PACCAR Inc (PCAR) Q1 2012 Earnings Report, Transcript and Summary

Robin E. Easton - Treasurer Mark C. Pigott - Chairman, Chief Executive Officer and Chairman of Executive Committee Michael T. Barkley - Principal Accounting Officer, Vice President and Controller Ronald E. Armstrong - President and Principal Financial Officer

Mark Mihallo - Barclays Capital, Research Division Jamie L. Cook - Crédit Suisse AG, Research Division Jerry Revich - Goldman Sachs Group Inc., Research Division Ann P. Duignan - JP Morgan Chase & Co, Research Division David Leiker - Robert W. Baird & Co. Incorporated, Research Division Henry Kirn - UBS Investment Bank, Research Division J. B. Groh - D.A. Davidson & Co., Research Division Andrew M. Casey - Wells Fargo Securities, LLC, Research Division Joel G. Tiss - The Buckingham Research Group Incorporated Timothy J. Denoyer - Wolfe Trahan & Co. Robert Wertheimer - Vertical Research Partners Inc. Adam William Uhlman - Cleveland Research Company Seth Weber - RBC Capital Markets, LLC, Research Division Patrick Nolan - Deutsche Bank AG, Research Division Basili Alukos - Morningstar Inc., Research Division Brian Michael Rayle - Northcoast Research

Good morning, and welcome to PACCAR's First Quarter 2012 Earnings Conference Call. [Operator Instructions] Today's call is being recorded and if anyone has an objection, they should disconnect at this time. I would now like to introduce Mr. Robin Easton, PACCAR's Treasurer. Mr. Easton, please go ahead.

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 excellent quarterly revenues and net income for the first quarter of 2012. PACCAR's first quarter sales and Financial Services revenues were $4.8 billion compared to $3.3 billion in the first quarter of 2011, a 45% increase. Quarterly net income increased to $327 million, a 69% increase versus the $193 million earned a year ago. I'm very proud of our 23,200 employees who have delivered industry-leading products and services to our customers worldwide. Increased truck deliveries in North America, higher aftermarket sales and a growing Financial Services business contributed to PACCAR's increased profits. Our customers in North America are benefiting from increased freight tonnage and higher freight rates, which are generating good profitability and enabling them to replace their aging fleets. The vocational truck market in the U.S. and Canada remains subdued due to the low levels of new housing starts. One of the highlights and we're very pleased with the positive response to the launch of the new Kenworth T680 and the Peterbilt Model 579. These exciting new trucks are the result of a 4-year, $400 million program that designed and developed a new family of 2.1 meter-wide cabs. These new trucks expand our product range and complement our existing vehicles. For the first time in our history, Kenworth and Peterbilt have a 3-cab family. PACCAR's range of 3 cab sizes is similar in format to BMW's 3, 5 and 7 Series of luxury automobiles. I think our trucks will haul a little bit more than those wonderful BMW cars, though. These investments in new products will contribute to the company's long-term growth. PACCAR delivered 39,800 trucks during the first quarter, and our truck deliveries were about 45% higher than the same period last year. Market pricing has improved since the first quarter of last year…

Operator, we'll take questions.

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

Mark, it's actually Mark Mihallo on for Andy today. Just a few quick questions. Just firstly, can you just provide an update on your margin guidance for the year? I believe in the last call you said something along the lines of flat to potentially down gross incremental margin. And just on top of that, just the cadence that you expect in terms of margins for the year, kind of 2Q through 4Q.

I think the margins will be relatively stable. It's what we're seeing in the markets really around the world. I guess that's probably the forecast for the year.

Okay. And then just kind of in terms of 2Q margin, in terms of the production cut in Chillicothe, is there any expectation for kind of a sequential decline in margin in 2Q versus 1Q and then heading out to 4Q, kind of an uptick there? Any type of guidance around that?

Let me kind of break that into 2 parts. One, in terms of Chillicothe, where we -- the good news in the last year, we've increased the employment at Chillicothe. We have almost doubled it, and we've got a lot of wonderful employees there. We've had to make some adjustments. What probably wasn't reported was the increase in hiring in our facilities in Mexico and Australia. So kind of looking at the bigger picture, we obviously hope that we can increase production at all facilities, but sometimes that's not possible.

Okay. That's helpful, Mark. And then just a follow-up, in terms of Europe, I believe a European competitor recently was talking about European build rates remaining weakened. Obviously, you guys willing to lower, or the upper end of your forecast seems to correspond to that. But just in terms of aftermarket opportunities, it seems like this competitor was saying that they're holding up relatively well. Are you guys seeing or capturing that? Are you kind of expecting it to be better expected in the back half of the year in terms of European aftermarket opportunities?

