PACCAR Inc (PCAR) Q3 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to PACCAR's Third Quarter 2012 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. And if anyone has any 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 calls, if there are media -- 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 good revenues and net income for the third quarter of 2012. PACCAR's third quarter sales revenue were $3.8 billion, and quarterly net income was $234 million, an aftertax return on revenues of 6.1%. For the first 9 months of this year, revenues were $13 billion, up 13% compared to the same period last year. Net income for the 9 months was $858 million, a 20% increase versus the same period last year. Earnings per share for the first 9 months this year were $2.41, an increase of 24% compared to the same period last year. I'm pleased to report that the results for the first 3 quarters of this year are the fourth best 9-month results in PACCAR's history. In addition, PACCAR's dividend increased by 38% compared to a year ago. I'm very proud of our 22,500 employees who have delivered industry-leading products and services to our customers worldwide. Our dealers and customers in North America and Europe are benefiting from good freight demand and good freight rates, as evidenced by strong aftermarket parts and service business and excellent PACCAR Financial Services performance. Customers are focused primarily on truck replacement as they navigate the uncertain global economy. PACCAR delivered 31,200 trucks during the third quarter, about 17% lower than the second quarter. However, year-to-date, we delivered 12% more trucks than the same period in 2011. More good news is that Peterbilt, Kenworth and DAF grew their market share to record levels as customers recognize the benefit of our high-quality and efficient trucks. PACCAR's retail share of the U.S. and Canadian Class 8 truck market was 29% for the first 9 months. DAF's market share of truck registrations in Europe, above 16-tonnes reached a record 16%. In the Andean region of South America, that's the region outside…

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

Mark, you mentioned delivering 1% to 2% more trucks in 4Q. Can you talk about truck production in 4Q? Has it stabilized for you guys? I mean, we've -- we noticed inventories are up a little bit as sales have fallen. So how do we look at margins in 4Q? Do we have more absorption issues in 4Q than we did in 3Q, I guess, is what I'm trying to ask.

Okay. We're talking about 1% to 2% more production in Q4. And as I indicated, we have our normal couple-week summer shutdown in Europe, as most companies do. And we're past the summer, so we're just back to business as usual. And margins for the fourth quarter, I think, will be comparable to the third quarter.

And Mark, it's fair to say that the current production is set for what the current order rates are, correct?

Yes, it reflects incoming order rate at the higher market share that we've been able to achieve, which we're pleased about.

Got you. And then can I ask you about the seasonality of the U.S. trucks business? I mean, it seems like since the recession, seasonality has been stronger than it was prerecession. Do you guys see that? Do you expect orders to ramp up here over the next few months as the fleet guys get ready for the '13 trucks?

Well, that's interesting you talked about seasonality. It's probably been dampened down a little bit since the recession because an important consideration will be the vocational market, particularly -- well, let's call it residential and commercial construction. You had some of that, I think not offset, but by the let's call it natural gas, oil. And I wouldn't call that seasonal, but that's offset it somewhat. Now as you've seen in the papers, there's some improvement and housing starts across the U.S., in particular, which is good. Still at relatively low levels, but certainly, it looks like it's off the bottom. So we're seeing a little bit more interest from some of the major construction groups in getting some new vehicles.

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

A couple of detailed questions for you relative to the '13 outlook. The comment about a prebuy in Europe, kind of widely expected. I'm just wondering what sort of magnitude you're building into that industry forecast.

Yes. I think looking at the industry, probably in the 5% to 10% range of our total industry outlook.

Okay. And then in kind of just building off of Andy's question earlier, the 2013 U.S. and Canada industry sales outlook, could you comment on, not so much your production, but what you think the impact of kind of modest improvement in sales would have on the industry production given pretty sizable 2012 year-to-date industry overproduction on many measures.

Well, I think that's a -- it's a good question, sort of a relative question. I'm not sure that there's overproduction, obviously, as we've talked the last few years, and you've been asking good questions. There's a lot of older vehicles out there. I think as I see many of our customers, there's -- customers are doing well, and they're very happy with our products, and that's contributed to our growth in market share. And when I talk to them, there's a lot of interest in purchasing new vehicles. They've been, I think, more of a replacement cycle at this time. But as we have some general, slowly improving economic outlook, whether it's housing or consumer spending, I think we may see a little bit of, first, replacement of older fleets and then possibly some expansion of those fleets. The companies that are operating today, that have been around for the last decade, are very well managed. They know how to analyze the market, they've got good customer relationships, and frankly, they would like to get some of the new products that certainly we've introduced over the last 12 months.

Sure. I guess a follow-up on that. If we look at your fourth quarter production more on a daily rate as opposed to the quarter total, do you expect that probably goes up during the year?

You're talking about fourth quarter this year?

Yes.

