PACCAR Inc (PCAR) Q2 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to PACCAR's Second Quarter 2013 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; Bob Christensen, Chief Financial Officer and Executive Vice President; and Michael Barkley, Vice President, Controller. [Operator Instructions] 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 second quarter of 2013. PACCAR's second quarter sales and Financial Services revenue were $4.3 billion, and quarterly net income was $292 million, an after-tax return on revenues of 6.8%. I'm very proud of our 22,000 employees who have delivered industry-leading products and services to our customers worldwide. PACCAR's second quarter truck results reflect gradually improving industry truck sales in North America compared to the first quarter of this year. In fact, second quarter truck and parts revenues increased by 10% compared to the first quarter. Class 8 industry retail sales in the U.S. and Canada were 54,000 units in the second quarter this year compared to 45,000 units in the first quarter. Customer truck purchases are focused primarily on replacement vehicles for their fleets. PACCAR delivered 34,800 trucks during the quarter. In addition, PACCAR generated record parts revenue in the second quarter. PACCAR Financial Services results for both the second quarter and the first half were records. The U.S. and Canadian Class 8 industry retail sales are estimated to be in the range of 210,000 to 230,000 units this year. Turning to Europe, freight in Germany, as measured by truck miles driven, or the MAUT, continued at levels comparable to last year. DAF truck orders for the second quarter increased by 34% compared to a year ago and were up 19% from the first quarter. Customers, particularly in the U.K., are accelerating purchases of Euro 5 vehicles before the introduction of the Euro 6 emission standards in January 2014. In Europe, the greater than 16-tonne truck market is projected to be in the range of 210,000 to 230,000 units. Looking forward, PACCAR truck deliveries in the third quarter are expected to be 1% to 2% higher compared to the second quarter. The benefits of a slightly higher daily build rate are offset by the regular annual 2-week factory summer shutdown in Europe. Third quarter gross margins should be similar to the second quarter. There are a number of encouraging macroeconomic data points in North America that should benefit truck demand. First, construction activity is picking up, specifically, the housing sector. Housing starts in the U.S. are projected to be approximately 1 million units this year. Second, North American auto production is expected to be 15 million vehicles this year. And third, freight tonnage in the U.S. is at a seasonally adjusted record level, beating the previous record set in December of 2011. These economic improvements have enabled many dealers and customers to generate strong results. PACCAR Parts business had record quarterly revenues of $709 million, an increase of 6% compared to $666 million in the prior year. Parts quarterly pretax income was $109 million, an increase of 21% compared to $90 million earned in the second quarter last year. The excellent results were driven by record freight tonnage and improved fleet utilization. PACCAR's capital spending this year is estimated to be $425 million to $475 million, and research and development expenses are estimated to be $250 million to $275 million. PACCAR has continued its new product introductions by launching new vocational and distribution trucks. We're very excited about the DAF CF Euro 6, which will be in production in the third quarter this year, and the Kenworth T880, the Peterbilt Model 567 and the DAF LF Euro 6 will go into production in the fourth quarter of this year. PACCAR, as you know, has the most modern vehicle range in the industry, and our dealers and our customers appreciate it. PACCAR has expanded its range of proprietary engines with the introduction of the updated PACCAR MX-13 and the new PACCAR MX-11 engine. The PACCAR MX-11 engine will begin production at DAF in the fourth quarter of this year and is planned to be available in Kenworth and Peterbilt vehicles in 2015. These new engines will benefit our customers with their excellent fuel efficiency and operating performance. I hope you all noted the wonderful picture of our new DAF factory under construction at Ponta Grossa, Brazil. We are right on schedule, and will begin production of DAF Trucks in Brazil for the South American market in the fourth quarter of this year. Exciting program. PACCAR Financial Services revenue were $289 million in the second quarter compared to $266 million in the second quarter last year. PACCAR Financial's second quarter pretax income was $82 million compared to $77 million earned last year. This is the best pretax profit quarter in PACCAR Financial history. Great job. The excellent results benefited from growth in portfolio balances. In summary, PACCAR is enhancing its leadership position in the global truck market by launching the highest-quality products and services in the industry, and by continuing to invest in new geographic regions. Thank you. I'd be happy to answer any of your questions.

[Operator Instructions] Our first question comes from the line of Jerry Revich from Goldman Sachs & Co.

