as I say is out almost one year.

Mark C. Pigott - Chairman and Chief Executive Officer

What is good is the orders are still up, you're saying in the quarter or...

Mark C. Pigott - Chairman and Chief Executive Officer

No. I mean we've seen some decline in orders over the last year. But they are certainly not too less to increase our build rate.

Unidentified Analyst

Okay, Great. Thanks very much.

Mark C. Pigott - Chairman and Chief Executive Officer

Thank you.

Operator

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

Robin Easton - Treasurer

No additional remarks other than to thank everyone for their excellent questions. And thank you operator.

Operator

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

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

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

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