PACCAR Inc (PCAR) Q3 2011 Earnings Report, Transcript and Summary

Good morning, and welcome to PACCAR's Third Quarter 2011 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. And if anyone has an objection, you should disconnect at this time. I would now like to introduce Mr. Robin Easton, PACCAR's Treasurer. Mr. Easton, please go ahead.

Good morning. We would like to welcome those listening by phone and those on the webcast. My name is Robin Easton, Treasurer of PACCAR, and joining me this morning are Mark Pigott, Chairman and Chief Executive Officer; Ron Armstrong, President; and Michael Barkley, Vice President, Controller. As with prior conference calls, if there are members of the media participating, we request that they participate in a listen-only mode. Certain information presented today will be forward-looking and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results. I would now like to introduce Mark Pigott.

Good morning. PACCAR reported record quarterly revenues and strong net income for the third quarter of 2011. PACCAR's third quarter sales and financial services revenue were $4.26 billion compared to $2.54 billion in the third quarter of 2010, a 68% increase. Quarterly net income increased to $282 million, more than double the $120 million earned a year ago and our best quarterly profit since the third quarter of 2008. The lower tax rate in the third quarter reflects the benefits of the recently enacted research and innovation tax incentives in the Netherlands. I'm very proud of our 23,000 employees who have delivered industry-leading products and services to our customers worldwide. Increased truck deliveries, higher aftermarket sales and a growing financial services business worldwide contributed to PACCAR's increased profits. Our customers in North America are benefiting from increased freight tonnage and higher freight rates, which is generating good profitability for their companies and enabling them to replace their aging fleets. Through the first 9 months of this year, Peterbilt and Kenworth have achieved a record Class 8 market share of 27.7%. The performance of our suppliers improved significantly in the third quarter as they invested in production capacity to meet increased market demand. Turning to Europe. Economic uncertainties in recent months in the Eurozone have resulted in lower industry truck orders. You may have read, I'm sure you have, that a number of our competitors have taken actions to reduce their build rates. DAF is taking similar action and will reduce build rates 5% to 10% in December. The good news is that Europe's 2011 industry registrations are up 30% compared to last year, and DAF has achieved a year-to-date 15.2% share of the above 15-tonne market. All of PACCAR's factory production worldwide slots are full for the year. PACCAR delivered…

[Operator Instructions] Your first question comes from the line of Andy Kaplowitz of Barclays Capital.

Mark, so I recognize there's economic uncertainty globally, but if I look at the North American market, it's been constrained to somewhat by suppliers in 2011. You gave us a 2012 forecast. Do you think maybe you have above-average visibility or at least good visibility into that forecast given we still have this replacement demand and we haven't been able to make as many trucks this year as we wanted?

Well, I think the industry estimates that replacement demand is approximately 225,000 units a year. And you're right. For the last 3 or 4 years, we certainly have not been at that level. You know, talking to a lot of the customers at the recent ATA meetings that's held in the last week, I think there's a good balance between the number of trucks and the freight they can provide and the demand for freight. And as a result, you're seeing improvement in freight rates, and also freight utilization, as measured within the company's own fleets. So that's good for our customers. They're making good money. It's kind of up-and-down decade for many of them. But those that have survived are well positioned. They're, for the most part, continuing on a steady program of replacing their trucks, and we kind of missed a cycle in the, let's call it, 8, 9 and 10. So they're going to lower the average age of the trucks in their fleet. I think only a few of them are really talking about expanding their fleets. And some may buy out a competitor. So until there's more fleets looking to the expand, which means more GDP growth, which, as you know as well as I do, has been pretty limited in the United States anyway, I think the forecast we have shows some improvement, which is good, but still trying to get to that replacement level.

That's fair, Mark. And then just shifting gears, how much unusual inefficiency you think -- unusual inefficiency you think is still being created in your business? As you said, 5% to 10% growth in production this quarter over last quarter. As you train your people, you add more people, when do you see that maybe stabilizing a bit so that, that can help margins going forward?