I'm wondering if you could just give us an update on the dealer development efforts in Brazil, just in more context if you don't mind. How many dealer groups do you have signed at this point? And how many dealer locations do you expect to have by the end of next year? And then, excellent SG&A control in the quarter. I'm wondering, to what extent should we expect that to move higher as you continue to build out the network in Brazil?

Absolutely. That's an important part of the foundation that we're setting in Brazil. Right now we have 12 dealer groups and they will have approximately 25 dealer locations complete by the end of this year. Over time, we'll have 100 dealer locations throughout the country. We're very pleased with the quality of our dealer groups in Brazil. Every one of our dealer signees in Brazil, we take over to Europe for an extended period of time so that they can see, firsthand, the DAF factory. They can talk with the current existing DAF dealers in Europe and get a real appreciation for the quality standards and the customer service that we expect. So the construction's ongoing right now throughout the country, and it'll be a very exciting and important plank to support our customers as we grow in Brazil.

And in Europe, Mark, we've seen some pretty good pickup in replacement tire volumes. Looks like your Parts business really saw an acceleration in the quarter. I'm wondering if you could just step us through how you're thinking about the market developments at this point, how much of the new truck demand that you're seeing, do you think, is prebuy versus recovery and -- are aligned demand off a low base? I appreciate that might be tough to break out the 2, but would love your broader thoughts.

Well, looking at the prebuy, which right now is focused primarily in the U.K., I think U.K. and 1 or 2 other countries have defined what the program is for our customers or our dealers in terms of when they can buy, when they can sell Euro 5 vehicle. I'd say, if I had to put a number on it, probably 3% to 5% benefit in terms of number of units that we're looking at. And that's probably comparable to what our competitors are seeing also. Although, since we're the market share leader in the U.K., it might be a little bit more of a benefit for us.

Okay. And lastly, you've had a pretty big new product development push out over the past couple of years. I'm wondering how you would guide us to think about your R&D and CapEx plans over '14, '15, '16 timeframe compared to what we're seeing this year.

We have had a wonderful 18 months of introductions with the finest products I've ever seen and great engines. I'd say, we'll see slightly lower investments, but in this very exciting and challenging competitive world, I think even in the truck industry, you're seeing an acceleration in terms of midlife model introductions. And obviously, the engineering teams are already excited about working on new models. There's always new regulations in terms of the engine development. So you might see something slightly lower, but not too much.

Our next question comes from the line of Jamie Cook from Crédit Suisse. Jamie L. Cook - Crédit Suisse AG, Research Division: Just wanted to follow-up again on overseas or Europe. I mean, because you mentioned, I think, in this quarter that orders for DAF were up 34% year-over-year, I think it was up 19% sequentially in the first quarter too, I think DAF was up, I don't know, 30% or something like that. So I'm just trying to understand the disconnect between the order trends and I guess, what we're seeing in the sales in Europe specifically and just, at what point do we see that translate on the sales side? And then just, my other question is, can you give us an update on what you're seeing in the overall pricing environment with one of your peers back in the market?

Good question. On the DAF sales and DAF production, when we look back at last year, it was at lower levels, obviously. We're seeing DAF has done a really remarkable job of maintaining a very consistent build rate for 18 months, and growing business outside of Europe and maintaining their share inside of Europe. Right now, we're seeing a pretty strong growth in the U.K. because of the prebuy, and DAF will increase its production towards the end of this quarter. I think we'll probably see some of our competitors doing the same thing. Obviously, we'll have to see how that translates into next year. We're still waiting for Germany to outline their Euro 5, Euro 6 transition program. But all in all, I think DAF has done a very good job. In terms of pricing, I think there's slight improvement in pricing. I think as I mentioned in my prepared comments, our dealers and our customers are doing well. There's record freight levels out there. Obviously, still looking to attract drivers. Fuel has been reasonably consistent. They're getting the benefits of improved efficiency out of our new vehicles. Right now, talking with many customers, they're primarily focused on replacement. But there's still -- there's a few that are starting to talk about growing their fleets, which would be good -- I'm talking North America now. In terms of any of our competitors, there's -- we enjoy the competitive environment and people come and go, and we're just consistent doing our job every day. Jamie L. Cook - Crédit Suisse AG, Research Division: I'm sorry, Mark, just 2 follow-up questions on the -- I appreciate your color on production, that was very helpful. Just -- you said production up 1% to 2%, an improvement, sequentially, can you just break out what Europe is versus U.S.? And then, did you get any material cost benefit in the quarter? I'll get back in queue after that.

