Earnings Call: Q4 2014

Jan 30, 2015

Summary

FY14 revenue and net income reached $18.9B and $1.36B, while Q4 net income rose 18% YoY. 2015 guidance pointed to stronger North American deliveries and ~50 bps gross-margin improvement, with market and oilfield uncertainties remaining.

Good morning, and welcome to Paccar's fourth quarter 2014 earnings conference call. All lines will be in a listen-only mode until the question and answer session. Today's call is being recorded, and if anyone has any objections, they should disconnect at this time. I would now like to introduce Mr. Ken Hastings, Paccar's Director of Investor Relations. Mr. Hastings, please go ahead. Good morning. We would like to welcome those listening by phone and those on the webcast. My name is Ken Hastings, Paccar's Director of Investor Relations. Joining me this morning are Ron Armstrong, Chief Executive Officer, Bob Christensen, President and Chief Financial Officer, and Michael Barkley, Vice President, Controller. As with prior conference calls, if there are members of the media on the line, we ask 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 Ron Armstrong. Good morning. I am pleased to share that 2014 was an excellent year for Paccar, with many records, expanded product and service offerings, and investments that provide the foundation for future growth. Paccar achieved record revenues of $18.9 billion in 2014. Net income was $1.36 billion, an increase of 16% versus a year ago, and the company's second-best annual profit in history. 2014 was Paccar's 76th consecutive year of earning a net income. These excellent results reflect the strongest North American heavy truck market retail sales since 2006. In addition, Paccar Parts and Paccar Financial Services earned record pretax income. Paccar celebrated several important milestones last year, including Peterbilt's 75th anniversary, the delivery of Kenworth's one-millionth truck, and the production of the one-millionth DAF cab in our Westerlo, Belgium factory. More good news. This week, Kenworth's new vocational truck, the T880, equipped with the Paccar MX-13 engine, earned 2015 Truck of the Year from the American Truck Dealers. I am very proud of our 23,300 employees who deliver industry-leading products and services to our customers every day. Paccar's fourth quarter sales and financial services revenues were a quarterly record, $5.1 billion, and quarterly net income was $394 million. Net income increased 18% compared to the results generated in the fourth quarter last year. The positive contribution of all company segments enables Paccar to attain the highest operating margins in our industry and to deliver excellent shareholder returns. Paccar declared cash dividends of $1.86 per share last year, a 9% increase compared to 2013. Paccar's total return to shareholders was 18.3% last year. Stockholders' equity at year-end was a record $6.75 billion. During 2014, Paccar repurchased 731,000 shares of stock for $42.7 million. Paccar delivered 40,100 trucks during the fourth quarter, a 7% increase versus the third quarter. Vehicle deliveries in the first quarter this year will be 15%-18% higher than the first quarter last year, reflecting increased production in the U.S. and Canada. Truck and other margins are forecast to be 1%-1.5% better than last year's first quarter. Peterbilt and Kenworth achieved excellent market share of 27.9% in the U.S. and Canadian heavy-duty truck market in 2014. Retail sales totaled 250,000 units for the year. U.S. and Canadian Class 8 industry retail sales are estimated to increase to a range of 250,000-280,000 units this year, driven by ongoing replacement demand and further fleet expansion, which reflects continued economic growth. If recent order trends continue, retail sales would be towards the higher end of the range. DAF achieved a share of 13.8% in the European above 16-ton truck market, which totaled 227,000 units last year. Looking at this year, we anticipate the European above 16-ton truck market will be in a range of 200,000-240,000 vehicles. It is encouraging that the growth rate of the U.K. economy, which is DAF's largest market, is expected to grow by more than 2% this year. Lower diesel prices, low interest rates, and other economic stimulus measures could improve European truck market conditions during the year. Paccar Parts generated strong quarterly revenues of $789 million, an 8% increase compared to the same quarter of the prior year. Paccar Parts' quarterly pretax income was $130 million, an increase of 24% compared to the fourth quarter of 2013. The excellent results were driven by strong freight tonnage, high fleet utilization, and the many innovative products and services offered by Paccar Parts. For the full year, Paccar Parts achieved record revenues of $3.1 billion and record pretax income of $497 million. Paccar Financial Services revenues were $302 million in the fourth quarter, slightly higher than a year ago. Paccar Financial Services' fourth quarter pre-tax income was $96 million, compared to $90 million earned last year. The excellent results benefited from growth in asset balances and continuing strong portfolio performance. For the full year, Paccar Financial Services earned record pre-tax income of $370 million. Paccar's capital spending of $300 million-$350 million this year will expand Kenworth, Peterbilt, and DAF product offerings, enhance the Paccar engine range, and increase the operating efficiency and capacity of our factories and distribution centers. Research and development expenses are estimated to be in a range of $220 million-$260 million. As the company begins its 110th year, we are in an excellent position to grow with industry-leading products and services. Thank you. I'd be pleased to answer your questions. As a reminder, if you would like to ask an audio question, simply press star, then the number 1 on your telephone keypad. Your first question comes from the line of Patrick Nolan with Deutsche Bank. Good morning, Patrick. Good morning. Thanks for taking my question. I actually had two questions. Could you give us some color on what you would expect for, thanks for the color on Q1, but what you would expect for full year margins to do year-over-year? I think for the full year, our current thought is that margins would be up a bit over the 2014 