Well, the good thing about PACCAR employees, and that's all I can really comment on, is that we have well over 80%, 90% of our employees who, unfortunately, they did had to be let go during the difficult times, come back. They love working at PACCAR, and we love having them there. So the training, although there certainly is training anytime you bring an employee in, I don't think, has really been that much of a factor in our ramp-up. Obviously, it does take time and you've seen production increase significantly over the last year or 2. So I think we're in good shape. People are making great quality products. The suppliers situation has improved quite a bit. A lot of that is because we're out working with suppliers. We're continuing to invest in some of their machinery. We're training them in Six Sigma and 5S. We're helping them on the material analysis, which benefits the whole industry, by the way. So I think we continue to be efficient, and our goal is to improve efficiency 5% to 7% every year. And typically, we achieve that. So I think we're in pretty good shape in terms of production efficiency.

Your next question comes from the line of Ann Duignan of JPMorgan. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Mark, could you talk a little bit about Europe and what you're seeing over there? It's the question that gets asked over and over again, the lack or the potential for the lack of financing. Are you finding that your financial services business has to step up a little bit more? Or have you seen any change in the kind of deals? More leasing rather than buying? Could you just talk us through what you're seeing from that perspective in Europe?

Sure. A couple of points on the PACCAR financing. We're seeing good interest. Many of the markets we're in are actually achieving record levels of financing percent in terms of the people that use our financing versus another source. So that's good news. We continued to add people to our financing teams. In terms of leasing, and I'll talk about leasing as we might note in North America, our PacLease organization is as strong in Germany and continues to add dealers and service points. So we're very pleased with that and looking at how we can grow that over time. I think generally, the financing aspect has not been -- it's been good for our customers, whether they finance with us or through an independent source. We don't see that as too much of an issue. Ann P. Duignan - JP Morgan Chase & Co, Research Division: So you're not seeing any fall-down in potential sales because customers cannot get access to financing?

No, we're not seeing that. I'm not sure what the competitors are seeing. But we get a lot of great customers, obviously, and most of them, hopefully, qualify for using PACCAR Financial, and as you know, our finance company is in very strong position, so sounds like an opportunity for PACCAR. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Well, yes, and it wasn't really a competitor saying it. It's just given the financial difficulty, the banks have or may have going forward and your financing may be more difficult to come by across many industries. And I think people were just looking at it.

I think you're probably right. Obviously, we all read the headlines. And of course, we're there every day, living it. And certainly, banks are working through different challenges. But as far as the truck industry specifically, seems to be in good position. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Okay. And sticking with the European theme, could you talk a little bit about -- and I know that the range you gave for next year is probably pretty broad at this point in terms of by country, but could you talk a little bit at least about Western Europe versus Eastern Europe or DAF more bullish on 1 or the other? Or just a little bit of what the DAF team is seeing over there just by region or by country would be great.

Sure. And I would say -- let me just say, on a macrolevel, because we have a team that's been in place for a long time, measured in decades many times, I find that our forecasts are typically closer to reality than maybe some others. So I know you guys sometimes think we're a little conservative. But usually, as time goes on, we seem to be pretty much in line. So looking at the market, certainly there's been discussion about, let's call it, Central Europe perhaps being a little bit weaker. We do very well there. DAF is a market share leader in Poland and the Czech Republic and Hungary. Those -- the customers there really enjoy the product. I think those general economies might be a little bit more challenged than Western Europe. Certainly, there's been a lot of discussion about North, South, and the southern countries in Europe, and I don't think we need to talk too much more about it. It's in the press every day. The good news for us is that we're gaining some share in the South, and retaining or growing our share in the North. And I'll just say in terms of DAF's approach to Europe, we're either #1 or #2 in every country in Western or Central Europe, with the exception of Germany. We're #3, behind 2 local manufacturers. So DAF's in good position. It really sees all of Europe. There's a lot of uncertainty out there, certainly as we and others have adjusted build rates. We're just not sure, I'm not sure anybody on this call, I'm not sure who knows what's going to happen. But we obviously track it as closely as anybody. And the customers, we're seeing a little bit of improvement in amount, which tracks German mileage on their highway systems. So that's good. We're seeing good financial services reports. The customers we have are in good shape. So it's just the overall macroeconomics are very unsettled, and obviously, that is having impact for customers saying, "Should I buy? When should I buy? How much should I buy?" And I think that's going to take a while to work our way through. And it's much more than just the trucking industry. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Yes, that's for sure. And it was good color. I appreciate it. Just a real quick follow-up just on your comments about build rates being up 5% to 10% in Q4 versus Q3. I just wanted to clarify that, that was both U.S., Canada, as well as Europe, that it was [indiscernible].