Yes, sure. I think the benefit would be a little bit more in Europe than in North America. North America is probably comparable in Europe because of the prebuys, it's a little bit up. And in terms of material there, obviously, has been a lot of discussion in the international press about material costs going down. So we see some benefit, but the vast majority of our relationships with our vendors, our long-term contracts and I think it's a little bit of ebbs and flows. So slightly beneficial, but not really noteworthy. Thank you. Good questions, Jamie.

Our next question comes from the line of Stephen Volkmann from Jefferies.

I was -- I was kind of struck by your margins in the quarter, which were, I think, a little better than in terms of...

In a good way?

Yes, in a good way. They were, I think, a little better than the flattish kind of guidance we talked about a month ago. And I'm wondering what you think might have driven the upside there, whether it might be, I don't know, mix or pricing or whatever you think might have contributed to that?

I think the -- we have a pretty long, established program of driving efficiency improvements every year, regardless of the competitive and economic landscape. I think the people in the production side, because of the slightly higher build rates, have been able to get some of that, let's call it, production efficiency, which translates into slightly better margins. Maybe a little bit of it, also, is because of the new products that we've been able to launch and enthusiastically received by our customers. I think that would be 2 main elements for improvement.

And the new products would be the trucks and the engine both?

Sure. It's a complete package now. I mean, that's -- kind of, when we look at our vehicles, we look at it with the PACCAR engine and say, all-new family of engines, all-new family of trucks.

So is it reasonable to expect that penetration of those new products to continue to grow as we go forward over the next several quarters?

That is certainly -- the plan here is to continue to grow both the engines and the new products. And we're in good shape.

Your next question comes from the line of Ann Duignan from JPMorgan. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Mark, I'm interested in your perspective on the backdrop -- from a fundamental standpoint, you've seen quite upbeat with activity up, and automotive production up, freight tonne -- tonnage at record level. And yet, we've had a couple of months of weakish, maybe slightly disappointing, truck orders. I'm wondering if you can reconcile that for us or what you think is going on? Was it just a step-back by fleets, as hours of service got implemented or diesel prices rising, or do you have any explanation for why we might have seen that slowdown?

Well, yes. I mean, there was -- it was a slower month in June, but -- and we modified our industry forecast, which I think you noted, Ann, both for Europe and North America. But I think there's getting to be some fundamental improvement throughout our industry. I guess, we've seen many, many of our dealers and they're in very good position, they have relatively low inventory. They've got a good population of trucks. The parts and service business is good. There's really an excellent utilization by fleets. Fleets are making reasonable money, some are making record results. So the general economy in North America, let's say, it's growing 2-ish percent; flat to down, depending on what country you're looking at in Europe. And in North America, I think people are saying, "These vehicles are getting old now, not only age but also in terms of miles." And they're excited by the benefits they see on our new vehicles. So I think it's -- the foundation is getting strengthened, and I think it will translate into improved sales over time. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Okay. That's helpful. And then, a follow-up on natural gas. I was at the Alternative Fuels Conference there, a couple of weeks ago, and there was huge excitement around the 12-liter natural gas offering by Cummins Westport. Does that engine -- because both Kenworth and Peterbilt are going to offer that engine, does that cannibalize your own MX engine, your own 13-liter?

No. Of course, we are very strong partner with Cummins around the world and we're very pleased -- and I think you probably ran into some of our team there at the conference. I think we had a lot of people there. It's a little hard to get exact market share data, but we figure we're -- 30% to 40% of the natural gas industry is taking Kenworth or Peterbilt vehicles. We feel very good about that. It's still, Ann, 1% of the total industry sales. But if it improves, whether it's because of the differential between natural gas and diesel or as the infrastructure starts to get built out, I think we're in excellent position to continue to ramp up our business within the industry. So it's an exciting element. It probably gets a lot more press because it's a very topical item right now. Other parts of the business that only are 1% to 2% of the industry don't get anywhere near that press, but we are pleased to be a strong performer in that area. Ann P. Duignan - JP Morgan Chase & Co, Research Division: And I appreciate, but there does seem to be a lot of interest in the 12-liter, maybe not the 15-liter.

Well, the 12-liter, it's a very good engine and I think it's -- it has really very little impact on our product offering. It's a nice addition.