We're anticipating building more trucks this quarter than last quarter.

Right. I'm just wondering, based on what you're seeing in both U.S. and Canada as opposed -- as well as Europe actually, is that production in the fourth quarter kind of underproducing demand relative to what you're seeing to kind of rebuild backlogs?

No, we really match -- I'm not sure what our competitors do, but we really match and align our production levels with incoming orders and having a reasonable backlog of demand. So I think our production really reflects what the market is doing at least for our customers is all I can really say.

Okay. And one last one for me. There's some potential short-term tax law changes out there. When you develop your total dividend payout on any one given year, do you consider things like short-term tax law changes?

We certainly take into all the relevant laws out there and what will be the most beneficial for our shareholders, absolutely.

Your next question comes from the line of Ann Duignan from JPMorgan. Ann P. Duignan - JP Morgan Chase & Co, Research Division: My question is around your outlook for 2013, both U.S., Canada and Europe. Could you just talk about what kind of macro environment is encapsulated in kind of the low end of the guidance and the high end? I'm just trying to understand as we go through the year how your views might change.

I think on the macro side, it would very much reflect what's going on in total GDP for each of those regions, whether it's U.S., Canada, Mexico or overall in Europe. You see the headlines as well as we do, particularly in Europe, what's the next steps towards the resolution of some of the challenges throughout the eurozone. I'm not sure as the final chapter is being written, and I don't even know what's going to be in that final chapter. So that will have -- that will certainly have an impact on consumer confidence, how our customers are doing, freight demand. We follow the MAUT kilometers driven through Germany, and they're better than the last few years but certainly not at the levels of '07 and '08. That's one of the macro criteria that we track. And the good news is, I know our inventories are in very good shape, our dealers are doing well, our customers are doing well, but certainly, the macro will have a lot of impact on our business. So if people feel good, whether it's after the election, or we get the fiscal cliff behind us in one some way, shape, people feeling good, probably going to buy more and build more, and hopefully, that will drive demand for trucks. Ann P. Duignan - JP Morgan Chase & Co, Research Division: And I haven't asked this, but what's your personal view? Do you think that we will see an acceleration in economic activity post elections in Europe?

I am -- my job is focused on building the best trucks in the world for the greatest customers and provide those services. I want to take that off-line sometime. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Okay. Well, let me ask a different one then that you might answer. Your assessment of the prebuy in Europe, there's a lot of discussion around that, whether that would be a prebuy or there won't be a prebuy, and we haven't had any precedent for a prebuy in Europe, albeit there had been tax incentives in prior cycles. But can you talk about what are you hearing from your dealers or what are you seeing that has caused you to assume there will be a prebuy?

Well, talking with particularly our customers, and we saw quite a few of them at the Hannover show in the last month or so, there's a price increase of EUR 14,000, EUR 15,000, so that's real. And if you're a person operating trucks in your business, that's something you got to be thinking about. And I think that's going to be a very important consideration for a number of our customers if they want to have a prebuy. And as I think I mentioned to Andy, we're looking at maybe 5% to 10%. It's not a large prebuy if it happens. And I think your assessment is correct. There typically hasn't been too much of a prebuy. Each country takes a look at their infrastructure sort of separately and determines if they want to make any incentives for the customers to purchase greener vehicles. We'll just have to see how that shakes out.

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

Mark, can you talk about your expectations for your Latin America and Australia businesses in 2013? Perhaps give us an update on order trends or how you're thinking about the outlook broadly.

Sure. Well, looking at Latin America, we'll be excluding Mercosur because we're just building our factory. The Colombia market is a very strong for us as they have transferred a lot of oil. But they're building a pipeline now, so they're just coming out with some new regulations in the country of Colombia to begin, I think, some infrastructure investment, which will be good. I think overall for the non-Mercosur, it will be maybe a little bit lower than it has been. What we're looking to do is offset that with growth. We're appointing new dealers. Our current dealers are investing in their territories. We've introduced the DAF product line in a number of countries in Latin America. So I think overall, it might be a little bit of a slower market, but we're looking to see what we can do working with our dealers who continue to deliver and get a higher share in that region. In Australia, it's been good for us. They've had a strong market and had a little bit of a slowdown but now seems to have rebounded a little bit. Australia seems -- the economy seems to be in good shape, so I think steady as she goes.

And Mark, is there a way to put the new locations in Latin America in their context, how many are you expecting to add dealer locations in 2013 versus where you're running now?

Oh, I'd say probably -- without putting a number on it, 10% to 15% more locations would be in the ballpark.

Perfect. And on capital deployment, you've just delivered major new products in the U.S. and Europe. I'm wondering if you can just provide high-level view of where you're deploying your R&D budget over the course of 2013 and the next couple of years just from a high-level standpoint.