Yes, that's correct.

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

Mark, could you expand a little bit on what's happening down in Brazil as we get ready to build a new plant down there? Maybe talk a little bit about signing up new dealers to handle the product?

Sure. Well, as I mentioned just in the prepared comments, the largest truck show in South America is going on right now at Sao Paulo, and we've got a wonderful stand. So that's putting, let's call it, a face with a name since we made the announcement in the last month or 2 about building a factory in the state of Paraná. And now we've got our products there. And we have our senior leadership team there. And we have a number of the sales team there. So we got a lot of customers and potential candidates for our dealer groups who are now coming by and meeting with our teams. I think one of the real strengths of PACCAR and one that probably doesn't get talked about enough is our dealer network, our independent dealer network. And many of our competitors have different approaches to their dealer network, and I'll let them talk about that. But what we do is we try to partner with the strongest groups in each region and allow them to do well financially and invest in their business and really provide wonderful support for our customers. So as we go into Brazil, the reputation of our Kenworth, Peterbilt and DAF dealers around the world, and we have 1,900 service points, is outstanding. So what we found very pleasantly is that there's a number of groups, whether they're in the Automotive sector, whether they're in the truck sector, whether they're in the agricultural or industrial machinery sectors, we're saying, "Wow, how do we get involved with PACCAR, and specifically DAF, in Brazil because we know that we're going to get the greatest technology, we'll be able to make a good return on our investment, and we're going to deal with a company that's been around for a long time?" So we are actively sitting down and working with different groups, and we'll start announcing, let's call it, dealer partnerships probably next year, obviously. But this truck show has had a wonderful time. And there's a lot of excitement about 'how do I get to sell DAF trucks? Because if I do, I know I'm going to have a very good business.' So it's exciting for us.

Okay. Got it. And then an unrelated question, but with the Europe builds in the fourth quarter just coming down a little bit and North America coming up a little bit, how should we think about the margin trends in the fourth quarter relative to what we saw in the third quarter with that mix shift?

Great question. I think the margins will be in line with third quarter.

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

Mark, can you update us on how you're thinking about capital deployment? Has stock buyback moved up higher on your list? And on the joint venture side, are there any other areas that are in the works? Just directionally, can you give us an update broadly?

Sure. Well, I think we always have a balanced approach to capital deployment. Certainly in the last several months, there seems to be an opportunity on the share buyback, which we have taken advantage of. And we still have some opportunity to do additional buyback, and then the other buyback is obviously at a Board level. So we've done that. And Of course, PACCAR's balance sheet is in excellent position. We also generate good cash flow. Joint ventures, I think we were just talking about that. We had our Investor Conference with many of you a year or so ago, and I think it was a good one out here in Bellevue. And I know a lot of you wanted to become professional truck drivers after our tour in the technical center. But all the areas that we discussed in detail for you, we've actually accomplished or in the process of accomplishing in the succeeding 12 months. So India, we're pleased with direction that's taking. Obviously, China, we continued to do some sourcing from China on quality products. We know all the Chinese truck manufacturers. They know us. So we continue to evaluate opportunities. We're moving ahead in a strong way in Brazil. We're having record share in Europe, record share in North America, record number of trucks sold in, let's call it, the western half of South America. So we're in a good position to continue to work on a variety of fronts, and stock buyback, investment in our existing factory, growing our engine business, building a new factory in Brazil. I think it's all -- it's pretty balanced right now. And it continues to be.

And Mark, can you talk about your vision for the TATRA business specifically? Did you anticipate at some point owning a bigger piece of the company? I guess what's the extent of the opportunity here?

Well, full points to you for asking that question. TATRA, of course, we've known TATRA for a long time. They've been around, well, for over a century. And right now, our focus with TATRA, and I just came back from Europe recently and drove an 8x8 TATRA through our most rigorous off-road course and it handles beautifully, is really to sell that product through our DAF dealer network in addition to TATRA's own network. And I think you've seen a picture. There's been a couple of articles in the commercial truck press. I know there's a good one in Commercial Motor magazine in the U.K. in the last couple of weeks. So that's going to be the focus. Initially, we'll be in Europe. And it's an adjunct product. This is not a mainstream product. It's focused off highway. But there's good demand for it. And then over time, we'll take a look at other opportunities to use that product around the world. Initial focus is certainly in Europe.