level, probably about 50 basis points. That's very helpful. Can you expand on what you're seeing as far as raw material costs, what kind of benefit you think that could be in 2015? Well, again, we have long-term agreements with almost all of our suppliers, which manage the ups and downs of material cost movement. So I suspect we'll get some benefit, but it will be muted because of the long-term arrangement. Very helpful. Get back in the queue. Thank you very much. Thank you. Your next question comes from the line of Steven Fisher with UBS. Great, thanks. Good morning. Good morning. Clearly, there was a big pickup in the industry orders trends in the latter part of 2014. I am just curious to what extent your order patterns were consistent with that trend as well, and do you expect to see a pause in orders before the next reload and how long that pause might be? Peterbilt and Kenworth's order intake in the fourth quarter was excellent, very consistent with industry order levels. As I said, if the order trends continue, we'll see retail sales at the higher end of our range. I don't think they'll continue at the 123,000 order level, which was the fourth quarter level. They just can't continue at that pace. Okay. Can you just talk a little bit about how the slowdown in oil activity is affecting your business, assuming current conditions hold, when you might see sort of the worst of the impact on it? I guess our assessment of the impact of the lower oil prices is a positive for the U.S. economy, and that will create additional consumer spending and consumer demand, which I think will benefit freight volumes and be a positive for the industry. Okay. Thank you very much. Thank you. Your next question comes from the line of Tim Thein with Citigroup. Morning, Tim. Good. Thank you. Good morning, and good luck to your team there on Sunday. Thank you. Yeah. So just first one, Ron Armstrong, on truck pricing in North America. It looks like through the first nine months of the year that the realized pricing in the U.S. and Canada was just under 2%, and I am sure there is all kinds of other things that get included in that or don't, that make it maybe a little bit less straightforward. But if we just use that, call it 2% pricing for 2014, what would your expectations be for 2015, given that you enter with a higher backlog and given your outlook for the markets overall? Well, I do not know exactly how you get the 2%, but obviously, we are participating in a competitive marketplace, and we have great products. The performance of the new Kenworth, Peterbilt, and DAF products around the world has been excellent. And we expect to be able to earn a very fair price, and I think pricing will continue to see levels that have been consistent with what we have seen in 2014. Okay, got it. And just your expectations, it is a marginal increase, but on the back of the higher retail sales forecast for North America, are you still thinking about for parts growth in 2014, still in that kind of 4%-7% range? Is that still your expectation here for 2015? Yeah, I think something in that range in terms of parts deliveries will be something in that range, for sure. Okay. Last one for me, Ron. On Western Europe, from a used truck perspective, what, if any, impact are your dealers seeing just given the more difficult environment in Eastern Europe, especially Russia. In the past, it's been a pretty important outlet for used trucks. Has that led to any kind of backup in Western Europe? No. Used truck inventory levels are pretty normal. I think just the volume of activity has probably dampened a little bit, but not anything of major consequence at all. All right. Thanks a lot. Yeah. Your next question comes from the line of Nicole DeBlase with Morgan Stanley. Yeah. Good morning, guys. Good morning. My first question is on R&D. I am just curious what caused you to take up midpoint R&D guidance by 7% and the 11% growth that you are projecting year-on-year. Are there any key projects there that we need to be thinking about? Oh, we just continue to invest, obviously, throughout all phases of the business cycle. We continue to expand the Kenworth, Peterbilt, and DAF model offerings, as well as continue to invest in our engine platforms. We will be launching the MX-11 in North America in the beginning of 2016, and preparing for the transition to greenhouse gas emissions requirements in 2017. That is the bulk of where our spending is. Okay, understood. Thanks. My second question is just around build rates. Given the continued industry order strength we have seen, do you guys have plans to increase your build rates further in 2015? If the order rates continue, I think there will be some potential for us to further increase our build rates as we go through the year. Okay, great. Thanks. I will pass it on. Your next question comes from the line of Steve Volkmann with Jefferies. Morning, Steve. Hi. Good morning, guys. Thanks for taking the question, especially since it's coming today from Massachusetts, so don't hold that against me. I may not wish you good luck on the weekend, but certainly good luck with the business. I'm wondering if I could just follow up a little bit on, you talked about the energy cost declines or price declines being ultimately good for the economy. I'm just trying to figure out the other side of that equation, because there's obviously a thesis out there that a fair amount of the truck's strength in recent quarters has been driven by capacity increases in the energy segments and transportation of oil and gas and so forth. I'm just curious, I know nobody has to check a box or tell you what they're going to use the truck for when they buy it, but you probably have a better sense than we do about how much has been actually going into those end markets and could be at risk going forward. Yeah, I think about 10% or less of our volume is related to the oil and gas industry, and that includes a lot of elements of that industry. I think for sure, if oil prices stay at these levels, exploration and production will be at lower activity levels and trucks that participate in that portion of the oil and gas segment, will have fewer orders, but that's a very small portion of what we do. Okay. Have you seen any of that in your discussions with clients yet? Are you seeing any orders canceled or