That is an excellent question. Let's talk a little bit about aftermarket. Our Parts group and all the aftermarket services are performing well, and we continue to introduce a lot of exciting innovative programs, whether it's selling parts and services for our products or for our competitive brands. So that's going well. As I mentioned in the prepared statements, we're looking to expand our facilities in Eindhoven and in Madrid. So I think that bodes well for the future as we look to continue to grow. In terms of the truck side, the market overall, when you look at the greater than 16 tonne over the last 10 years, this year will be the third or fourth lowest, I guess I'd put it that way. It's going to be a reasonable market. We have made a minor adjustment to the upper end of our forecast range. The good news is that DAF just had a very successful truck show in Amsterdam at the RAI, introduced the Euro 6 and some of their new aerodynamic products. Market share is holding up well for DAF. So Eurozone is certainly in the paper for a lot of other things besides the truck market. And as that gets resolved, it may take time, I'm sure the truck market will improve. Our customers are in good shape. We meet with them on a regular basis. A lot of them came to the show in Amsterdam. There's freight to haul but like any good business people, they want to make sure what's going to happen in the next 12 to 24 months. So that needs to get resolved first. So it's going to be a reasonable year. It's one of the lower years in the last 10 years, but DAF's doing very well in Europe.

Your next question comes from the line of Jamie Cook from Crédit Suisse. Jamie L. Cook - Crédit Suisse AG, Research Division: A couple of questions. First, Mark, just a clarification on your commentary about the margins. You said they think -- you think they'll be relatively stable. Can you talk about, I guess, stable relative to last year, stable relative to the first quarter? And then can you talk about -- I mean, you had originally guided to margins being flat to down last quarter. So what surprised you on the upside? And then just my last question, how do you think the market reacts in Europe ahead of Euro 6? Do you think there's a potential for any pre-buy? And then I'll get back in queue.

Sure. A couple of good questions. Euro 6 takes effect January 1, '14, so we're still about 19 months away. A number of our competitors and DAF now has shown their engines that will meet the Euro 6. Different countries are evaluating, is there or is there not a benefit to having some sort of incentive program. I think it's still early days. I think you're talking over 1.5 years. So I think we'll start to see -- if there's going to be any sort of pre-buy, that won't really happen until next year, if it happens then. In terms of margins, Michael?

Yes, the -- compared to last year, our truck margins are up on a dollar basis, up 85% on 58% higher truck sales. And during the quarter, we were -- had slightly higher sales which resulted in better operating leverage, which helped us achieve a little bit higher margin percentage than what we had originally anticipated. Jamie L. Cook - Crédit Suisse AG, Research Division: Yes, but we -- I mean, I guess we still haven't seen an improvement really on the incremental margins. I mean, do you expect incremental margins to be where we were in the first quarter and consistent with last year?

Well the incremental margins, we had 85% increase in truck margin on a 58% increase in truck sales, which was pretty good. And we also anticipate that during the course of the year, with truck sales being down slightly that there'll be some softness in margins, but it will be minor.

So I'd say pretty -- echoing Michael's side, it'd pretty stable to the first quarter. And I think what we -- you guys and we have been around for a long time. In the U.S. market, this is still one of the lower markets and of course in Europe, it's the third lowest in the last 10 years. So if you can get back to the upper half in terms of market size, that tends to drive some margin improvement as people are more eager to purchase trucks, and pricing isn't as competitive. So unlike a few -- well I see some other -- a few other industries, it's being impacted by still an uneven economic recovery. The good news is that we've got strong market share, we're introducing a lot of new products and I think the Brazil is an exciting venture for PACCAR that has some opportunities for improved margins. If that seems to be the location or the region of the world where most of our competitors achieve their highest margins, and certainly PACCAR is at the premium end of the scale, that could bode well. We'll actually have to get our factory up and running and sell trucks there.

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

Mark, Robin and Michael, I'm wondering if you can talk about the first quarter gross profit performance on a bridge basis, the way you typically do in your Qs. And I guess specifically, can you touch on the impact of pricing net of material cost?

I think again, what you saw was primarily the benefit of higher production levels. When you look at, compared to the first quarter, more trucks, some operating leverage and pricing costs are not a big factor at this point. Pretty stable and then you're getting some additional price realization, as Mark mentioned in his comments at the offset in the call.