And lastly, Mark, can you comment on whether you're seeing pricing discipline in Europe holding up? It's great to see the uniform production kind of announcements. Are you optimistic that industry will be disciplined? Or do you see any risk based on, I guess, recent market data points?

That is what makes our industry so exciting. We certainly have a approach to pricing that is consistent decade in, decade out. You all know that. What our competitors do sort of depends on who's at the helm of the ship with our competitors. It's a great question. I think the answer is each company has its own approach to the marketplace. And we're going to continue to provide outstanding quality service and great products for our customers and our dealers. And we certainly hope that our competitors do the same. But we'll have to see how that shapes out.

Your next question comes from the line of J. B. Groh of D.A. Davidson. J. B. Groh - D.A. Davidson & Co., Research Division: Could you give us an update on your North American engine penetration and maybe some updates on the engine business?

Sure. It continues to do very well. And I know a number of you, I'm not sure, J.B., if you were in the group, went down and toured our Mississippi factory. Robin has taken a number of people there, and we'll continue to do that on a regular basis. If you haven't, we invite you to go around that factory. I think you'll be impressed by the technology and efficiency that we have there. The PACCAR engine continued to perform well, as we expect it will for a long, long time. It's 25% to 30% share of our Kenworth and Peterbilt product. So that's good, and it's certainly in line with what we expect. We're also having a lot of success with the PACCAR engine around the world. You may have noted, we won in China for the fifth year in a row the Bus Engine of the Year award. And of course, in Europe, it's just a normal part of doing business. I think over time, even though there's a lot of excitement and a lot of discussion now, I think the engine business will just be part of what we do in our business. And probably won't -- it would just be like when you buy a car. Whatever you -- when you put the hood up, the name of the car is probably on the engine also. So I think it's going well. We continue to invest with more machining lines being installed currently, adding people. And it's going well. Good question. J. B. Groh - D.A. Davidson & Co., Research Division: Should I read into that, your goal for penetration is 100%?

Well, that's probably a goal we have for many things. I think what you should read into it, that we're pleased with the steady process we're making. We've been in the engine business for 50 years or longer, and we certainly will be in it for a long, long time. So it will just be part of what we do. And it is part of what we do. J. B. Groh - D.A. Davidson & Co., Research Division: Good. Looks like that increased. I see. Did you guys -- I may have missed this, did you give currency impacts for revenue and...

Yes, just a sec.

We have the benefit from currencies on revenues for the quarter. It was $159 million. And pretax income was about $8 million.

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

Could you talk a little bit about price cost as we go through the balance of this year and what you're thinking as far as tailwind and headwind as we enter into the next?

Sounds like a good question, but help me understand it. Tell me a little bit more about what you're asking.

In terms of are you expecting raw materials and your component cost to be a tailwind or headwind as we go into next year. And is pricing able to offset any headwinds that you might be seeing on the cost side?

Okay. Well, the raw materials -- first, if you track the price of a barrel of oil and you try to estimate, I guess there are some people making money on that, but I bet it's not as many as there used to be. Raw materials saw a big increase, and then some of them have fallen off. As we talked earlier about China, reducing their production in the truck side. Car side, I think, is doing pretty well. And India, perhaps slowing down a little bit, still having really great GDP compared to North America and Europe. So there may be a little bit less pressure on some of the raw materials. I think in terms of our pricing versus the cost, I think we're going to try to be a little bit more in line now. We're not seeing quite as much pricing pressure. There's good demand out there for our products. The costs aren't going up as much as they were in the last 6 to 18 months. So I think the balance is probably a little bit better right now.

And Mark, has the pullback in China influenced your thoughts on the time frame for entering that market?

No, no. I mean, when we say pullback, we're talking about pulling back to 900,000 trucks a year, which I don't expect you to know all the numbers, but it's basically more trucks than the rest of the world combined. And it's a big market. It's a market very similar to what we've seen in, let's call it, North America and Europe a number of decades ago, meaning that there's lots of competitors and there's always discussion about will there be a shakeout or will that be government-led because all of the Chinese truck manufacturers have a ownership structure in which the government is involved. And if there is a shakeout, then who are the winners and who gets consolidated. But no. As far as we're concerned, we know all the players. There's been a lot of investment in the infrastructure in China. We just had our senior team. I was just there about a couple of weeks ago. And we're actually adding to our employee base in Shanghai. We're finding a lot of interest for our products, trucks and engines. And we're waiting to see what makes sense for the right joint venture. And when we decide that, I'm sure we'll let the world know. But right now, we're just evaluating.