anything like that? No, it has been and remains pretty constant year-on-year. Okay, great. That's helpful. How far out are you booking now if somebody wants to come to you with new orders, or how far out is the backlog? How far out are the delivery times? We have a very healthy backlog, so probably looking at second quarter timeframe. Okay, great. Thank you. Yeah. Your next question comes from the line of Jamie Cook with Credit Suisse. Morning, Jamie. Jamie, if you are on mute, please unmute your line. Hello? Hello. Can you hear me? Yes, I can. Oh, we are back. Sorry, I do not know what happened there. Good morning. Sorry about that. I guess just a couple of questions. There's a lot of questions out there in terms of where the U.S. truck cycle is relative to peak. What is your view on what inning of the ball game we're in there? My second question, just within Europe, can you talk about your ability or how we should think about your ability to pass through emissions Euro 6 over there this year, and if that's a negative to margins? Thanks. With respect to Europe. Yep Pricing is stable, and Euro 6 trucks are performing excellently in the market. A lot of very positive feedback from the customers on the excellent reliability of the DAF product as well as the fuel efficiency. DAF just recently introduced some additional enhancements with predictive cruise control and predictive shifting that further enhance fuel efficiency. So I think that will be a positive aspect of demand for DAF trucks in 2015. With respect to the peak, we don't have the ability to forecast that. Obviously, the market has been improving over the last 15, 18 months, and as long as the economy continues to grow, the freight demand is there'll be demand for the excellent Kenworth and Peterbilt products. They continue to expand their model offerings to further enhance transition to the new cabs. We can just continue to participate as the market, as the economy progresses. Sorry, just to follow up in response to, I think, Steve Fisher's question, I think he asked about orders. The recent strength in orders, and I think you sort of made a comment that Paccar had pretty good share. But I think there's some concern out there that the orders over the past three months were inflated by, in particular, one OEM. Can you comment on that? Or what do you think the reason why order. I know you don't view it's sustainable, but why would orders be that strong for a three-month period if there wasn't anything sort of funky in the order trends? I can't comment on what the other OEMs order intake is. All I can say is Peterbilt and Kenworth orders were very strong and consistent with overall industry trends. In great position to continue to take advantage of the strong freight markets and the demand for our great products. Alrighty. Thanks. We'll get back in queue. Thanks. Your next question comes from the line of Seth Weber with RBC Capital Markets. Hey, good morning, guys. Good morning, Seth. Just wondering, given the strength in orders and the volumes, can you talk about whether you're seeing any stress points in the supply chain at this point? The suppliers continue to perform excellently. Because the ramp up has really occurred over a 15 to 18 month period, they've been able to adjust and adapt their capabilities to fit our needs. We see that continuing for the foreseeable future. Okay, thanks. Then, I guess within your backlog, can you comment, are you seeing any evidence of the smaller owner-operators getting back into the market? I know that you've talked about that market kind of not definitionally being different this cycle versus prior, but are you seeing any comeback from the smaller operators? I would say that the order volume that we've experienced over the last several quarters has been broadly based and includes demand not just from large fleets, but also from the vocational segment, as well as some of the smaller sized fleets in the market. So it's more or less a broad-based order book that we have. Okay. Thank you very much. Thank you. Your next question comes from the line of Andy Casey with Wells Fargo. Morning, Andy. Hey, good morning, everybody. I'll send a reluctant Boston-based good luck to you this weekend also. First, I didn't hear the margin comment very clearly. Was that specific to gross margin? Yes. Okay, thanks. Yeah. In North America, we have seen these cycles before and at some point, pricing goes up. You are kind of suggesting modest price increase potential. What do you think has to happen in the market to enable more aggressive pricing potential? I think the pricing is reasonable given the market conditions. I do not see major movements. I think the length of the backlog is clearly a factor in how pricing reacts in the market. I would say backlogs are in good shape at this point. I do not see any major adjustment in those levels as we go forward. Okay, thanks. If we can go over to the EU, from what we can see, freight seems to be stable to slowly improving. Is that translating into any order improvement? How specifically did orders trend in Q4 versus last year, if you could share that? Yeah. The orders are pretty consistent as we look at the quarters over 2014. Orders are pretty stable, and I think as we talked about with the lower fuel prices, historically low interest rates, some of the stimulus measures, that could have a benefit for orders as we progress through the year. Obviously, the situation in Russia has impacted demand for that market. It's trending positively, and we'll see how the year progresses. But I think there's some positive things that could impact it. Okay. Thank you on that. Lastly, if I look at the share buyback activity, there wasn't a whole lot in 2014. Could you help us understand how you're thinking about the potential for the upcoming year? Well, as we just have a long-term view of periodically buying back shares, and we'll continue to take that perspective and buy shares as we feel it's appropriate in the marketplace as we progress to 2015. Okay. Thank you very much. Thank you. Your next question comes from the line of Ross Gilardi with Bank of America. Morning, Ross. Yeah, good morning. Thanks, Ron. Just a couple questions, maybe a little bit more on Europe. If you could just talk a little bit about what you're seeing in different countries, and