Yes, I think that's a good one. Also on the suppliers, 6, 9 months ago that was the topic that we're talking about and suppliers are in good position. I know you've heard from a few of our suppliers and will hear from more of them over the next week or 2. I think their factories are in good position. They're getting good returns. The pipelines are in good shape. One item that certainly has been in the news is Nylon 12 and the fire in the factory in Europe. I just would address that our suppliers, particularly Eaton and Parker and a few others are working that very hard. We seem to be in good shape. The whole industry obviously is discussing it. That includes the automotive groups. And the good thing and one of the things we love about this industry is that when we do have these industry opportunities, everybody rallies around and they come up with some creative solutions. So I think as Ron mentioned, I think good pricing from suppliers, good steady deliveries to our factories and people love our products. And some of you were at the Mid-America Truck Show and you could hear by the roar of the crowd when we unveiled the new Kenworth and Peterbilt, there's -- we're taking these products to the next level in terms of comfort, reliability, durability, low cost of ownership. So a lot of good things progressing.

And Mark, how should we think about pricing versus material cost over the balance of the year? I think at the Truck Show, we spoke about better built-in material margin on the new Kenworth and Peterbilt aerodynamic products. Are we going to see a greater tailwind on net pricing of material costs in the back half of the year?

I would say that it's certainly one of the -- one of the benefits of these new products is not only better performance and profitable opportunity for our customers, but some reduction in cost. But I think to have any meaningful impact, it will be next year. We're just having a very limited released start-up in terms of production.

Okay. And on the R&D outlook, it looks like you trimmed it at the high end. Is that a function of project timing or projects coming in below budget?

I think a little bit of both. We got a lot of projects, as I tried to share with you, and we got a very dedicated team who's working, and some of them have been able to achieve what they anticipate will be lower cost in some of these projects. But we got a lot going on, and it's going to be an exciting next couple of years.

Okay. And lastly, can you comment on how we should think about pace of stock buyback over the course of the year and just refresh us on any capital deployment opportunities you have outside of Brazil? You had spoken in the past about potential on opportunities. Are those any closer?

Yes. Well on the stock buybacks, as you're aware I think we put in our press release, we have authorization from the board, and we periodically go into the marketplace as it makes sense to repurchase shares. So that's an open authorization, and we'll just have to see how the stock's doing. That's kind of really how we're looking at it. In terms of other utilizations, one of great things about PACCAR, we got a wonderful balance sheet and we're able to take advantage of opportunities as they come up. The big project right now would be building the factory in Brazil, which is going very well.

Your next question comes from the line of Ann Duignan from JPMorgan. Ann P. Duignan - JP Morgan Chase & Co, Research Division: I'm curious to get your color on what's going on in the U.S. market. I mean we saw orders slowed significantly over the last couple of months versus to your point, freight tonnage is strong, the fleet is building over [ph] than it's ever been. Do you think it's just customers paused a little bit over the last couple of months just because of higher diesel prices? Do you think there was some pre-buying at the end of last year? I'd like to get your color. You are closer to those customers than any of us.

Sure. I think the term you used is certainly the popular term right now, pause. Now when I pause my television, then I can't -- I lose the signal. I think what we're seeing here is not so much pre-buy. I think people have been ordering a good amount. There's still certain segments of our general economy, as I mentioned in my comments, sort of the construction side. And I focused in on the housing starts as one. But commercial activity is picking up in some regions, but still pretty low in a lot of regions. So that's certainly a percent of our business, and we tend to do very, very well. So that market is very low. Right now, if we get back to 225,000 for U.S. and Canada, that's replacement level or what we anticipate as replacement level. And as we talk with the customers and you probably saw a lot of them at Mid-America, they're pleased where their business is, but they're not expanding their business. There's not that many, say, acquisitions of one truck company buying another. That's -- a lot of that's been worked through the system, particularly during the recession in the last few years. So I think U.S. economy is still at pretty low levels of GDP growth. I think people are just -- they're buying what they need. They certainly recognize the very tangible benefits of having a new truck versus a truck that's 5, 6, 7, 8 years old. That can be measured in thousands of dollars per year. So I think they're just -- they're cautious. All -- their trucks are running. You don't go to a dealership or a customer and see trucks standing anymore. That's a thing of the past. So I think people are saying, "Hey, when I really get a good deal and I think that the economy is really strong and people are buying refrigerators and more computers and fixing up their houses, then you're going to see some good growth." And at 225,000, it's replacement value, but it would be nice to see the 250,000 and 275,000. That could be a while. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Yes. As one of the major capitalist's been going forward, the construction sector, I mean Sandy Cutler yesterday was talking about -- quite bullishly about broader-based construction activity and an acceleration in a number of sectors in construction. Is that kind of the next leg up that we need in European?