Our next question comes from the line of Eric Crawford from UBS.

Just following up on some earlier questions on Brazil. Have -- how have developments there, economically, politically, shaped your view as you prepare to enter that market? Are you seeing a need to fine-tune your marketing or financing or dealer support?

This is Bob Christensen. We really don't see any of the near-term impacts that you read in the press impacting our long-term direction to participate in the market. We see that the fundamentals in Brazil remain strong from a long term point of view and PACCAR intends to be there for a very, very long time. We'll start slow but ramp up over the next 5 to 50 years.

Okay. Great. And then, just briefly, could you provide an update on what you're seeing in terms of the vocational market and how that trended through the quarter?

We're seeing some improvement in the vocational market, and as I mentioned, we're launching a new Kenworth, Peterbilt and DAF vocational vehicles now until the end of the year to take advantage of that. So we're excited about it. Obviously, the housing industry and the car production uses a lot of, let's call it, vocational vehicles. So that's continuing to be a strong point for us. In Europe, of course, car production is at about a 20-year low, so we're not seeing quite the benefit there. But in North America, it's a good, consistent performer for us. And we have brand-new vehicles, which the customers and dealers are looking forward to.

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

A couple of quick ones and then, a broad question. The first one, on your answer to a prior European prebuy impact, the 3% to 5%, was that on industry sales or on your orders?

Let's say it's on industry sales. It's a little hard number to get, but let's use that as an estimate.

Okay. And then, on your orders, do you think it was all impacted by that or is it more related to the stability and people are starting to replace again?

Well, we have an underlying improvement in the orders we're getting, and there is some, let's call it, benefit from a prebuy. Primarily, in the U.K., we have about 30% share in the U.K. overall. And the U.K. is still 1 of the top 5 truck markets in all of Europe. So there's some benefit there. But it's just a couple of percent.

Okay. And then, one last quick one. The new segment reporting format, could you help us understand, is there any seasonality in Parts, Q3 versus Q2? Or is it pretty consistent depending on what the trucking activity is?

Yes. No, not really any seasonality. We've got a very talented Parts organization that works very hard to not have seasonality. They only have programs tailored for each part of the year. And of course, they're also doing a great job of driving into new markets such as regional transportation, buses and after, let's call it, all-makes vehicles. So there's -- they're a very creative group and have set up very good programs, and working directly with fleet customers. And our dealers continue to generate very solid earnings for the company.

Okay. And then, stepping back from the quarter a little bit, a broad question on the U.S. Class 8 market. Your customers are facing a couple different regulatory headwinds, one on -- as you've talked about in the past, the capital cost part of their cost structure and then, operating expense with some of the driver regulations. Do you view that as somewhat causing a hesitation, or is it kind of a more, more of a long-term dampener on industry volumes?

I think the -- the customers -- and of course, they just -- one of the industry publications just published the top 100 fleets in North America in the last week or so, it makes good reading to see the strength. But the customers have been through a challenging time over the last dozen years. A few tough recessions in there for our industry. So the -- the customers that are operating today, I really give them a lot of credit. They're very smart. They analyze their business. They take a look at their capital expenditures, obviously, they're dealing with a whole host of regulations, hours of service, cost of new vehicles, a changing customer base for themselves. So when we had 300 -- over 300,000 units back in '07 and '08, there was a strong GDP growth throughout all of North America that's dampened down to -- I think the customers, in some ways, are even better now. They're at higher utilization. Obviously, they're continuing to work on attracting drivers. I think they're actually doing pretty well. A lot of them are generating record profit results and I think as a number of the analysts pointed out, it's still a very up-and-down economy in general. And so I give our customers a lot of credit for navigating through the challenges. As the general economy improves, which we're starting to see some of the -- some of the benefits of, I think truck sales will improve because it is a fairly old fleet out there and the new products that, certainly, we're introducing and have introduced will directly benefit their bottom line. So we're encouraged by it. We're pleased by the strength of the dealer and customer body out there and it should be an exciting couple of years.

Your next question comes from the line of Ross Gilardi from Bank of America Merrill Lynch.

I just had a few questions, just back to the Parts business. I mean, obviously, you saw a big pickup in margins year-on-year, and I -- just hoping beyond normal seasonality, can you talk about the sustainability there? And if you see an acceleration of replacement cycle, do you think we will be on an upward trajectory for parts margins in the coming year or is it kind of the goal to sort of sustain where you are now?