clearly the overall market's still pretty soft. Europe's been weak for many years now. I'm curious where you think we are on fleet age in Europe, and if we do get a little bit of a pickup in the European economy Do you see any realistic prospects for a decent replacement cycle kicking in the next several years? No, I think that's a good observation, Ross. There were lots of trucks that were put in the market in the 2006, 2007, 2008 timeframe, and while it's difficult to find somebody who has an independent measure of that, I think the age of the fleet is extending in Europe. With some good, healthy demand, positive demand, that could trigger a healthier replacement activity. Could you just talk a little bit more about what you're seeing across the continent? Well, I think, again, as I mentioned, Russia, the impact there, we'll see how that develops during the course of the year. U.K., for us, which is our largest market, impacted by the pre-buy in 2014, but with a good economy, we're off to a good start in the U.K. with our DAF business. Northern Europe, as you mentioned or somebody else mentioned, the freight activity is up year-over-year as we look at the activity through Germany, and it's up 2%-3% for the year last year and continued to show increases in the fourth quarter. There's a lot of good elements that are present, and I think if things can develop to take some of the uncertainty away about how the future might react, I think the European potential for an upturn is there. Okay. Thanks, Ron. I do not know if you can comment on this or not, but I will try anyway. On the competition investigation, I know you cannot say anything on the dollar amount or speculate on that, but can you give us any sense as your best guess on timing as to when you might be able to provide an estimate? Because obviously several of your competitors have already taken a stab at that. Yeah. We included an update in the press release on our evaluation of the European Commission, and I just do not have anything else to add at this point. Got it. Okay. Thanks very much. Yeah. Thank you. Your next question comes from the line of Andrew Kaplowitz with Barclays. Hey, good morning, guys. Morning, Andy. Ron, can you maybe walk us around the world, outside of the U.S. and Europe, your other truck markets have continued to improve after maybe a tough time a year or so ago. Maybe talk to us about Australia, Mexico, these other markets, because they do seem like they're getting better. Mm-hmm. Australia is a great market for Kenworth and DAF, and we have about a 25% share of that market, continue to be the market leader. We're optimistic about our opportunities in that area. The Australian economy has been impacted obviously by the mining activity and some downturn there, but we think, again, this year and long term, we're in great shape in Australia. Mexico, again, we're the market leader there with over 40% share of that heavy-duty market. We'll continue to see, I think, as the year progresses, Mexican economy's closely tied with the U.S. economy. We expect to see them benefit from some of the activity that's going on in the U.S., so upside there. We talked about Europe, and Brazil, it's early days for us, and we continue our steady progress, and dealers continue to finish their facilities and begin operations out of their permanent facilities. The progression of our efforts in South America continue as well. Okay, that's helpful. Ron, if I could look back at the fourth quarter again. You had guided to, I think, 5%-7% up in deliveries. It looks like your truck revenue was up about 5%, and December build was down. It was very strange in the industry. It was probably because of the weird holiday weeks, but it does seem like the industry is being pretty careful with increasing build rates. Maybe you can just comment on Paccar specifically. Was that sort of the case? Was build what you thought it would be? Did the holidays mess things up more than you thought? Any color there? No. We built exactly what we had planned to build when we talked in the last call. We talked about 5%-7% increase in production, and we increased at 7% in terms of trucks produced. There was some offset with the effect of foreign currency movement in the quarter. But we're right in line, and as I mentioned, we'll see strong production increase in the first quarter of this year compared to the first quarter of last year in the tune of 15%-18%. How should we think about currency for you guys in 2015 in terms of impact on the business? Clearly, we operate in a lot of countries around the world, and the translation of those foreign currencies into U.S. dollars impacts revenue and profit numbers. We do have an offset. We purchase a fair amount of components from European suppliers that we use in our U.S. products. So there's a bit of a natural hedge there. Okay. Thanks, Ron. Thank you. Your next question comes from the line of Anne Duven with J.P. Morgan. Hi, guys. Morning, Anne. I was going to say, what's going on this weekend that I don't know about? Then I thought, oh yeah, there is a big football game. It'll be exciting. I guess I wanted to follow up on the last question. Your European share was down to 13.8% from 16.2% in 2013. I wanted to just address that in terms of, is that because U.K. is your largest market and U.K. was messed up because of the emissions changes? Also, how do we think about the competitiveness of the U.K. business since you produce in the U.K., but you sell in euros, and is that a competitive disadvantage over there? The market share DAF was at 15% in the second half of the year. The year was really affected by, as you mentioned, the pre-buy and the transition rules that existed in our two largest markets, which is the Netherlands and the U.K. So, that impacted DAF share. We expect this year that we're going to return back to our 2013 share levels. The U.K. economy, as I mentioned, is one of the stronger economies in the region. So, again, we're off to a good start there and expect to have a good year in the U.K. Okay, and then competitiveness, the products you build in the U.K. but sell in euros, is there any risk? Well, we build trucks on the continent that get sold into the U.K. We build trucks in the U.K. that go to the continent. We have a pretty natural offsetting effect of those