Yes, it is. And I think obviously, Eaton is a wonderful partner with us, and they kind of have their hand directly in the construction business with a number of the products that they sell that go into buildings. So there I think when they said they're seeing some of that on the commercial side, which is certainly a driver but we also have the residential side, it's still at -- well it's literally at 50-year low levels. So that needs a kick a bit. Because the commercial side, that's one step then you can get the residential side, another step. I think you'll see our customers are in excellent shape. When you see their financial results, the ones that are publicly traded, they're making good money. They love our products. They're excited about the new products as they come onstream. And -- but right now, we're just kind of at that level. We've been able to grow our share because people like the products. So we're expanding elsewhere like in Brazil.

Your next question comes from the line of David Leiker from Robert W. Baird. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: First, a numbers question. Can you break out for us the parts revenue and the profits?

Well, we don't have the Parts' profits. We can tell you what Parts' margin was. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Sure.

Parts' margin was $237.9 million compared to $219.2 million, up in line with the volume growth. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay, great. And then Mark, a bigger picture as to kind of following up on what Ann was talking about. In an environment where we've got 2% GDP growth plus or minus, say for several years, it seemed like that the market, overall truck market stays relatively flat over that time period. Is there anything you would think that would cause us to go one way or the other in that type of environment?

Well, it's an excellent macro question. I mean, 2% is okay growth for the general economy. I think we may get to a point, and it may not be a truck-driven solution. It may be more in the political arena in terms of people's demand for housing and what, let's call it, the more broader financial institutions are able to do in terms of selling home inventory, and once we get that home inventory sold, how that will then ripple into new home construction. Trucking would be the beneficiary of that. I'm not sure it will actually be the driver of that. So it could be -- we could still have 2% GDP growth but if there's other, let's call it macro political or macro financial stimuli, we could really benefit from that. But our customers are really in good shape. As I mentioned, we have good financial performance from our PACCAR Financial group, the PacLease group performing very well; very, very low past dues. And as you talk with the customers, I know you do, they're reasonably bullish. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: On then a different topic, if we look at your quarterly revenue here, you got 2 quarters in a row at essentially $4.5 billion. And if you go back in 2006, you peaked at $4 billion on a quarterly rate. With your margins today, they're at the gross margin or at the EBIT -- or about 200 basis points lower. What needs to happen to be able to close that gap here, and do you think you could -- that can happen?

I think it goes back to the discussion we had earlier about the markets. The fact that in Europe, the market currently this year is expected to be about the third lowest in the last 10. In North America, U.S. and Canada, it's fourth or fifth highest out of 10. So the markets just aren't as strong as we've seen historically. We've seen some of those peak margin levels. So at stronger market, stronger market conditions, I think there's upside to the margins.

And I would add one point to I think Ron stated very clearly, is that certainly there's been a lot of additional cost, and we've talked about this in the past, in terms of just the -- meeting the different EPA and European environmental regulation. I think the good news is that over time, the whole industry and usually PACCAR is the leader, you work with our suppliers and keep refining the cost of these after treatment systems, meaning reducing the cost. These are big cost segments to absorb, certainly for our customers. And I would say, having been in the industry for 35 years, over the last 10 years have been the biggest series of cost adjustments that we've seen in 35 years. And I think that probably needs to get a little bit more airtime. We didn't see it in the '70s, '80s, '90s but certainly from, say, 2000, 2002 on, we've seen it. And so the good news is we continue to work with our great suppliers like Cummins and others on reducing that cost. If we can then couple that with a stronger general economy that drives the demand for more trucks, as you've seen in your experiences as a stronger market people, they're a little bit more willing to pay more probably just for about for any item, but I'm talking about trucks now. So reduce the cost of the after treatment, get a stronger market and increase our pricing and we'll be doing very well. We're already doing very well. We had a great quarter.

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

Could you talk a little bit about credit conditions in Europe, and maybe the opportunity banks stepping back gives to your Financial Services business?

Yes, I think we've -- we continue to not experience credit demand for our customers. They're able to get their trucks financed. PACCAR Financial in Europe has been beneficiary. They've seen their market share grow from 20% to 24% last year. So a record share level for them in 2011, and we continue to see strong share performance in the first quarter. So our portfolio's performing very well and we see further potential for growth as truck sales evolve.