You bet. As I mentioned, a milestone year this year. Great, great new products. Obviously, one of the major CapEx users next year will be building a beautiful factory in Brazil, that's ongoing; and then we have our normal cycle of new trucks being developed; and then parts warehouses, there's always lots of initiatives to keep our factories the most efficient in the industry -- R&D centers. So that's kind of the high level, but I think primarily focused on factory in Brazil, new products, engine development, pretty normal.

Okay. And lastly, your comments on the North America production schedule for the fourth quarter implies, I think, that you picked up some order share over the course of the third quarter because the industry as a whole has been outproducing orders by about 30% in the third quarter, so they probably need to cut. Is that a fair comment? You've seen the industry order numbers. Have you picked up order share in the third quarter?

We -- well, we picked up a little bit, but our dealers are in great shape. They're at very low inventory, and they're very excited about these new products that Kenworth and Peterbilt introduced in the Mid-America Show in March, and those are really coming into production now. So I think it's pretty steady with the third quarter, with a little bit of improvement for Peterbilt and Kenworth.

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 just wanted to kind of square up this sort of beat a dead horse here, the Q4 outlook versus -- one of the retailers had some pretty dour comments on Q4 sales. This is just a truing up of their inventory levels, is that what it is? I mean, I think there's a coming down?

I don't -- I'm not sure who you're talking about and -- I know what we're doing. That's all I can really say. J. B. Groh - D.A. Davidson & Co., Research Division: Okay. And then maybe you could help us on the provision for losses in Financial Services has been coming down pretty nicely. Sort of give us some insight there.

It primarily reflects the portfolio performance as we progress through the year. Past dues at the end of last year, 1.5% for our Financial Services companies worldwide. And at the end of the third quarter, that had come down to 90 basis points. So just as Mark mentioned, our customers are performing well, and we're seeing that in the performance of our portfolio. J. B. Groh - D.A. Davidson & Co., Research Division: Okay. And I know it comes out in the queue, but can you give us the breakdown between the truck sales and the part sales?

Sure, yes. The truck sales were $2.8 billion in the third quarter, and aftermarket parts was $650 million.

Your next question comes from the line of Joel Tiss from BMO Capital.

I guess you're not going to answer this anyway but...

What is it? What is it?

Can you just frame for us the -- what Brazil looks like in terms of is it accretive in 2014, what kind of market share, like just so we can try to get a sense of where things are going, like how big?

No, it's a great question, and we're investing now, as you know. It's a $300 million investment, and I was just there a few weeks ago, and it's really shaping up, but it'll take a year to actually build the factory after we've had all the preconstruction work. So we're looking to get a few trucks out next year. And in 2014, we begin to ramp up. Of course, we're appointing dealers, and we've got some great dealers joining our team. We're looking forward to having them with us, and they're looking forward to selling DAF trucks. So 2014, we begin the ramp-up of production. I think it really has a tangible benefit in 2015, would be the pretty normal way when we're building and bringing a factory online.

And then if we just wanted to think about 2015, I'm just trying to get like a normalized, early-stage revenues. Is it sort of $300 million to $500 million? I mean, you can make it as wide a range as you want, just think about it.

Yes. I mean, 2015, our goal for the medium term is to get up to 20% share. But right now, we're starting at 0, so it's going to take some time to get there. And in 2015, why don't we say $200 million to $400 million.

Okay, that's helpful. And then does the replacement cycle, the number of units in replacement demand go higher over the next couple of years as this big bubble of 2006 trucks come to the end of their useful life? Or is that really not affected, it's smoothed out? Do you know what I mean? [indiscernible]

I think they will certainly contribute to some of the demand in the marketplace, whether it's a bubble, some of those companies that purchased in 2006 may not be around anymore. Depending on what total GDP growth is, that will have an impact on how much freight is being transferred. I think it makes a contribution, whether it's a bubble or not. Well, that's hard to tell. There's a lot of great customers with products they would love to -- they'd love to trade in right now. And having just talked with many of them in the last week or 2, they're saying first half of 2013, they're going to be really taking a serious look at starting to update and upgrade their vehicles.

How hard is it going to be for one of your competitors who's been struggling with market share when they come back to the market with their new product that's not all of a sudden the cheapest product out there anymore? How hard is it going to be for them to re-brand and to gain that share back?

I'm not sure. That's obviously, a great philosophical question, but we're focused on [indiscernible] It's a milestone year and best products we've ever had. We're excited about them, and dealers are in the strongest position they've been for years and years. So we're going to keep focused on what we do.

Your next question comes from the line of Steve Volkmann from Jefferies. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: I, too, am going to focus on what you do. I had a couple of things to ask you, and I'm trying to think a little bit about kind of mix, I guess, is a way to put as we go into 2013, the T680, 579. How much of your North American production just by order of magnitude could that be next year?