trucks and the movements back and forth. Okay, thank you. That's helpful to understand. Sure. I just wanted to also ask about, you talked about less than 10% of your business being exposed to oil and gas, and you kind of said broadly oil and gas. Do you include things like the Canadian oil sands when you talk about oil and gas exposure? Could you just address the business there? Is there any risk of cancellations? Anything that we might be missing on the oil and gas exposure as we go through 2015? When we talk about 10%, we're principally talking about trucks that are sold into production activities. Those would be water trucks, sand trucks, those types of applications. For sure, the level of new permitting is off, and so we would expect some impact in the second half of the year, but don't see any significant impact on our backlog at this point. Again, on balance, we feel that lower oil prices overall are good for Paccar. What drives freight in the U.S. economy is a large function of consumer demand. On balance, we think it's a very positive thing for the company. Yeah, I guess investors' concern is that the two might not happen coincidentally, that we might see a slowdown in oil and gas activity, and then later in the year, consumer activity pick up. Just trying to get a sense of how to put that in the model. I appreciate it. Sure. And good luck on Sunday. Bye. Good luck. At least I think the game is Sunday, is it? That's right. Your next question comes from the line of Jerry Revich with Goldman Sachs. Morning, Jerry. Hi. Good morning, good afternoon, everyone. Ron, I wonder if you could just talk about the drivers of the 50 basis points in margin improvement of 2015 versus 2014. How much of that is just the mechanics around the warranty? Any mixed headwind of higher production rates in Europe versus flat to down, or production up in the U.S., and flat to down in Europe? Can you just maybe give us a bit more of the bridge there? Obviously, the margin really reflects the stronger anticipated market in North America. We are going to be operating for sure for the first part of the year, and probably throughout the year, at a higher production level than we were at in the first half of 2014. The benefits of that higher production volume is what is playing through to the margin improvement. Okay. Then, you alluded to earlier on euro impact on net imports into the U.S. for Europe. What proportion of your U.S. total truck component costs are in euros, roughly? I do not have that number, Jerry. It is not a great number, but it is a sizable enough number that there is a natural hedge that we have. Okay. Ron, you touched on it a moment ago in terms of your guidance, I guess, implies year-over-year flat to decline production rate in the North American market. I am just wondering, are you folks planning for slower demand, or is that a function of, look it is early in the year, let us see what another quarter or two of orders looks like before we get more aggressive about the guidance? I don't think I understand your point, Jerry. The North American market last year was 250,000. Peterbilt and Kenworth had a 28% share of that market. We're looking next year at 250,000 to 280,000. If the demand level continues, maybe towards the higher end of that. Peterbilt and Kenworth have great products, and I think they have the opportunity to continue to have strong share position in the market. So, if that market is there, we'll deliver more trucks in 2015 than we did last year. Okay. I guess it just comes back down to, on a year-over-year basis, your production in the U.S. should be up somewhere in the 30% range, right? So compared to the full year guidance at the midpoint or even at the high end of not that strong growth implies a potential flattish back half of 2015. Does that make sense? I'm not sure where all of your numbers, but again, we're going to be able to participate in the market growth, and again, because of our product positioning, we have opportunity to have a very strong share of that U.S.-Canadian market. All right. To switch gears a bit, we spent a lot of time over the past couple of years talking about the expanded range of products for the European markets. Can you just talk about the traction that you're getting in the marketplace? As you alluded to earlier, a lot of noise in the 2014 market share numbers. Maybe you could just talk about how the specific launches have gone and what the acceptance rate has been. Oh, it's been excellent. The XF product, we launched that in 2013, so it's been in the market now for over 18 months. The LF and the vocational CF product was launched late 2013, early 2014, and again, very well received in the market. DAF introduced some enhancements at the Hanover Truck Show and has launched those enhancements now into the market in the beginning of 2015 with Predictive Cruise and low-deck tractors, the CF with the silent package. So lots of good feedback from dealers and customers on the fuel efficiency, the reliability of the product. So DAF is very well positioned with its product as it moves forward. All right. Thank you. Thank you. Your next question comes from the line of Joel Tiss with BMO. Hi, Joel. Hey, guys. How's it going? Good. That's good. Great questions and even better answers. I'm not used to this. The lower spending that you guys, it's just slightly lower in your leasing business. Can you give us any of the dynamics behind that? Are there more used trucks in the market, or are you just sort of tempering your growth outlook a little bit? I'm not sure I'm following the question, Joel. On your cash flow statement, you spent $1.2 billion in 2014 on lease vehicles versus almost $1.4 billion in 2013. I just wondered if there was any sort of message in that little bit lower spending in a growing market. No, I think that's a mix shift of the method of financing of vehicles, both a bit in Europe and a bit in North America. It's really just the way that the customers have opted to finance their product. Okay. Since almost everything else has been asked, can you give us any sense if the energy-related vehicles are higher margin or similar margin or lower than the overall segment? I'd say similar. Okay. Yeah. All right. Thank you very much. Thank you. Your next question comes from the line of David Licker with Robert