And I think we've had PACCAR Financial in Europe for 10 years. So this is our 10-year anniversary or thereabouts, and so we're very pleased with the progress being made there. The dealers, it's just part of their integrated selling approach. The customers are comfortable and you recognize if you're customer and you have a 20-year relationship with a bank, it takes a while to shift allegiance to a different credit source. But they can see the benefit of working with one supplier, the dealer who supplies the trucks, the parts, the after service and the finance. So that's very good. Good credit availability in all our markets. That's really good news.

And in North America, can you talk a little bit about the penetration of the engines here and maybe the factors that your customers are looking at today to decide whether to go with your 13-liter engine or Cummins' 15-liter engine?

Sure, sure. Well we're very pleased. We've installed 22,000 engines of the PACCAR MX engines. They're doing well. We've got customers that are reporting excellent fuel economy improvements. And I just -- so we're very pleased. The factory continues to increase its production. I think you had an opportunity to visit it and if you haven't, I highly recommend it. One macro element that probably hasn't gotten a lot of press is that when we look at the industry in total for the first time in North America, 13-liter engines are now selling slightly ahead of 15-liter engines. And that's a little bit of a -- not a little bit, it's quite a sea change and there's a couple of reasons. First of all, there's still a good demand for 15-liter and we are very happy to supply 15-liter. Our customers love them. But the 13-liter brings a lower price, 300, 400 pounds lower weight. It can deliver a better fuel economy and it's just a very proven engine worldwide. So I think in terms of the timing, I have to take my hat off to our engine design group and production people because literally for the first time, I'd say in history, the 13-liter is now selling slightly ahead of the 15-liter. So it's exciting.

Your next question comes from the line of J. B. Groh from D.A. Davidson. J. B. Groh - D.A. Davidson & Co., Research Division: I had a question sort of on that same 13-, 15-liter and PACCAR engine line of questioning. I was curious as to -- of the trucks you're putting out now, what sort percentage of those are with growing [ph] engine, what -- how is that -- what kind of share are you getting there?

Still the 25% to 30% range. And it's exactly on schedule. And I'd say as we sell more of them and the customers are gaining the benefits, the word-of-mouth and the reports are positive and it's good. J. B. Groh - D.A. Davidson & Co., Research Division: Okay. I'm kind of curious as to what your customers are saying about driver shortages and the CSA impact and improving economy and competing for labor and how that impacts their truck buying decision.

Well, it is interesting because typically when housing is down, that actually frees up people for the freight truck industry in this slow period. It appears that a certain number, I don't have the exact percent, of those potential drivers who are working in housing decided, "No, I'm not going to do it. I'm not going to maybe spend the time away from the family." And there's probably overlaid on top of that some element in terms of the higher qualification standards which is good for the industry in terms of getting -- we already have -- the industry has great, great drivers and putting, let's call it, a formal guideline, will continue to strengthen the great industry. So there hasn't really been an issue in terms of driver shortage for many of our customers, particularly ones who are buying new trucks. They're attractive. They get good fuel economy. They're very comfortable and people that may not have been driving for a few years are very pleasantly surprised when they get into a new vehicle because they really evolved over the last 3 to 5 years. So yes, it's healthy.

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

Just a couple of short-term questions, a lot has been asked and answered. On the positive pricing, does that include Europe and Australia?

I'm not sure what your question is.

Oh, in your comments, you talked about a positive pricing environment and clearly, U.S. is in there. I'm just wondering if that positive pricing environment is something global or if it is driven by the U.S. and not existing in Europe and Australia.

Well, Australia is good. Mexico is good. South America is good. I think Europe is probably relatively flat, stable. Does that answer it?

Yes. And then short term, are you seeing any demand dampening from some of the reported slumping activity in portions of the U.S. energy sector, mainly the hydraulic frac-ing?

Oh, that's a good question. Let me take it from a slightly different approach. The dealers that we've had in, let's call it, the shale, oil areas, they've seen demand that has been unprecedented whether it's in portions of Canada or Pennsylvania or the Dakotas, it's been pretty amazing. To be a dealer there is to do well. So I think in terms of just the frac-ing itself, I can't really comment on that. I don't think I can really relate that to sort of the trucking demand. But sort of the general focus on oil and gas has really been strong in terms of driving a lot of the, let's call it, local or super local regions. There's been a lot of demand for trucks in those regions. Let me just sort of segue off of that in terms of there's been some discussion about alternative fuels, LNG, CNG. And I think once again the good news is that PACCAR is a leader in offering the complete range of products including hybrid. We've got a strong market share, over 30%. And certainly in the press, maybe focused a little bit more on the car side than the truck side, but we've got good customers who like to buy that product. I think over time what will be driving that particular industry is the difference between the pricing for diesel and, let's call it, gas. What's going to be the differential, obviously the infrastructure in North America in terms of offering LNG, CNG is very, very small compared to diesel outlets. And I think we also have to recognize that the LNG or CNG in terms of the number of miles you can drive on 100 gallons of whatever the equivalent fuel you're using is about half of what you can get with diesel. So these are some of the elements that are not typically brought up in the press but when you're operating a truck company, you're looking at those very, very carefully. So the good news is PACCAR's a leader. We got the product. If that's what you want to buy, we're happy to sell it to you.