I'd say it could be for the whole year, obviously, we'll be looking to improve that through the year as we begin. And we're ramping up production now. For the whole year, I think 20% to 30%. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Okay. And my understanding was that, that has been sort of specifically engineered to have sort of more commonality and better margins than some of your historical products. Is that accurate?

We -- it's a highest-quality product, the most automotive, and certainly, there have been some lower costs associated with the design. So... Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Great. Okay, that's helpful. And then on the DAF XF, can I think of that in similar terms?

It's -- I mean, it's the highest-quality, most-automotive product, absolutely. But it's also aligned with Euro 6. And as I indicated, there are some significant cost increases that the industry will face with Euro 6, so it's not quite the same. But a fabulous new vehicle, absolutely. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Okay. Fair enough. And then what do you think the MX engine mix is in 2013, again, order of magnitude in the U.S., sorry.

Yes, I think it will continue to improve. I'm not going to put an exact number on it. But as I indicated in my prepared comments, to have the 13-liter now be essentially 50% of the U.S. and Canadian Class 8 market is a significant number. And I think that may continue to grow the 13-liter. So as we tie this, our MX engine, in with the new Kenworth and Peterbilt trucks, it's a very exciting, fuel-efficient combination for our customers. So we're looking for steady growth. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Okay. And are all those MX engines now coming out of Mississippi? Or are you still getting some parts of some of them or anything from Europe?

I think, certainly, early next year is going to be all out of Mississippi. I mean, you get parts sourced from different sections of the world, but you need to think of it essentially as a Mississippi engine. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Okay. And can I assume the cost structure on an engine that comes from Mississippi is better than one that comes from Europe for you?

Yes. Yes. We're -- that's why we build it in Mississippi. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: That's what I thought, but I just want to make sure we're on the same page here. I appreciate that. And then my final one, just quickly. Some speculation about pricing pressure in the North American market because of -- with a little bit of weakness we're seeing here, any comment on that?

I think margins for the fourth quarter will be comparable to the third quarter. And I think that's kind of reading between the lines of your question. And I think our industry is pretty straightforward. When there's a strong market and good demand, margins tend to move up. When demand slows down, whether it's macro or micro, margins tend to move down.

Your next question comes from the line of Tim Thein from Citibank.

Just a follow-up on that last one, Mark. Can you maybe just switch over to Western Europe in terms of what you're seeing there on the pricing side? I don't know if that fits into your commentary with regards to margins in the fourth quarter, but what specifically you're seeing in Western Europe, and then if we can just quantify it in terms of what the average truck sales price change was in the sales bridge. I know it comes out in the Q, but I'm wondering if you have that for the third quarter.

I think pricing is pretty flat in terms of -- in Europe. We're -- we've been very good. The DAF team has done a fantastic job of not only developing great products and services, but growing share. And DAF is either #1 or #2 in every market, I think except for Germany, where we're #3. And there's a lot of variables in Europe, and obviously, some of them affected the truck market in terms of what the customers are willing to pay for the product. And I think it's been relatively flat.

Okay, got you. And then back on -- you alluded to dealer inventories earlier. And I'm wondering if -- based on what it included and what we can see anyway from the cash flow statement, it looks like wholesale receivable payments exceeded investments in new loans. And obviously, that reflects a weakening sales environment. But I was wondering if we can extrapolate anything from that further in terms of dealer inventory levels, both either here or in Europe. Can you comment on that?

Yes, the number in our cash flow statement is a year-to-date number. And so I think if you look at that for the quarter, there actually was a reduction in the amount, and we've seen dealer inventories in North America declined, dealer inventories in Europe were steady, and they are in great shape -- I mean, very well balanced with the market demand.

Okay. Right. I think it was actually a source of cash, right, in the third quarter?

Third quarter, yes.

Your next question comes from the line of Jamie Cook from Crédit Suisse.

Actually, this is Andrew Buscaglia on behalf of Jamie. So I just have a quick one. Can you guys comment a little bit on your -- what you saw on material costs this quarter, and then just sort of walk through what you're thinking about it into Q4 and then potentially in 2013 as you begin your planning process?

Yes. Material have been probably relatively flat. It was in a narrow range. We've seen -- of course, we track all the major indices for raw materials, and a lot of those have gone down. The sort of worldwide demand has softened. There's been a few exceptions, but a lot of that is offset because we have -- over 75% of our supplier agreements are long term, so multiple year, which is a nice arrangement for us and our partners or our suppliers. What was your next question?

Okay. And then just to clarify, so I know you said you have about 5% to 10% baked in for the prebuy in Europe. So if we don't see this come to fruition, I guess we could assume as the year progresses, maybe that your initial industry outlook might come down a little bit, or is that you're not expecting a prebuy until later in the year. Can you just talk a little about that?