If the right joint venture popped up tomorrow, could you enter China at the same time you entered Brazil, fighting 2 wars at once?

Well, as you've seen from a number of joint ventures in China on the commercial truck side, there is a time period in terms of the necessary approvals that many levels within the government, and let's say 18 to 24 months is probably a good average for processing a major joint venture.

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

A few questions. A lot have been asked and answered. On the supply chain improvement in North America, I'm just wondering how we should view the transition period, meaning is the Q4 production ramp still a little bit constrained?

No, I don't -- no, I don't think so. I mean, in any manufacturing channel, it doesn't have to be trucks, it could be anything, it can be electronic equipment, there's always an ongoing discussion, whether you're going up and build rate or flat or down with suppliers, because it's part of what you're doing. But no, I think it's pretty much business as usual right now. And as I say we've worked with many of our suppliers, and they've made some investments and we've made some investments and everybody's working hard because it's in everybody's best interest to be able to meet the customers' demand. So I think suppliers in the fourth quarter is just be normal business.

And then looking over in Europe, do you think the industry inventory levels today are in good shape, and I'm not talking about PACCAR, I mean just industry, in the event of a production, a more prolonged production decline than what is being talked about in Q4?

Are you talking about finished inventory or inventory in factories?

Finished inventory.

So trucks, built trucks?

Yes.

I would say right now, probably the industry is in pretty good shape. A number of competitors have had a couple-of-week shutdowns to balance inventory. Some of them have more ownership of their distribution network, and we don't. We're focused on independence. So sometimes, what we might consider a finished vehicle is a little hard to tell how they measure it since they own their dealerships. We're in great shape. Our dealers are in excellent shape. I don't think this slowdown is not as severe as it was in '08. We all lived through that. So I think many in the industry is probably in pretty good shape.

Okay. Great. And then briefly on the industry credit trends, you talked about decreased provisions and past dues for your credit business. Are you seeing the same sort of trends in Europe, meaning are the provisions being decreased over there as well?

Yes, we've seen continued improvement in performance of the portfolio with reductions in past dues, both globally and in each of our markets. So we're seeing good performance in all of our finance companies.

And you're talking about also our competitors?

No, just yours.

Oh, yes, we're in very good shape.

And I guess a hypothetical question. I'm kind of curious as to your view on what the replacement demand would be in Europe.

You mean the number?

Yes, yes, similar to the 225,000 you talked about for U.S. and Canada.

I think it would be probably in that same range. If you go back over 10 years, obviously, the North America and Europe sometimes are higher, sometimes are lower. They kind of -- the trucks in Europe tend to be newer right now, and that's a little longer discussion. But essentially, the recession was sharper but shorter in Europe versus North America. So you didn't skip a buying cycle. And that's what we found in North America in the, let's call it, 8, 9 and 10, with a production so low. So I think you're probably -- you've taken a number of different economic factors. I think the replacement is probably 225, 235, probably in that range.

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

I wonder if you can just talk about any signs of financing getting tougher in Eastern Europe. There's been some talk about that, but I don't know if you're seeing it or not.

We're not seeing that. I know what you're talking about. But for our customers and -- seem to be in good position. But I mean, you can read the press about financing in general, and I don't think that's specifically truck-related in Central Europe, is perhaps a little bit more constrained. But as for our industry, our customers, we're in good shape.

And then are there any signs in North America that the financing is getting easier enough for the owner-operators and some of the smaller fleets to come back into the market? I'm sure that can't be helping the mix with those guys absent recently.

Well, I think there's always good-quality customers in all categories. And we're willing to finance. I think others are willing to finance. We have not seen the lack of financing as an issue with customers being able to buy trucks in this particular market.

And then just -- I think someone else asked you the question about cost increases. But we've been hearing more about supplier price increases and you talked a lot about raw material cost increases not being a big deal for 2012. But what about supplier price increases? Are you going to be able to pass that through as we move into 2012?