On that last one, on the alternative fuels, are you recognizing that you have the flexibility to ramp up demand if it manifests itself? Are you currently looking at, particularly some of the nat gas power potential as more of a niche market? Or is it something that over time, maybe 5 years, could approach a meaningful size of the market?

Well that is a question that's obviously getting debated in the press on, let's call it, a macro level. Right now it's a niche market. It's less than 1% of industry demand. The people who want it are generally pretty happy with it and we certainly are happy to build them and deliver them. Looking out 5 years, it's really going to be impacted by how fast will the buildout of the supply infrastructure be. That's important. The cost is almost -- it's almost twice the cost of just buying a normal Class 8 truck. So you got to have an operating environment that you can recover that cost. And for many, many customers, they just don't see where it's viable. So 5 years out, I think we maybe should be looking 10 years out. And if you look at the history in the automobile of hybrids and people like Toyota are probably leaders on hybrids, that's still a very, very small percent of the vehicles. I'm reading an interesting statistic in one of the magazines that the number of people who buy a second hybrid is roughly 25%. What that means is 75% of people that buy a hybrid don't buy another one because it's about 50% more expensive to buy it. So anyway, we're ready, willing and able and have a full range of product.

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

So do you think the 2013 trucks coming out will be pricing and mix improvement will be enough to that they will notice it on your margins and your incremental margins?

You're talking about for North America?

Yes. And when are those products going to hit? Probably late summer, right, or early fall?

Yes, that's right. That's right, but probably later in the year. I think there are some benefits to the new engine, that are the new EPA 13, that could have some minor positive benefit, but you probably won't see it this year, probably more next year.

And any signs that the owner operators are coming back at all? There are whispers of it at the end of the show, but I don't know.

Were you at the show?

Yes.

Yes. Well, the -- we talked about owner operators. We love all our customers. I think it has to be taken in a broader light for any industry and that these owner operators, they're small businesspeople, they're very dedicated, they're wonderful customers. But I think to continue to grow, they typically align themselves with a larger company so they get whether it's the health care benefits, they get regular freight, they know the routing, they might have some sort of maintenance programs with a larger fleet. So I think the concept of the owner operator, it's a wonderful thought. But I think it's moving on to, I would now say, it's sort of small, medium and large businesses. That's the way I kind of look at it.

Okay. Yes, I'm just trying to gauge if the negative mix shift that we've seen has run its course and if we can see enough profitability improvement, even if the U.S. and Western Europe stay depressed over the next 2 years to continue to see some of it.

Yes, I think the mix has been very positive. We've seen continued growth as -- we sell to like all the medium, large and extra-large customers. That's great business or great customers, great partners. And I think it's all good. It's all good. And that -- say, we're in a strong position and that you saw the new products we're coming out with. There's been great interest from a lot of people. And we're just bringing in the, let's call it, medium-sized cabover product. And there's been a lot of interest, particularly for people in intercity, urban distribution are very interested in that. So right now, we have the broadest lineup of products in our history, and I think that positions PACCAR very, very well. We're very excited about it.

Your next question comes from the line of Tim Denoyer from Wolfe Trahan. Timothy J. Denoyer - Wolfe Trahan & Co.: Quick question for you on North American market share. If I look at North America overall, including Mexico and I guess exports, your market share I think was a record in terms of the data that I have about almost 32%, which was up about 5 percentage points year-over-year. Obviously, that's a very impressive result. And I'm just wondering if the oil and gas business that you talked about earlier was having a significant impact on that. And Alison Transmission said yesterday afternoon that they're seeing some cuts from oil and gas customers in terms of orders. So I'm wondering if you can give us a little bit of a sense of how you expect your market share to develop throughout the year and what impact do you expect oil and gas sector to have?