Yes, I think in terms of the prebuy, you're absolutely correct. That will be third, fourth quarter of next year. And what -- on the positive side, we still may achieve that range if the general economy has some improvement. Of course, reading in the press nowadays in Europe, you've got sort of limited growth for many countries. But we're also looking at gaining some share. If the macroeconomic environment in Europe does not improve, then it may have an impact on the total truck industry even if there is a prebuy. So there's a couple moving parts that have to be taken into account, depending on what's going to happen in the total market. Obviously, on a quarterly basis, we're going to be revising and updating our total industry forecast.

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

I'm down to one question here. You've done a nice job. Some of the expenses have stepped down here recently. Do you think that's sustainable going forward? I guess what I'm getting at is in a flattish build environment in 2013, would you expect margins to be flat or up?

I think margins for 2013 will -- our initial look is probably flattish. One of PACCAR's strengths is excellent cost control and controlling our expenses. So we -- we're very diligent about that every single day, and we look to have a very low SG&A ratio. So I think we'll continue to focus on that every day, selling a lot more of our --- these wonderful new products we introduced this year.

Okay. So SG&A may come back up from where it's ticked down here recently, so we may expect that to come back up next year?

Well, it's very much -- is going to be reflective of what's going on with the marketplace. We're going to be producing more units, reflecting a stronger market. SG&A will probably go up a little bit.

Your next question comes from the line of Alex Potter from Piper Jaffray.

I had one question here on 13- versus 15-liter, and then I had a couple of housekeeping questions. So first on the 13, I guess if we were 5, 10 years in the past and I were to tell you that by today, the market would be 50% 13-liter, would you have been surprised that it progressed that quickly? And if you look 5, 10 years into the future, where do you think that breakdown will be?

Well, I have to get you on my strategic staff here, Alex. The vast majority of the world in the truck world, 13-liter is the engine of choice. When you look at Europe, Africa, Asia, South America, it provides a good combination -- excellent combination of horsepower, torque, weight, cost, all the things you're looking for when you're operating a truck business. The -- so I think North America, U.S., Canada and Mexico are just really moving towards a reflection of what's happening in the rest of the world. And I would expect that will continue. Now there are some applications where a larger engine, a 15-liter, may have some advantages. You're talking about a lot of weight you're hauling, a very arduous operating environment. There are certainly benefits for having that larger-size engine. But for the vast majority of truck operators, 13-liter is what's driving the industry. If you're carrying -- if you have a 80,000-pound total payload in North America or 80,000-pound in Europe or Asia, it's still 80,000 pounds. And everybody has got mountains and long areas, so 13-liter is probably going to continue to grow. You've got a good combination of torque and horsepower, and it's a great engine. 5, 10 years ago, we knew it was going to transition. I think it's probably moved a little faster than the industry anticipated.

Okay. Fair enough. And then housekeeping. I was wondering if you could give me gross margin in new trucks and aftermarket. I know you gave revenue already, but just sort of for gross margin.

Sure. For the quarter, the truck gross margins were 7.2% and 34.5% for parts. Overall, it's 12.3%.

Okay. It's very good. And then could I also get deliveries by region, North America, Europe, South America, slash other?

Can we take that offline?

We'll take that offline.

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

I guess, first of all, on the inventories, I might have missed it, but why exactly have the inventories grown so much year-to-date relative to the second quarter?

Yes, I think 2 areas. One is in line with the rest of the industry. We have some engine inventory anticipating the EPA 13 transition, so it's very normal. This happens every couple years as we go to a new EPA emission level. So that's a portion of it. And the other portion is some trucks, bodybuilders getting ready for delivery, that will be gone by the end of the year. That's pretty straightforward.

Okay. Now the emissions standard, the on-board diagnostics, it doesn't seem to be that expensive. Is that correct or is that a bigger price increase than I would've...

No, I think you're correct. It's part of the ongoing program of producing a greener and greener engine. But this one wasn't -- it's not as significant as, say, EPA 10.

Okay. And then...

A lot of work though.

Yes, sounds like it. And then on the fourth quarter build rates, I'm sorry, I'm a little bit dense, but we're picking up a couple of weeks extra production in Europe relative to the third quarter, so does that mean that the fourth quarter production in the U.S. is going to be down 15%?

No, I think it should be relatively flat.

Flat. Okay. And then on Brazil, I might be looking into this a bit too closely, but has the timetable changed? It sounds like now it's late 2013, the tail-end at the year for the [indiscernible].

No, it's on schedule. And I think we had a good discussion a few minutes ago that in terms of having a real impact, it would be really 2015 because we'll be ramping up in 2014. But no, it's going well, and it's going to be another world-class facility. We look forward to having many of you there touring around and see what we're doing.