Well, we have about 75% of our supplier partners we have on long-term agreements. So we have mechanisms to moderate these, let's call it, price increases and material fluctuations. But certainly, our goal -- and we're kind of the end of the stream, the OEM, and that is where the rubber meets the road. It's certainly more difficult to pass along price increases to our end customer than it seems to be for our suppliers to try to pass along their increases to the OEMs. So that's the ongoing creative tension in the supply chain ladder.

Your next question comes from the line of Steve Volkmann of Jefferies & Company. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Just a couple of quick follow-ups and fill-ins to your -- unfortunately, I got a little static, right, when you said what you were doing with DAF in the fourth quarter. Could just repeat that?

Well, let's see. With DAF, we're going to be building more trucks, but we're taking the build rate down 5% to 10% in December. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Okay. So overall, build will be up for the quarter, and then you'll just take [indiscernible].

Correct. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Got it. Great. And then the shares outstanding at quarter end, Robin?

Yes, we have that, even the number of PACCAR shares. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Yes, please.

$358 million. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: 358. And tax rate in the fourth quarter?

We expect the tax rate to be around 31%. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: 31%, 4Q. Great. And then, Mark, if I could, more conceptually, you called out that you have a fair amount of cash on your balance sheet and you seem to be generating it faster than you can figure out how to spend it internally. I'm wondering...

I'm not sure if that's correct, but keep going. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Well, I'm wondering -- please feel to disagree, but I'm wondering if it's time to start looking for some external ways to spend that money.

We certainly are and have been. We certainly made some excellent investments in our engine factory, in our current products, in a new factory in Brazil, and we talked a little bit about China opportunities, and of course, repurchasing shares. And you know, even though you may not look at it, some of the credit rating agencies seem to like us to have cash in the balance sheet. So there's always a good discussion about that. So I think we're in very good shape. And we're glad we are where we are right now.

Your next question comes from the line of Jamie Cook of Credit Suisse. Jamie L. Cook - Crédit Suisse AG, Research Division: Most of my questions have been answered. Just one question. As you sit here today and you look at your industry outlook for both U.S. and Europe I guess, how should we -- I mean, do you feel like -- you said pricing probably is going to be a little more favorable. We've walked rather right on this Whether it's the type of truck or geography or absorption rate, I mean, a whole bunch of things. But how do you think about incremental margins in 2012 relative to 2011? Should we expect an improvement overall?

There's a lot of ways to measure that. I think we indicated our margin for the fourth quarter is going to be comparable to the third quarter. And next year, we don't see anything dramatically changing. But I think when we look at how we're performing with the improvement of return on sale, return on revenue, we're improving. We're getting good leverage that way in our truck margins and seeing some improvement even in the aftermarket margin. So I know that's a particular area that you focus on, and we appreciate that. So we're continuing to look at, let's call it, the operating margin, how we can improve on that. I would just say that sometimes people look at '06, which is the high watermark for margins in our industry. And I think in some people's minds, they've tried to normalize that, saying that's the goal. I was around in '06. I was around in '96. And '06 was a remarkable confluence of economic indicators and factors that, are we going to see that again? Well, I certainly hope so. But as one of our leaders in the economic world said, the sort of irrational exuberance was at its heyday in '06, and that's certainly a trickle down to the truck industry. So I think we're doing very well. We've got strong margins, good returns of shareholders, outstanding products. So we continue to work it, and we appreciate your thoughts.

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

Mostly asked and answered. But just going back to an earlier question, can you maybe give us a little more color on what you're seeing with the owner operators versus the fleets, I mean, how you see that kind of progressing over the next -- into the first part of next year maybe here in North America?

Well, when I started almost 35 years ago, there really was a segment called owner-operators. I am not sure that segment -- it's certainly not as populated as it used to be, and most of the people with, let's call it, less than 5 trucks, and there's still a group out there, but it's a pretty small group. And most of them have aligned with medium and large fleets, whether it's for improved healthcare or better routing or more access to end-use customers. So I think the owner-operator segment is sort of -- it's important in a smaller way. It's just the -- I don't know what an owner-operator is. We build a truck one at a time, but even the people that have only a few trucks are about as sophisticated as the large companies. They've got all the electronic tracking, and we're helping them with a lot of that. So we just look at it as sort of fleet sizes now.

Understood. So it's not a significant delta to the outlook one way or the other at this point?