Okay. Well a good question. The oil and gas sector for us is they're very good customers, but it has sort of minimal impact on market share for us. We are -- our market share is driven by, right now, on-highway haulers. We sell certainly to the oil and gas and other groups and we love working with them, but market share is really very, very minimal. I think the growth has just been people like the Kenworth and Peterbilt product. As you followed our company, you've recognized that first is really build the premium product and premium service and over time, the market share has increased as a result of that. People love the product. It's the low cost to operate. There's a lot of pride driving our products around the world. So in terms of our share, probably be in about the same range you're looking at. But that's not the #1 driver for us. The #1 driver is great premium product and that's what we work on hard every day, highest quality. Timothy J. Denoyer - Wolfe Trahan & Co.: Okay. And a follow-up on Brazil. There were some recent announcements of new local content regulations essentially trying to localize more of the supply base down there. Has that had any impact in terms of your plans in terms of building out the facility? I mean, specifically on engines, I believe you had said that you're planning on exporting from Mississippi. Is that still the case?

Yes, you are correct that Brazil as a country continues to evaluate local content requirements. Once again, the good news is we meet all the requirements. That is certainly one of the first areas that we took a very hard evaluation of. The vast majority of our suppliers have been in Brazil, are in Brazil. We're working with them closely. In terms of the engine, we'll be sourcing essentially the vast majority of the content of the engine in Brazil. And if Mississippi was mentioned one time, maybe that was a thought. But we have suppliers in Brazil and we'll be sourcing a large percentage of the content in Brazil. We may do some additional machining or things outside of the country, but it's being bought in Brazil. Timothy J. Denoyer - Wolfe Trahan & Co.: Okay. But you are planning to be vertically integrated on engine pressure in Brazil.

Well I mean, we're going to be -- we'll only offer the PACCAR engine. I think that may be one part of your question. We're buying the major components, the heads, the blocks in Brazil. Timothy J. Denoyer - Wolfe Trahan & Co.: Okay, great.

And that's the big elements, and those are certainly the big cost drivers for an engine.

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

Just one quick question. I know it's kind of basic, but I wonder if you could just walk through pricing and how and the timing of when it flows through. My impression is you took us from a big hit on the components on the engine with the '10 and that you've been slowly recouping that. And I wondered especially this year whether you get the list price increase benefit in 1Q, 2Q, 3Q time frame. And you described the pricing as being sort of smooth throughout the year, so I just wanted to understand how that flows through.

I think you actually described it pretty well. You absorb these large cost increments and then you work with suppliers and try to keep refining it. The customers who are the -- they're the final judge on what they're going to purchase, work through. They see the benefits of buying the new componentry. They are perhaps a little more willing to pay a little bit more because they can see the benefit will come to their bottom line. And in terms of this year, I think suppliers are in good shape. We've got the vast majority of our agreements or multiple year long-term agreements with our suppliers. So I think it should really be -- I think it should be very smooth in terms of supplier cost increases affecting us. And as a result, I think the pricing will be stable. Because I think you also have to incorporate what's going to be happening to the general economy, and that's more than just trucking.

Your list price increases though, when would that sort of benefit your revenue for the current model year?

It's very similar to the rest of the industry. You either have 1 or 2 list price increases during the year. So at the beginning of the year and the middle of the year is pretty typical. And so that's the timing. And you hope that it'll have some impact. That's really all I can offer on that.

That's fine. And then if I can ask you -- you kind of addressed this, Mark, just a second ago, but the market share look for throughout the year -- the build -- your share has been phenomenal. The build rate in the first quarter were a little bit strange with one of your larger competitors having sort of a lower build rate. And I just wondered if you could address whether your market share and build is similar to your market share in the order book. In other words, whether you would've built more of our backlog down or whether just the build is a true reflection of the share you've gained in the order book as well.

I think our share, I think -- I just want to jump in. We build the highest-quality product in the industry. That's what we provide to our customers. And we've been very fortunate and we thank our customers for buying them. And that's what has driven the share. I think our production, our dealers are in very good shape. Their inventory is in good shape. So when we build it, it gets to our customers and they register it and that's what reflects the shares, so it's a pretty straightforward process.

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

I was wondering if you could give us a little bit more color on what your order trends have been like in the U.S. and in Europe. I'm trying to put the build reduction in the second quarter of 2% to 3% in perspective so we can understand why the builds are going down.

Sure, you bet.

Our order intake in the first quarter was similar to the fourth quarter of 2011, if that's what your question was.

Yes, and we had some adjustments, and you're aware of those. In Europe, it's pretty stable. We took the adjustments essentially in the fourth quarter, a little bit in January. And in North America, the orders have seen some decline on the industry for the industry. And we'll also see -- I think Ann asked the question, are we sort of in a pause mode. So we reflect that also as our competitors do. So we're saying second quarter might be 2% to 3% down and first quarter we got some improvement in other markets. Mexico and Australia and South America's going well. So that's kind of where we are.