Your next question comes from the line of David Leiker from Robert W. Baird. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: I just want to follow up in the last comment you made, Mark. You were talking about U.S. sales or production, your North America production flat, essentially Q4 versus Q3. And with your comment about industry volume, looks like sequentially is down pretty significant double digits, if you can reconcile those 2 because it seems to be larger than just market share opportunities.

Well, we've had -- looking at U.S., Canada, Mexico, in Mexico, which -- we've seen a little bit more of a slowdown, but U.S. and Canada is a little bit up. So overall, it's flat. And Europe is up primarily because we don't have the couple-of-weeks shutdown during our normal summer vacation schedule. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: It seems like your 215,000 U.S., Canada retail sales number would imply a fourth quarter number versus Q3 that's down.

Oh, well, it might reflect that. I'm really focused on what we're doing. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: All right. I understand. And then as we look at the -- so we've been talking about the last couple years about the increased cost for emissions and the challenge in the market of passing that on. As Navistar comes to the market with cost structure that's going to be more comparable to everybody else, do you think that's an opportunity to recoup some of those costs, or you think that's an opportunity to continue to drive share?

That is an excellent question, and I look forward to sharing the answer as time progresses.

Your next question comes from the line of Kristine Kubacki from Avondale Partners.

I just want to ask a question about -- I guess to address a little bit -- as I perceive, a bit of a disconnect on your view between a flat market in 2013 in North America. I realize that you mentioned that customers are doing fine. But it seems like what we're hearing out of this -- at ATA and out of this earning season, both from public and private carriers, is that freight has definitely turned choppy, rates are not doing so great, and costs are going up. So I guess with all that said, and it sounds like carriers are generally thinking CapEx is going to go down and not up next year after using bonus depreciation, '11 and '12, and a softer U.S. truck market, I mean, do you think carriers are just being too cautious and they're really worried about the headwinds facing them right now and things get better? Or do you think that really that there is maybe downside risk to your estimate in 2013, and we could be looking at a down year-over-year versus flat to up?

The carriers are excellent. We love our customers. You know that. Having been in the industry for 35 years, what I've been able to observe, and I know that you've been tracking the industry for quite a while, so you probably know the same thing, is that if you talk with those same excellent customers in August -- I'm talking about U.S. and Canada now, freight was going up, good rates. Fuel was up but they pass that through. And there was strong discussion about, boy, 2013 really going to be great. We're going to buy a lot of trucks. Now fast forward 6 weeks and dealers are saying, "Well, fuel has gone up a little bit more, not sure what's going to happen." And of course, everybody is spending a lot of time looking at the election and what's going on in their state, what's going on nationally. It is choppy, I think, to use your words. But fast forward another 6 weeks, and you can be getting a story saying, "Things are now looking a little better. I think 2013 is going to be good." So what that says is when things are going well, a lot of people will think that it's always going to go well. When things are not going as well, a lot of you will think it's never going to get better. What I found is that what makes this industry so much fun is that there is a cyclicality to it. Sometimes, that's measured in decades, years or months. I think with the customers doing well, and you've seen many of them have reported in the last week or 2, some of them have increased their profits, some have lowered their profits, but most have made a profit, which is the most important thing. Dealers doing very, very well, strong absorption; parts and service business good; finance, good, and lay the overarching opportunity of having a very old truck fleet, whether it's 6, 7 or 8 years, and you can get any of those numbers depending on who you're talking to, I think with some growth, housing market, general GDP, consumers feeling a little bit better, I think it could be a reasonable year next year. It's the way I look at it.

Fair enough. Maybe if we get the right outcome in the election there as opposed to [indiscernible].

Election -- it's always -- it's obviously -- every election is important for us, but at the end of the day, we've seen strong markets with all sorts of different types of leadership in Washington, D.C. When you talk with a truck, and it doesn't talk much, but if it's 8 years old, it knows it wants to get replaced. That's what we're focused on.

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

I just want to follow up on the last question. Most of my other questions have been answered. But when you guys updated your Q3 guide in September, it was looking like your inquiries were actually tracking up pretty nicely, sequentially. When we look at the industry orders, they haven't really seen a pickup there. How are the inquiries tracking now? And do you really -- is there a disconnect? I mean, are the customers really still kind of hitting you to kind of get quotes and you really think that if things do improve, you can really see the orders really get on the books really quickly?