W. Baird. Hi, good morning. This is Joe Vruwink on the line for David. Morning, Joe. I'm in Green Bay Packers country, so you'll excuse me if I don't wish anyone good luck this weekend. Well, that was a tough five minutes of football for you. Very tough. Moving on. In gaining back market share in Europe, which sounds like it's your plan for 2015, is that just a function of country mix and the U.K. expected to be stronger? Or are there customers or applications you've identified that are helping as well? I think it's a combination of both. I think country mix and the reception that the Euro VI product has received in the marketplace will support DAF's targets for 2015. Okay. Are you seeing any sort of shift in, let's say, the head-to-head matchups at the high end? I think one of your high-end Swedish competitors gained some market share in 2014. Again, I think the 2014 share numbers were really impacted by the level of Euro V sales in the 2014 year, and which countries your particular strength was in. So 2014 is probably not representative of sort of the long-term trends. Okay. Then shifting to the U.S., when making the comment that maybe for the industry, production rates need to stay at or can stay at Q4 levels into 2015, that's kind of where you get the growth coming from. Order rates in 2014 were well above production rates. So just rough math, I think there'd still be quite a few units in the backlog, just maintaining Q4 production rates that would still really be targeted for 2016 at that point. It kind of goes back to the earlier comment on OEM discipline. But is that a reasonable trajectory where OEMs are planning already for a 2016 delivery cadence? I would say the vast majority of our backlog is backlog that's going to be built in 2015, if that's your question. I'm not certain we're following it. Just in terms of, there's already a pretty sizable backlog across the industry. If orders maintain even reasonable rates, let's say a low 300 or at 300,000 rates, it would seem like there's obviously a fear that the truck market is known for ratcheting it up to mid-high 300s and then crashing back down. It seems like the plans across the industry are for something more gradual than that, where a good growth number in 2015, but certainly not a ratcheting back down in 2016. Well, I think the cycles in our business over the last decade have been both economic, but more importantly regulatory, based upon the implementation of emission standards. As we kind of look out over the next five years at least, we don't see significant impact from any regulatory requirements. The market demand for commercial vehicles is going to be largely based upon the economics in the country. Okay, great. Then one housekeeping item. It looks like your depreciation expense stepped up in Q4. Is that the right level to be thinking about into next year? Yeah, I think that amount in Q4 annualized is probably a pretty indicative number for next year. Okay. Thank you very much. Thank you. Your next question comes from the line of Rob Wertheimer with Vertical Research. Hi. Good morning, guys. Good morning. Two quick questions, definitional really for you. I think the press release said 37% Paccar engine penetration. You have obviously been on a very positive trend. I assume you have now just stated that for U.S., Canada, and Mexico as opposed to what you used to do was U.S., Canada, and you are still gaining share? That really is a U.S. and Canada metric, yes. Mexico, we launched the engine last year, very well received by our customers there. And so a growing percentage penetration in the Mexican market as well. But in the fourth quarter press release, do you happen to know if you included Mexico in the share of 37? Oh, that was U.S. and Canada. Okay. I'll come back and circle back afterwards then. Do you have any capacity constraints on that, or are you continuing to see customer preference shift, or have you seen yet any capacity or preference limit to how far you can go? Well, we have two great engine factories, one in Eindhoven and one in Columbus, Mississippi, and both can produce the full line of Paccar engines. So we have the ability to produce engines around the world to support our needs in whatever market it might be. So capacity is in excellent shape. Our capacity for both the truck business and for engine production is in great shape. Excellent. Thank you. If I may, when you take an order in November or December for delivery next year, just mechanically speaking, does that have a potential to have next year's pricing in it, or is it always the existing year pricing? Thanks. Typically, if we take a multi-year order, there is some factor that's used for the subsequent year in the pricing that is in the order. Well thought. Okay, thank you. Your next question comes from the line of David Raso with ISI. Hello. Thinking about your production mix geographically, the near term build schedule, can you help us with, it seems like you are implying deliveries are down about 8% fourth quarter to first quarter, just backing into the math that you gave us year over year. Can you help us understand the geographic mix in that down 8%? The first quarter will be down about 5% from fourth quarter levels, primarily related to Europe. Okay. You are implying the gross margins are down a bit sequentially. I mean, it looks like the absolute levels of deliveries are down, so there is some maybe just overhead issue. But can you help us understand from a mix perspective, I am generalizing, but I would think North America at this high level would be running better margins than Europe. So why, if the mix is more toward North America sequentially, should I have down gross margins sequentially? Just purely reflects the production volumes in the first quarter. Okay. Moving further into the year, maybe if you gave it, I apologize if I missed it, the full year deliveries, how are you characterizing full year deliveries 2015 versus 2014? We have given our market range, and we expect our shares to be good in all of our markets, and so that will impact the primary drivers of our volume numbers in our business. In Europe, the build schedule versus the industry, say market share is flat. Early in 2014, dealers were selling out of their inventory of Euro V. Would that suggest your builds in 2015 in Europe should be