No, it's not. It's not. It's a great group, been a wonderful little history. But like many industries, there's been a real evolution in the customer profile.

Sure. Understood. And I guess just quickly, is there a number that we can -- you can give us for parts revenue?

Yes.

Parts revenue was $655 million in the third quarter.

I'm sorry, I didn't catch that.

$655 million in the third quarter.

That's up about 18%.

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

Yes, most of my questions have been answered. I just wanted to confirm...

Andrew, I need to complement you.

What have I done?

You wrote a very good analysis of the Brazil truck market. It's been widely disseminated amongst the industry, and I think it captured a lot of the key points. And surely, one of the main drivers within our industry, I would say more our competitors, is how important the Brazil market has been to their profitability and margin performance. And I think as you rightly pointed out, it's probably the highest margin market in the world, and so it was a good write-up. So hats off to you.

Just a question just to confirm, on sequential improvement in North America, just want to make sure that where are we in terms of hours per truck, asset terms versus your internal targets as we are exiting the month of October? Are we finally hitting the internal targets at Denton and Chillicothe? Without disclosing the target, but are we finally hitting the internal targets?

We have achieved many of our targets every month of this year. So I'm not sure exactly what you're talking about. But I think you've had a chance to tour those facilities. And certainly, as the supplier bottleneck, if you will, of the summer has cleared up, they're performing well. And of course, our teams in all of our factories worldwide are very dedicated. And the good news is every truck we deliver is the highest quality. So I think we're making -- we're doing well.

Your next question comes from the line of Tim Denoyer of Wolfe Trahan. Timothy J. Denoyer - Wolfe Trahan & Co.: If I could ask a question about Europe in a little bit of a different context, obviously it's tough to know how bad things might get near term. But as you look at the second half of the year and given the wide range in your guidance, are you expecting any sort of a prebuy to start ahead of the 2014 switch to Euro 6 standards?

Well, a good question. I think in terms of the guidance, of course, I think that's pretty normal guidance, still being a couple months away from actually being in the year. I think if we go back through the last 10 to 20 years, I think probably that same range is pretty typical. So I think that's normal. In terms of prebuy, there might be some in the second half. Timothy J. Denoyer - Wolfe Trahan & Co.: Okay. And what would you be expecting in terms of 2013? Obviously, that's a long ways away, but with the addition of EGR, certainly it seems like a good precedent to that would be the prebuy that we saw in North America, although obviously it's going to be a very much different economy.

That is something that a lot of us discussed. In some ways, the European economic model tends to smooth out the, let's call it, prebuy. There may be incentives by country to adopt technology faster. We certainly have seen that over the last 10 years. And it's not by every country. It's certainly usually by selected countries. And as a result, there's not this great prebuy swell. It tends to be more modulated. And I would say that probably that's what we're going to see again. So it's not sort of pushed into 1 or 2 quarters. It's more over the course of 4 quarters, as a year. So looking back in history, it's not so dramatic as you see in North America, which is oftentimes more of a cliff. Timothy J. Denoyer - Wolfe Trahan & Co.: Yes. And are you seeing any increase in those country-specific incentives? I mean, I know Germany has some pretty significant tolls where the incentives are driving newer trucks. I think Denmark was talking about it. Have you heard anything more in that front recently?

I think there are some country initiatives to come up with some incentives, but the incentives that we've seen so far have been pretty modest and sort of few and far between. So probably more will happen in the coming months and years. Timothy J. Denoyer - Wolfe Trahan & Co.: Okay. And then just one last one, if you don't mind. Going back to North America in terms of its near-term order trends, it seems like your guidance is more like 5% to maybe 15%, 20% growth next year for retail sales for Class 8. I've certainly heard a lot of expectations more in the 20%-plus kind of range. Is there -- can you give us a sense of how October orders are trending?

It seems to be reasonable. When you're looking out for the guidance, 12%, 15%, 18%, 20%, it's all pretty fluid because there's lots of moving parts on that. So I think it's -- right now, orders are pretty good.

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

Most of my questions have been answered, so I just got 2 quick follow-ups. Just on the finance business, can you tell us what the charge-offs were in the quarter?

They were very comparable to the provision number, just slightly different but very comparable to the provision.

Why don't we get back to you on that with the number. We have it.

Yes. There were $9.9 million for the quarter.