Well, I think as we've said, really for North America, we see Q4, Q3 pretty comparable, pretty steady. And as we look at net orders on a quarterly basis through the year, there certainly for the industry has seen a slowdown. And third quarter, the industry adjusted their builds down from the second quarter. But you also have to lay in, as you know, we've been able to pick up a couple points of share because of the great dealers and great products we have. So if things get good again, the industry could certainly deliver. If things continue as they are, I think everybody has pretty much adjusted their production to reflect this build rate. So the guidance we gave for third quarter, we're another quarter smarter now. I think right now, we're looking at, as I said, perhaps 1% to 2% increased truck deliveries, production for us in the fourth quarter. And next year, I think could be slightly better both in North America and in Europe

Your next question comes from the line of Jeff Kauffman from Sterne Agee. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: I mean, most of the good questions have been asked here at this point. So if it's okay, Mark, I just want to get a clarification and then kind of an open-ended question here. You made a comment a couple times that you're expecting to sell another 1% or 2% more with flat margins. Are we talking margin dollars or margin percentages here?

Percent. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: Percent? Okay. And we're talking about evolution in the truck market, and you were talking about the 13- versus 15-liter. Can I get your thoughts on the adoption rate of natural gas engines?

Sure. There's been several very well-attended and I think excellent speakers at a number of natural gas conferences over the last few months, and we've been involved with a number of them. This is a great industry because, in many ways, we're really a leader and on particularly a lot of the environmental aspects. If you go back a number of years and start with hybrids. And I think on the car side, probably the Toyota Prius gets most of the credit for pioneering that, and I think they're still the largest seller of hybrid cars I think worldwide. There are a lot of discussion about how fast would hybrids take over, and you could read lots of different press and they throw a lot of numbers out. At the end of the day, it's still only 1% to 2% at that. And there's a lot of reasons why it's not higher, but that's what it is. It's an interesting statistic, and I think it's accurate, but you can never tell that. Less than 25% of all hybrid owners buy another one. Okay, what does that mean? I think if you look at, say, Apple computers, probably something over 90% buy another Apple computer. So the whole press got excited about it, and it's still good, and we still sell hybrid. And a number of our customers have great benefit from it, then it goes into the electric introduction. And whether it's our government or other groups saying you're going to pour billions of dollars into electric cars -- and there are certainly some real benefits to it. But the early projections of strong growth, it have not materialized, and there've been obviously a lot of -- more challenges. A number of companies have gone out of business, and the demand has not been there. Natural gas, 5 years ago, there was not a lot of discussion about it. And now I think, particularly for the United States, there's a great discussion about being energy-independent, which is wonderful, but you didn't see too many articles about the U.S. being energy-independent 5 or 10 years ago. But now we're talking about it, which is great. Natural gas, I'm very proud that particularly the Kenworth and Peterbilt teams are the market leaders. 40% of all natural gas heavy trucks are Kenworth or Peterbilt. We're a real leader in things like the waste haulage industry, but other industries. Certainly, lots of press, lots of investment, lots of states have benefited from it. What is the long-term benefit or what's the long-term growth in natural gas? I think like these other 2, the hybrid, the electric, there's numbers of 5%, 10%, 15%, 20% of the market will have it at some time period. We're not seeing it now. Maybe we'll see it in the future. Irregardless of what the market share is, I would expect that PACCAR will be one of the leaders in that marketplace.

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

So one question on the U.S., outside of the biggest fleet, have you noticed any issues with -- I don't want to say exactly getting financing, but because fleets have stretched out trucks, they may have a lower down payment available over your lower value of the trade-in. The used values are high. Obviously, the trade-in may just be older and worth less. Have you seen -- is there any concern that the bigger fleets have the firepower to keep going and the medium-size fleets don't? Is that an issue for you guys next year, you think?

I don't think so. I think we've seen pretty readily available credit for our customers that want to buy trucks really in all of our markets at this point. So credit availability has not been an issue.

Perfect. And then I don't know if you can find a way to answer or opine on this one, or you want to or not, but a lot of us have been a little bit puzzled with not so much PACCAR build rates in North America, but industry build rates, which have come in but maybe were a little slow to come in. Do you feel like there is any inventory overhang? And do you feel like that has the potential to affect pricing or not?

Well, I think our dealers, our customers are in very good shape. If you're building a product and indicating it'll do X, Y and Z. And then for whatever reason, it doesn't do X, Y and Z, it causes challenges within your system, and that's maybe what you're hearing from competitors.

Yes. Okay. And well -- and just build rates were slow to come down among -- well, okay, I'll think about that for a minute. So just in general, are you able to comment on where you think pricing environment is robust at this point as it was last year?

I think -- the pricing environment for our industry is probably more robust in the first 6 months of this year. And that has probably moderated in the last 6 months.

Your next question comes from the line of Tim Denoyer from Wolfe Trahan. Timothy J. Denoyer - Wolfe Trahan & Co.: Quick question on European orders. I realized that you're keeping production rates there -- you're raising production in the fourth quarter. But can you talk about the order intake during the quarter? A lot of your large European competitors, pretty substantial drops around 20%. Can you comment on how you did relative to that?