better than the industry rate? The industry number you are giving is sales, but again, they were selling out of inventory in the first quarter of this year. So are your builds going to be above the- The midpoint of our estimate is pretty comparable to last year's level. We expect to see some share improvement, so we hope that our deliveries and registrations for 2015 are maybe a bit ahead of 2014 levels. Last question on pricing. A little disappointed what I'm hearing about the 2016 models on pricing, and we all understand what's going on with more vertically integrated drivetrains and who's trying to catch up on lost market share. Let me just ask you point blank, are you surprised how the pricing's developing? Because usually this kind of backlog, this kind of extension of build schedules, delivery lead times, I'm hearing 1.5%, 2%, 2.5% price increase for the '16 models is relatively disappointing between you and I. So just trying to understand when those prices are set, first, is that sort of the right magnitude? Second, maybe elaborate on why do you think that is. Then third, can we see pricing improve as the year goes on? I'm just not sure how much when you set a price, can we ratchet back some traditional dealer discounts or so forth during the year? Because again, I'd be hoping to get more pricing in 2015 than, say, 2% in North America. Yeah, I don't know what the source of your pricing information is, but obviously Peterbilt and Kenworth have great products, that it's all based on the value proposition with our customers, and we think we offer a great value proposition with the industry's best trucks, as well as the industry's best fuel efficiency, so- Would you disagree with my sources on that kind of price increase? I would be happy to hear I am wrong, but hopefully to the upside. I am just trying to understand if those are the right numbers. Again, I would be thinking we can get more. Can you at least help us order of magnitude? Do you think it will get more pricing than I am alluding to, or less? David, again, great products and competitive offering and great value for our customers, so. Okay. Well, we will take it offline. I appreciate it. Thank you. Your next question comes from the line of Neil Frohnapple with Longbow Research. Hi, good morning, guys. Good morning, Neil. Do you have the new truck delivery breakdown by geography in Q4? Yeah, we do. Just a second. In the U.S. and Canada, we delivered 22,200 trucks in the fourth quarter. In Europe, it was 12,100, and in Mexico, South America, Australia, and other, it was 5,800 trucks. Great, thanks. Just to follow up on an earlier question on the MX penetration here in the U.S. and Canada. The 37% rate in Q4 was in line with Q4 of 2013, and it seems like we've been in that 35%-40% range for all of 2014. Do you still anticipate this installation rate to increase over time? I guess what do you think is preventing faster adoption of that product closer to your 50% medium-term target? Well, I think we will see it increase over time. It's a great engine. It's really a matter of getting more and more of the customers who are significantly invested maybe in a Cummins engine or another brand to get in the vehicle and experience the engine. Once they do that, we'll continue to see conquest business over time. The engine is, with its horsepower capabilities and the torque capabilities of the engine, it's very well suited to 75%, 80% of our customer needs. So, we'll see it continue to develop over time. Just to follow up, are you guys planning on doing anything different this year to try to help accelerate the adoption, or is the go-to-market strategy kind of the same? I think it's very consistent. Great. Thank you very much. Thank you. Your next question comes from the line of Seth Grace with Susquehanna. Good morning, gentlemen. Good morning, Seth. I was hoping to ask a question on Paccar Financial. As we look forward to 2015, any handholding you could give us on how to think about the pre-tax contribution, how net interest margins may flow year-on-year, and maybe just start there? The portfolio has grown during the course of the year. Portfolio pretty well will track the demand for trucks. If the truck demand based on the market assumptions that we see, there is probably further portfolio growth as we enter into 2015. The portfolio is performing very well. Past dues have been below 1% now for over two years, and we see it continuing to perform well. Borrowing rates are at historic low levels, and we will continue to take advantage of that to support the sale of Peterbilt, Kenworth, and DAF products and support our dealers in their floor plan activities. Yeah. I guess the demand side is a little easier to kind of calibrate on, but I am just wondering the spread. Any handholding you can give us on how we should think about spread in the margin? I don't think it will be significantly different than what we've seen over the last several years. Okay. That's helpful. Then, maybe just a cleanup question. Could you talk about SG&A and tax rates as we think about 2015? SG&A, one of our strengths as a company is rigorous oversight of our spending activities in our plants and warehouses and offices around the world, and we'll continue to maintain that rigor. I think SG&A would be at levels comparable to 2014. The tax rate, as we look forward, probably in the 32%-33% range as we look to 2015. Super. Well, best of luck this quarter with the exception of Sunday. Thank you much. Your next question comes from the line of Scott Group with Wolfe Research. Hi, good morning. It's actually Reena Krishnan sitting in for Scott Group. Good morning. Hi. I apologize if you may have already answered this, but just wanted to get a sense in terms of how you are thinking about deliveries for the year. I do not know if you guys ever give color on this, but I guess within your expectations for deliveries, how much do you have confirmed orders already for the full year? If that makes sense. Our market estimate for the various markets that we participate in, we have identified what those are, and we expect to have good share positions in those markets. So that really can give you the expectations for units as we look forward for the year. Backlogs are in excellent shape, and we are well-positioned to take advantage of the market as