Yes, I think in terms of parts margin, we look at it as sort of comparable. We always have new programs introducing and retiring older programs and of course, all these wonderful new trucks that we've introduced don't really generate much parts business for the first couple of years. So I think margins will be comparable.

Okay. And then, I'm wondering if you could just talk a little bit more about some of the international markets about Russia, Australia, the Andean region?

Sure. For Russia, the Russian market continues to be solid. It's comparable level to last year and DAF continues to grow their presence. They've gone from 2 dealers to nearly 20 dealers and then, plan to add additional dealer locations in the coming years. Last year's deliveries were in the 2,700 level and expect to increase that further this year. So Russia is an exciting opportunity for DAF as they continue to build their business there. As we look at Australia, Australia is a strong market for PACCAR, always has been a market leader there. Australia is a reasonably good economy, and some of the challenges, currently, with some of the minerals, but long-term outlook for Australia in our business, is very positive.

And in Colombia, what were you seeing there? You were seeing some slowdown earlier in the year, last several quarters?

Yes, I think the Colombian slowdown, we've -- we talked about that I think previously, continues to be subdued. I think we -- again, we have a strong presence in that market, we're the market leader with the Kenworth brand in that market, and we see good long-term opportunities to kind of -- to grow that business as the demand recovers.

And then, just lastly, I was wondering if you could just talk a little bit about the order trends you're seeing in North America amongst the larger fleets versus owner/operators and where you think we are in terms of age of fleet amongst the different classes of buyers?

Of course, many of the "owner/operators" have really aligned themselves with medium and large fleets, but although they may continue to operate under their own colors, if you will, I think the age is still in that sort of 7-plus year average. And orders have been pretty, pretty steady for the last couple of months.

Your next question comes from the line of Andrew Kaplowitz from Barclays.

Mark, can we go back to Germany for a second? You mentioned that they're still sort of deciding what they're going to do, prebuy, no prebuy. I mean, is this kind of what you guys thought Germany would be like, that they'd make their decision sort of late summer and fall, and then, you could see a pickup there in that country? Or are they making -- maybe taking a little bit longer than you thought to sort of decide what to do?

I -- when we were at the Hannover show last year, the German officials commented that they would be coming out with their plans in the September timeframe this year. So I think they're following their -- what they said their plan was going to be.

Okay. And that's helpful. And then, going back to vocational, you've talked about vocational being higher-margin. Has that also helped mix -- I think I remember, Mark, from a previous call, that you said it wouldn't really help mix this year, but has it, did it have some impact in 2Q?

No, but we're starting to see some better orders coming out of the -- let's call it the construction segment. Obviously, the residential home construction gets a lot of positive press. You don't really see too much on the commercial construction side at this time. In fact, I think a number of large, international companies that do, let's call it, commercial construction, are sort of adjusting their forecast. But on the residential, I've seen some benefits there.

Okay. And then, just one other quickie, like one of the previous questions was around sort of the other markets. And one thing that we see, Mark, is a pretty decent inflection this quarter. And it's been going down for -- the other segment has been going down for the last few quarters. You've talked about Colombia. Our -- or did one of these markets materially pick up sequentially or is there some seasonality to the other business that we should know about?

No, not that -- you're talking specifically about the...

Other countries, so like Mexico...

Yes, we had a very nice second quarter in Mexico that offset some of the softness in Colombia.

Our next question comes from the line of J.B. Groh from D.A. Davidson. J. B. Groh - D.A. Davidson & Co., Research Division: I liked your comments on efficiency of customers, and I was just kind of curious if the -- if there -- if what they have said to you regarding hours of service requirements has maybe changed attitude toward buying or capital needs, if you could comment on that?

Yes, it -- it's a good question that way, I'm not sure that -- let's call it, one regulatory law introduction will sort of trigger a buy, no-buy decision amongst these fleets. These are very thoughtful, insightful customers who, of course, they recognize what regulatory actions will increase or decrease their cost of doing their business. I think it's really more in the aggregate that -- how do they remain competitive, how do they take care of their end customer, the benefits they see from our new products and the new products we've introduced or about 30% of our current production now. So that's going very, very well. It's just -- it's a myriad of different inputs that the customers have to decipher in order to make that purchase, no-purchase decision. But I think they're -- say, they're generating good results and if we get a few more elements of the economy starting to improve, it could be good for the truck industry. J. B. Groh - D.A. Davidson & Co., Research Division: So a little bit of a nuance, but certainly, the macroeconomic drivers are bigger?