Yes, our orders are pretty steady. For DAF trucks, they're steady. We're seeing some growth in Russia. It's a market that's really starting to gather some traction. And of course, we sell also in the Middle East; we're growing in Africa; and the joint venture in -- joint venture assembly agreement in Morocco. And throughout Western Europe, it's obviously down from a couple years ago but steady. And then Central Europe, we see that as some areas that are growing. So overall, pretty steady for DAF. Timothy J. Denoyer - Wolfe Trahan & Co.: Okay. And one question in the U.S. With the fuel economy standards coming in, in 2014, some of the OEMS have talked about introducing trucks that meet those early -- as early as the next couple months. Can you comment on your plans for that?

Yes, we've -- are you talking about greenhouse gas and others? Timothy J. Denoyer - Wolfe Trahan & Co.: Right.

We have been approved by the EPA for some of our vocational vehicles, and so that's good. That was done earlier this month. So yes, like everyone else, we're working on it and I think are in very good shape.

Your next question comes from the line of Michael Sheridan [ph] from Longbow Capital.

My questions have been answered.

Your next question comes from the line of Christian Frens [ph] from TIAA-CREF.

Just 3 quick questions on my part. Just going back to the build rate issue, which I think has been asked a couple of times already. So just to help me reconcile the ACT [ph] data which shows build rates in excess of order rates for the industry and I think would imply that industry production comes down in Q4. First of all, do you agree on that view for the industry? And then is PACCAR different effectively because of share gains and maybe EPA 13 or what have you? Just wanted to know if you could expand on that. And then I have 2 follow-up questions.

I think as we've shared the -- kind of with the Peterbilt in U.S. and Canada, comparable fourth quarter, third quarter; Mexico, slightly down, I can't really expound on what went into the ACT [ph] numbers. What's your next thought?

Okay. And the next question is very brief. Just your financial sub. How should do -- how should we expect assets to grow into the final quarter of the year?

Assets?

Yes, for the final quarter.

Yes, I think there'll be a slight uptick probably as we progress through the rest of the quarter. A lot of customers will be entering financing vehicles to take advantage of the tax benefits at the end of the year.

The slight uptick being a couple of percentage points, single digit that you're seeing?

Yes, something like that. Yes.

And then lastly, just on European demand and the prebuy discussion, I guess 2 things here. First of all, I was wondering whether you could clarify a little bit what -- specifically for Germany, what type of incentives or early adoption incentives Germany has this year, and how that compares to the last time round? And then second of all, I was just listening to the Scania call the other day, and they saw a weak Europe in September, specifically it was mentioned. They also mentioned that the Middle East was turning down. So I don't know if you could care to -- I'm just wondering why it seems that your view is a little bit different, or am I missing something here?

I think Germany actually had an announcement during the Hannover show which they were having lower incentive levels, so that's all we can -- and you're probably at the show, so that's all we can really comment on that. In terms of what our competitors are seeing, I don't really know. I mean we can track what their market share is, and you can derive an answer from that. In terms of the Middle East, yes, it might be slowing down. But the good news for us is that we are a relatively small player, so we see some incremental growth opportunity, which is good for DAF.

And you didn't see September drop in Europe, a significant weakening?

That was -- that's in the third quarter, that's behind us. We're looking forward.

Your next question comes from the line of Robert Pickels from Manning & Napier. Robert F. Pickels - Manning & Napier Advisors, LLC: Just a quick strategy question. In Brazil, it looks like your plan is to sort of build your own facilities and kind of organically try to penetrate that market. And it seems a little bit different strategy than some of the other efforts you've made maybe in Europe, where you maybe made some acquisitions. Can you just talk about that strategy, why you chose to build versus buy, or how that might change over time, or just anything you can provide on that would be great.

Okay. Good question. I didn't know there was anybody available to purchase in Brazil. They typically are a division of a larger corporate entity. So I don't think any of those were actually for sale. Second, we've got -- or we're considered the best product in the world, we're bringing the DAF product in there, and you've seen the wonderful success that DAF, through it's products and its dealers and its customers, have enjoyed over the last 15-plus years, and we're looking to certainly build on that. And we've got a great group of world-class suppliers in Brazil that are enthusiastic about us beginning to manufacture in-country. And we're also really able to take advantage of a new group of dealers who have experience in-country that are excited about being able to sell the DAF products. So it seems to be a very logical choice as to grow organically in Brazil, in all of South America.

Your next question comes from the line of Satish Athavale from KSA Capital.

Mark, can you comment on the cadence of production and sales expectations for first half versus second half next year?

I think we'll see probably the first half might be comparable to fourth quarter, and we're looking for some improvement in the second half.

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

I would like to thank everyone for their excellent questions. Thank you, operator.

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