it progresses during the year. Okay. Thank you. Thank you. Your next question comes from the line of Alex Potter with Piper Jaffray. Hi, Alex. Hi, guys. I was wondering if you could comment on this recent drop in fuel pricing and whether that impacts people's decision to downsize their engine to a 13 liter. I don't think that has much impact. I think they're all looking because fuel, even at the reduction, fuel is still the first or second biggest expense in their P&L. I think they're always looking to get the most advantageous cost level that they can, and the MX engine, combined with the Peterbilt, Kenworth, and DAF trucks, provide an excellent value proposition for those customers. Okay. Then another question, I guess along those same lines, saving costs on the fuel bill. Do you think given the decline in diesel pricing that the natural gas trend is on the back burner? The natural gas has been a niche product, and I think it will continue. We do not see any dramatic shift in that. Our Peterbilt and Kenworth teams have the leading market share in the natural gas products, so we are well positioned to provide those for our customers. It is just not going to be a high percentage of our build. Not willing to hazard a guess regarding whether 2015 natural gas truck demand might be up, down, or flat versus last year? I think it will be similar. Yeah. Okay. Fair enough. Thanks, guys. Thank you. Your next question comes from the line of Mike Shlisky with Global Hunter. Morning, guys. Morning, Mike. Want to start off here with a quick question, follow up on a previous one. Can you just quantify the fourth quarter impact of FX on your top line and on your pretax income? I guess both EUR and, of course, the Canadian dollar as well. Yeah. For the quarter, the impact on revenues was about $160 million, and pretax profit was about $13 million. Great. Secondly, I wanted to ask about your 2014 dividends. Historically, you've been talking about a 45%-55% payout rate of your annual net income in your overall dividend. Just from what was put out in today's release and what was put out back in December, it looks like you kind of hit the very low end of that range, paying out about 45% of your full year net income. I was kind of wondering, are you holding on to cash for any reason? Is there any reason why you didn't want to go towards the higher end there? I think we've been very consistent over time, and we evaluate that on an ongoing basis and consult with the board. The board decides what levels we will provide dividends. We have a long track record since 1941 of paying a dividend to our shareholders. We will continue, I think, with that practice for the foreseeable future. All right. Thanks, guys. Good luck on Sunday. Thank you. I guess keep those football pumps handy. Your next question comes from the line of Glenn Webb with Morningstar. Morning, gentlemen. Thanks for taking my question. Morning. The first one for me is, what are you guys expecting in terms of Brazilian production rates for 2015? I think we'll see be steady and to up because as we, again, more of our dealers finish their permanent facilities, they'll be able to enhance their business, which should translate into additional demand for our DAF trucks. Okay. When should we expect a more aggressive production ramp there? Should we expect it to be a 2016 or a 2017 type event? I think it will be steady. Okay. I think it will be very steady. Then just the other one from me on automatic transmission adoption. I know the penetration rate had been ticking higher over the last couple of years. Curious to get your thoughts on 2015. Well, I think it will continue to increase in penetration as time goes on, both for fuel economy reasons and for driver reasons. They are very fuel-efficient transmissions, and they are very easy to drive. So we will continue to see increasing acceptance of those products in the market. In terms of your own order mix, what would a 2013 versus 2014 have looked like? Probably about a 10% increase over the course of the year, so fairly significant. Okay, great. Thanks so much. Your next question comes from the line of Marty Pollack with NWQ Investments. Wow, a lot of questions been asked. When you look at Europe, your forecast for European, I guess, sales is down from 2014. You look at where this truck cycle in Europe has been, and it is totally in a different place where the North America cycle has been. You wonder then, what is the opportunity for some meaningful recovery in Europe, and how is it likely to be affected by what is going on in the Eastern block with Russia? At the same time, your market share, 13.8%, seems to be, I think, considerably lower than the sort of 16% or 17% range you have seen. If there is upside in Paccar, is it in Europe? If it is not this year, is it next year that we should be seeing some recovery? That is the first question. The second one has to do just with North America, the sustainability of the cycle. Clearly, in 2006, 2008, we had the pre-buy impact, and I think double ordering. Can you just talk about sort of those dynamics here in terms of the health of the cycle? Even if 2015 is a peak, can 2016 be still a fairly strong environment? Well, I think when you think about Europe, as we have commented on our products, the Euro VI products have been very well-received by our customers, and DAF continues to make enhancements both in terms of applications, fuel efficiency. They are very well-positioned to take advantage of any uptick in the market. As I mentioned, with the lower fuel prices, low interest rates, there is a potential for the market to improve. I think it is a matter of people getting confident about how the future may look for them, and once they gain that confidence, just as we saw in the past years here in North America, once they gain that confidence, they will be willing to be more aggressive in placing that order. In North America, as we said, the past cycles have been impacted by some of the emissions changes. We don't see those kinds of impacts. The truck market will pretty well track the economic developments as we see them occur. Right now, obviously, the economic forecasts for 2015 are good, and we expect that to have a positive impact on the size of the market for this year. 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.