Yes, that's very well put. J. B. Groh - D.A. Davidson & Co., Research Division: And then I had -- maybe you could comment on kind of general trends in your credit quality, seems like Financial Services have done pretty well.

You bet.

Yes, the financial services business continues -- the portfolio continue to perform very well for -- at the end of the quarter, our over 30-day past dues were 70 basis points. And so credit losses are relatively low and obviously, generating record profits was a big... recognition of the efforts that our teams put together in the Financial Services segment.

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

So real quick, the deliveries were up 14% in the quarter sequentially. I think your guidance was 5% to 10%. Can you just talk about where things were a little bit better than you might have expected?

Okay. Well, I think the -- most of it was in North America. The short answer to that one. Guys just did a very good job of not only continuing with our vehicles that we've had in production for a couple of years, but also incorporating and launching the new vehicles and updating the factories and continuing to improve the efficiencies. So they, the production and engineering material team, did an outstanding job.

Okay. And then, I guess in Europe, on the -- barring any changes for other countries or whatnot, would you expect the prebuy to basically peak here in the third quarter, then?

Well, it depends on the country, as we mentioned. I think Belgium, the Netherlands and the U.K. have pretty defined prebuy transition plans. So the orders come in, but we'll be building them in the third and the fourth quarter.

Okay. But the orders should peak in the third quarter then?

Well, you would think so, but depending on the country's guidelines, there may be customers who are waiting -- and I think we talked a little bit about the guidance from Germany. If that comes in September, I mean, you're going to be placing your orders in the fourth quarter.

Sure. Understood. Okay. And I guess, on the first quarter call, I think you mentioned that some of the weakness in the Parts business in the first quarter was related to Europe. So should we interpret that the strength here in the second quarter reflects a recovery in the European Parts business?

No, I think it's pretty much strong all over. Maybe a little bit more for North America than Europe. I think Europe reflects just a little bit more of a challenging economy.

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

Mark, I think you mentioned the mix of the T680 and the 579 was 30%, I don't know if I heard that right, of production. Is that still higher in the order book and how high do you think that could get?

It is a little higher than the order book and obviously, the teams are working hard to continue to grow that. Coming -- in the last 12 months, it's been right on target and we're very pleased.

Okay, and it was production, then, the 30% you mentioned?

Yes, that's right.

And then, I know it's been parsed over and over, but in Europe, your orders did pick up, you didn't take the industry forecast up. Did you think that you were gaining more share than you had expected or is this just a little bit of a lumpiness when the prebuy comes for you?

I think part of it is the prebuy. We're maintaining our share comparable to last year, still have half a year to go to see how the share translates. But people really enjoy and benefit from the DAF vehicles and I think we're certainly getting the benefit out of the U.K. market at this time.

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

I was wondering, can you talk about dealer inventory levels both in Europe and in North America? Do you think you have enough inventory to meet any projected prebuy incremental demand out of Germany for the fourth quarter? And in the U.S., do you have enough inventory on the dealers lots for improving vocational demand?

Of course, it's always -- inventory levels, always, are probably looked at a little bit differently between the OEM and the dealer. I think our dealer inventory levels in North America are at a lower level. I think our dealers probably think that's a good thing. But certainly, we think the inventory levels could be a little bit -- a little bit higher, but we're certainly meeting our customer demand. In Europe, slightly different economic outlook. As we get into the prebuy, orders are moving through the dealers very quickly and right into the customers hands. So I think the dealer inventory level in Europe is -- it's satisfactory.

Okay. Got it. Could you also talk about what you're seeing, in general, for leasing trends in North America? Or where do we stand in terms of your own unit deliveries, and has that changed much?

For leasing? Yes, I'd say, it's pretty consistent with levels that we saw in the prior year, probably up slightly. PacLease continues to add additional locations throughout their system, which is very beneficial, as more and more customers look to have nationwide or support for their vehicles as they cross the country. So leasing is strong and continue to make a good contribution to the Financial Services segment.