Got it. So I mean, charge-offs seem to be coming down. That's pretty consistent with your previous comments. So going into next year, are you pretty happy with where your allowance is? Or should we think about provisions tracking along with charge-offs next year?

Well, I think it will depend a little bit on the portfolio and how it grows. And so the provision will typically track the portfolio size and the trends and portfolio quality. So those 2 things will drive our provisions in our reserving approach.

Got it. And just -- you gave the revenue for the parts business. Can you also give us the margin as well?

Okay.

The margin was $227 million for parts in the third quarter.

And Mark, I just wanted to follow up on your comments about the suppliers. Basically, you think things are pretty much back to normal in the fourth quarter...

I think they've improved.

Okay. I mean, do you think most of these constraints are going to be worked through as we get into Q1 for next year?

It's certainly our plan.

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

Most of the questions have been answered. I guess if I look at your market share goals, North America, Europe and Brazil, you said 18% roughly was parts and service here in the quarter. If you hit those market share goals, does that get to a 20%, 22% revenue number as you vertically integrate or even higher than that? Just your thoughts on where that position is.

I don't think we've actually shared any market share goals. We always -- our goal is, as you know, to provide the best quality product to our customers and our dealers. And the good news is as we do that, the share seems to improve. So that's probably a broader discussion, but I'm not sure we've actually detailed that out for, let's call it, the industry in general.

Right. But I mean, if you have that 20% target for Europe and North America and if you take that and then layer over the fact, they are becoming obviously more vertically integrated in North America. Your market share goal was there. You're 18% in the current quarter. The math kind of comes out to be kind of low 20%.

These are -- those...

For parts and service, not for percentage of revenue that were driven by parts and services, not those actual market share goals.

Right. We don't have that.

There's no 18% share of parts and services.

Yes, there's no share. I think there may be a little bit of confusion here.

There's been a little bit of an increased number that was not [indiscernible].

Yes, yes, that's an increase. And in terms of the shares for Brazil, Europe, those are medium term. So those are looked at in years, not quarters.

Oh, yes. And I'm not trying to get a quarterly number. I guess what I'm trying to get at is if you hit sort of your even midterm goals on market share for the actual truck sales, what percentage of revenue do you think will be driven by parts and service? Might be a more direct way to ask.

Let's take that one offline. It's a good thing, but it's a much broader discussion. It's something that we don't really delve into that way. Good question though. Appreciate it.

Your next question comes from the line of David Leiker of Robert W. Baird. Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division: This is Joe on the line for David actually. Most of my questions have been answered, just more on maybe strategic or a long-term one. I think Daimler was out in the news recently, or a Freightliner, about their Detroit brand and maybe increasing their own vertical integration. I know you're probably in the 3 or 4 with complete engine strategy here in North America. But is that something you would maybe consider in the next 5 years to take another piece of the powertrain and maybe vertically integrate?

Well, we pretty much have our engines PACCAR branded. And looking out at other components, that would be gearboxes and axles and other smaller components, we have got very good supplier partners who appreciate the high-quality customer we are, and we'll just have to see how that unfolds. Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division: You happen to have your, let's say, axle, gearbox and transmission suppliers under the 75% that have long-term agreements with you?

Yes, we do. Yes, we do. Good question. Yes, that would be Sadoff and Eaton and Dana, other good companies out there.

Your next question comes from the line of Ben Elias of Sterne Agee. Ben Elias - Sterne Agee & Leach Inc., Research Division: Anyway, I have a question about your outlook for Europe. You're talking about expectations of European sales of about $225 million to $250 million next year. And I just wanted to understand what you're thinking in terms of present inventory levels. Is there still some inventory in the channel? Is that pretty lean? Or is production really going to match what you look at in terms of industry sales?

Yes. Well, the inventory is very lean. It's at a 3- to 4-year low. So the dealers are in great shape. So as we look at whatever happens in 2012, I think those numbers will be pretty much represented by production levels. Ben Elias - Sterne Agee & Leach Inc., Research Division: Okay. So you're not going to have to take any restructuring actions or any structural adjustments with footprint or anything else of that sort. You're pretty much well matched. Is that what you're saying?

Ben, this is a PACCAR call, so I'm not -- we don't even think about that. We're in great shape. I'm not sure what you're driving at here.

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

I'd like to thank everyone for their excellent questions, and thank you, operator.

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