Okay, great. And then congrats on the success with the Peterbilt awards.

Appreciate it. Thank you very much.

I'm wondering, going back to the discussion about vocational. If you're able to size what the construction market could be for PACCAR. It sounds like it's meaningful just so we think about the upside opportunity as the market starts to come back.

Yes, why don't we take that off-line, because that's a pretty complicated answer.

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

Most asked and answered, but appreciate you sticking around.

We're always happy to talk.

Just to tag along -- it's a couple of tag-along questions. If I can maybe try and approach that last question in a different way. Can you frame how much the vocational business has declined for you from peak to where it is today?

Yes, it's -- why don't we take that off -- let's not make something that it's not. We'd love to have house building strong again. That would be wonderful because it's timber, it's concrete, it's glass, it's carpets, it's refrigerators. It's a whole host of products that obviously many, many industries are involved with. And the good news, our share has gone up. The Kenworth, Peterbilt, DAF have done a fantastic job of growing on-highway business. We're into many, many more medium and large customers. So I think that's really the focus. But we're selling to customers who are out there. That's pretty basic.

Okay. Maybe just switching over back to the engine side then, can you give us I guess your build rate? And I think last quarter, you had talked about targeting 130 units, 130 a day, where we are in the ramp to that number and kind of your capacity utilization?

You bet. We've got plenty of capacity. That's the good news. 130 is not an accurate number, but we're increasing it. And over the course of the next 12 month, we're looking to double the engine production, and that's kind of why we're on schedule.

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

Most of my questions have been answered. I've just got a couple of quick follow-ups. Just on the Parts business, you had said the top line was up basically in line with the profit growth, so margins are kind of similar as they were last year. Is that what...

That's correct.

Correct.

Okay. That's what I thought. And I assume volumes in the quarter were pretty much down slightly in line with the guidance, correct?

Yes.

Yes.

Compared to the fourth quarter?

Yes, compared to the fourth quarter, yes.

That's correct, down about 2% or 3%.

Yes, you bet.

And, Mark, I just wanted to follow up on the earlier question about build versus sales. You clearly have made strong progress in both the U.S. and Canada taking market share. But it did look like the production was a little bit higher at least with the public data that we have than the sales rate. That's just kind of timing of orders. Could you could help...

Very simple. Yes, just timing.

So kind of going forward, build and sales kind of equal to each other. That's how we should think about it?

That's typically the way we look at it. You bet.

Your next question comes from the line of Basili Alukos from Morningstar.

It seems like my questions -- but I'll come and get it at a different perspective. When you thought about building the engine facility, kind of going back to when you started, what did you expect or what were your goal for production rates to be so that the engines would ultimately be accretive to gross margins? At least the way I think about it because you're at a lower production rates -- or penetration rate on your engines, you're having that fixed cost or holding down gross margins. So I'm just trying to get a sense...

No, it's a good question, but I don't think it's quite -- reflects what's actually going on. We're right on target. It's accretive and it's been excellent for our customers obviously benefiting for our dealers because it gets them into the engine powertrain business which is also good on, let's call it, the aftermarket support. So no, it gives us additional global volume which is a real benefit when we're talking with suppliers. And it also increases our expertise in engines, which as we look at doing things like Brazil, just enhances our opportunities to deal with customers around the world. So it's been a real win, a real win.

Okay. That helps. And then I just want to follow back, you'd said kind of first time 13-liter engines are selling slightly ahead of 15. Do you think that the pie is shifting as more people are going more towards 13, or is it because maybe rail is becoming more efficient, you're seeing those 15-liter engine customers transferring their load to rails and so the pie is shrinking and as a result...

That's a great theoretical question. I think people enjoy the benefits of the 13-liter. I think we'll just leave it at that.

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

Again, most questions have been answered. Just if we could look into Europe, I mean, I know you have the long-term target for 20% market share, obviously...

And we're at 15.5%.

Right. 15.5% was the end of the first quarter?

Yes, it was.

Okay. Obviously, your market share targets in North America have been lower. And you've kind of blown past those. Is 20% where you really think the ceiling is or something that's achievable here in the near term...

20% for Europe?

Yes. You could throw it out as a medium-term goal.

I know. It is a medium-term goal. It continues to be the medium-term goal, and it's a wonderful goal. Why don't we talk when we achieve it, and then we can take a look at that?

All right. So next quarter is...

I like your optimism. I like your optimism.

Mr. Easton, there are no further questions. [Operator Instructions]

All right. Thank you, operator. I think we -- time is up now.

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

I'd just 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.