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

So I just, basically, have one question. There are a couple of other people who alluded to this, but basically, it's this disconnect, seeming disconnect between the production forecast and it's not just you guys. I mean, there's a number of different folks who are out there projecting an increase in production, an increase in orders in the back half. And then, you referenced here this recent publication with the Top 100, that same publication is talking about surveying fleets and how they're not excited about buying new trucks or are less excited about buying new trucks than they were this time last year. So it seems like there's this potential disconnect. At some point, something has to give, either inventory builds up and it ends up being a pressure on the entire industry or end market demand picks up and everything is wine and roses. I'm just wondering, which of those 2 scenarios you think is likely to play out? If you could just kind of talk through what the puts and takes are there?

I don't think it's either of those scenarios, actually. As I say, our inventories are in excellent shape. Of course, we build to order. So we get an order in for a dealer who, typically, has a customer in mind and we build it. So we flex our production levels that way. In Europe, we're seeing increased orders coming in, as I had mentioned, some of it is related to a prebuy, primarily in the U.K. We may see some of that in Germany as we get into the fourth quarter. So the inventory levels for our dealers in Europe are at satisfactory levels. So I think that's a very normal business. Yes, you're correct. Obviously, we not only read that article, I alluded to it. But of course, we know all of those customers. I think if you look a little closer at that article, it will say that many of those fleets are looking to increase the number that they're ordering compared to a year ago. But be that as it may, in North America, we're looking at comparable production in the third quarter compared to the second quarter. So I think -- I think it's all in balance. It should be pretty much business is normal. We find that the benefit, of course, is all these wonderful, new products we've launched and the benefit that will bring to our customers. So I think it's -- it's very much in balance.

Your next question comes from the line of David Leiker from Robert W. Baird. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: I want to dig through the Parts business a little. Very strong performance there versus what we saw in the first quarter. It seems like it's stronger than just what utilization would be. We hear you talking about the truckers, it sounds like there's a little bit of a weakness on the freight side in Q2, but you had a pretty strong Parts business. Can help explain that a little?

Well, I think the Parts business in the first quarter was good also. I think we have to understand that there was -- it's gone from strength to strength, is the way we look at it. And I think as we -- we just begin to break out this segment, so I think obviously, a lot of new information. But Parts has always been a very solid contributor to the growth of PACCAR since the beginning of our company, and we've got the largest population of vehicles. We have Kenworth, Peterbilt, DAF over 1.5 million vehicles running around the world. We have the most extensive and strongest dealer network, I'd say, in the industry, and we continue to add dealers every year. We've got a lot more fleet-defined programs in Parts, whether it's the way we do centralized billing to the way we have all-makes parts. So there's a lot of very good and focused programs that are contributing to the growth of Parts. Not every quarter has such strong growth, but over the long term, we look for steady growth out of Parts. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Are you at the point where the Parts revenue stream from the MX engine is starting to be part of the driver?

No, no, not at this time. It's a -- that'll be off in the future. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Another couple of years there, probably?

Yes, probably. Maybe. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: And then, one last item here on the Euro prebuy. I want to ask the question, a little bit different way. As we go through that in these 3 countries and potentially, Germany, in most of these regions where we've had prebuy that first quarter afterwards, things fall off pretty dramatically. What are your thoughts about that in early '14?

Well, it just depends on what type of derogation guidelines are implemented by country. Some countries may allow a certain percent of your production in the previous year to be built in the following year. Also of course, the biggest driver for our whole industry is the economic development within the Eurozone. So if you got some insight into that, I'm sure there'll be quite a few people interested in it. So obviously DAF, as with Kenworth and Peterbilt, are also committed to continuing to grow their business. And so I think -- there might be some adjustment in the first quarter, but easily work through it. We've seen, gosh, what have we seen? Four of these in the last 12 years, so you work through it and move on.

Your next question comes from the line of Jeff Kauffman from Buckingham Research.

I got to be honest, my questions at this point have been asked and answered. So let me just throw a small one at you. The improvement in gross margin, I apologize if you hit this, I got on the call about 5 minutes late. How much of that is a mix issue in the manufacturing business with the Parts business being better, and how much of that is your raw material costs are actually down and lower?

Okay. Good question.

There's really 3 parts to it. There's obviously, a little bit of a volume impact, some factory absorption that's been to our benefit, a slight improvement in material cost and then, there's a mix impact associated with our Parts business as well. That, more or less, accounts for it.

And how would you split up the improvement between the 3?

Oh, I'd say, they're probably all about the same.

1/3, 1/3, 1/3. Okay.

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

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

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